Japan Seeks to Double Foreign Direct Investment in Japan within Five Years

The Japan External Trade Organization (JETRO) provides the following information examining these issues in greater detail.

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Japan Recognizes the Essential Importance of Increased Foreign Direct Investment

Over the past decade, Japanese executives and government officials have come to understand that FDI is not a threat – but an essential means to introduce new capital, human resources, management know-how and technologies -- which are unconstrained by existing organizations and domestic business practices. Closer cooperation with foreign companies also enables Japanese firms to respond more effectively to the challenges of global competition. Additionally, foreign capital and the manner by which it is allocated, serves to introduce a greater respect, understanding and capacity to utilize, “risk capital” – a source of financing that has driven innovation, new business development and corporate restructurings in the U.S. and other markets. This is helping to promote entrepreneurship and the rationalization of corporate assets and resources in Japan.

Nevertheless, FDI flows into Japan remain low compared to other major economies. According to IMF statistics, the ratio of inward FDI compared to nominal GDP in 2000 was only 1.1% in Japan. This compares to 27.9% in the U.S., 32.4% in the UK and 22.4% in Germany. The stark difference clearly illustrates that Japan is not taking advantage of its full potential and capacity to absorb inward investment.

The Japanese market is four times as large as China’s, with an established legislative system and democratic form of government. It possesses numerous advanced technologies, a wide range of supporting industries, sophisticated and affluent consumers, a diligent and highly educated workforce, as well as a favorable, safe living environment.

According to UNCTAD, Japan’s Inward FDI Potential Index is 14th among 140 countries although its Performance Index is 131st.

The mismatch between potential and performance is a sign of severe undervaluation and Japan pays a premium and suffers as a result. To reverse this dichotomy it will need to learn from other countries. This is essential to create a globally competitive investment environment. It will also help Japan to advance beyond the domestic precedents and structures that have constrained economic growth over the past decade. Foreign managers and investors are not beholden to old norms and business practices. They are able to raise the overall bar of efficiency and competitiveness. Along with the necessary administrative and regulatory improvements required to attract foreign investment in the first place, additional competition will be interjected into the system and efficiencies gained within whole industries and sectors. This will help to remove constraints and achieve reforms that could not have been easily initiated by existing management. One can see these forces at work within the context of Renault’s acquisition of Nissan. It has had a dramatic impact on other automotive companies -- as well as a wide range of related industries and the Japanese corporate world in general.

Japan has also suffered from a tendency to view itself as an isolated island nation. It preferred to conduct business within its own corporate community rather than to form the cross-border alliances and structures that are increasingly essential in a global, interconnected economy. Increased foreign investment inflows will serve to reverse this deficiency and help Japan to establish closer business, financial and social relationships with other countries. Through the introduction of foreign capital, companies and resources, Japan hopes to become a more fully integrated component within the global economic system and a stronger and more efficient competitor because of it.

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Japan Takes Steps to Facilitate FDI Inflows into Japan

To successfully generate increased FDI flows into Japan, a wide range of measures must be initiated to enhance its competitiveness and attractiveness as an investment destination. This includes:

Welcoming FDI into Japan:
Disseminating Information in Japan and Abroad

Although negative views toward FDI are still sometimes heard in Japan, new investment to revive and revitalize businesses should be welcomed regardless of whether capital is domestic or foreign. The role and the importance of FDI, including concrete success stories, must be shown to the Japanese people to win their understanding. At the same time, such information needs to be disseminated to foreign companies to display the welcoming attitude that Japan as a whole is taking toward FDI and to showcase the nations underlying attractiveness as an investment destination.

Smoother Mergers and Acquisitions (M&A):
Preparing the Business Environment

Today, cross-border investment between developed countries usually takes the form of M&A, rather than the establishment of new businesses. This is because M&A can be undertaken more rapidly and can make use of existing resources. Therefore, to encourage FDI into Japan, it is essential to make M&A smoother and faster. This will facilitate corporate revitalization, and the input of the knowledge, know-how and risk capital needed to revitalize Japanese companies and to dispose of non-performing loans. In particular, steps need to be taken to strengthen oversight by shareholders and boards of directors and to develop investor trust and secure increased transparency in corporate information. The importance of tax-oriented issues in the selection of new investment venues also necessitates that Japanese tax treatment of M&A must to be examined in greater detail and any necessary changes be made.

Clear, Simple and Fast Administrative Procedures:
Facilitating Regulatory Approvals and Constraints

To make administrative procedures in Japan better than those in other countries, effective and user-oriented ways of thinking need to be adopted throughout the government. In Japan, many believe that complex, difficult-to-understand administrative procedures -- existing in practice but not necessarily stipulated by legislation -- prolong the preparation period for investment and result in increased costs. Even though regulatory reform has produced improvements in some areas, such a negative impression has itself become an obstruction to attracting investment.

All public officials involved in regulatory procedures, including those answering queries, must recognize the need to provide public services in a clear, simple and fast manner. This is needed to build investment conditions that are not surpassed by other countries, and strive for improvement by putting themselves in the position of investors and other users.

Securing Necessary Human Resources:
Improve Employment and Living Environment

Human resources play a key role in driving industrial growth. Being able to secure a supply of excellent personnel is essential to develop growing, dynamic businesses. Facilitating approval of resident status for foreign managers and engineers is vital to promote FDI inflows. In addition, it is essential to develop human resources that meet international standards. Furthermore, it is also important to create a living environment in which professionals and their families who come to Japan can feel comfortable. This includes improvements in education, medical services and pensions.

Local Government Creativity and Ideas:
Enlarging the Role of Local Governments

In many countries, local governments proactively work to attract FDI -- and their initiatives contribute to the economic strength of their national economies. In Japan too, it is necessary to promote the competition of creativity and ideas among local governments, and to encourage them to enhance, and demonstrate, the potential of their particular regions to foreign investors. Local governments who hope to strengthen their local economies through the introduction of FDI must actively develop plans to attract investment. This includes granting incentives, simplifying administrative procedures, and promoting their business environment and relative attractiveness in an investor-friendly manner.

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Efforts of Japan Investment Council Already Achieving Substantial Results

• Compulsory application of consolidated financial statements;
• Enforcement of a consolidated taxation system;
• Removal of the ban on treasury stocks for companies holding their own shares;
• Establishment of a system for stock swaps and transfers;
• Implementation of a system to facilitate corporate divestitures;
• Review of the stock system including treatment of stock options;
• Reforms related to corporate governance including a strengthened auditing function;
• Establishment of the Civil Rehabilitation Law;
• Deregulation in principal of use of temporary workers for specific work;
• Deregulation in principal of fee-charging employment referral businesses; and
• Enforcement of the Defined Contribution Pension Plans (Law No. 88, June 29, 2001).

Initiate Additional Attempts to Promote Deregulation and Reform

• Creation of designated special zones for economic reform;
• Establishment and revision of the Three-Year Deregulation Action Program to promote regulatory reform; and
• Compilation of the First and Second Reports Regarding Promotion of Regulatory Reform.

Facilitating the Establishment and Operation of International Schools

• Simplifying rules to change unused public school facilities into international schools;
• Low-interest financing to international schools through the Development Bank of Japan; and
• Relaxation of qualification requirements for high school equivalency examinations.

Providing More Extensive Information on Health and Medical Care to Foreigners

• Deregulation of advertising by medical institutions that provide consultation in foreign languages; and
• Provision of information on university hospital medical information network websites.

Promoting Closer Coordination Between the National and Local Governments

• Regional Bureaus of the Ministry of Economy, Trade and Industry organized meetings on promoting direct investment inflows into regional areas to enhance communication, investor contacts and the dissemination of regional information.

Establishment of a Comprehensive System to Provide FDI-Related Information

• Implementation of a system to provide comprehensive information, linking the meetings on promoting direct investment inflows into regional areas, local governments, JETRO, and the Development Bank of Japan.

Responding Quickly to the Complaints and Requests of Foreign Investors

• Complaints and requests to be dealt with by the Office of the Trade and Investment Ombudsman (OTO) Secretariat, relevant national and local government agencies, and JETRO.
  

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Japanese Views Toward FDI Have Changed Dramatically Over Past Decade

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Japan Moves to Initiate Additional Measures to Enhance FDI Inflows

• Using every opportunity to actively inform corporate executives, investors and policymakers within other countries of Japan’s desire to welcome FDI; and
• Seeking the understanding of the Japanese people on the role and importance of FDI inflows to help revitalize and restore growth to the Japanese economy.

Improving Japan’s Business Environment

• Improving domestic rules and regulations to facilitate cross-border M&A;
• Enhancing transparency and the reliability of corporate information and otherwise promoting improvements in corporate governance;
• Making it easier to start-up new business ventures;
• Maximizing use of the abilities and resources of foreign companies’ in a wider range of sectors including public services; and
• Improving access to legal and other services that support FDI in Japan.

Reviewing Administrative and Regulatory Processes and Procedures

• Making the information needed for investment available in a one-stop form, and simplifying and speeding up related administrative procedures; and
• Promoting use of no-action-letter system, to clarify interpretations of legislation regarding which investors have queries, and of the public comment systems.

Creating a Favorable Employment System and Living Environments

• Stepping up the reform of the Japanese labor market to introduce diverse ways of working and to improve the public pension system to allow greater pension portability;
• Improving systems related to visas and immigration;
• Improving the environment for international schools, accepting greater numbers of foreign students and preparing Japanese students to be adaptable and resourceful in business; and
• Increasing acceptance, and ability of foreign doctors to practice in Japan..

Improving Local and National Government Structures and Systems

• Assisting local governments in their efforts to attract foreign investment;
• Facilitating utilization and development of designated special zones for structural reform; and
• Improving the national structure for promotion of FDI into Japan.
  

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Japan Determined to Double Foreign Direct Investment Inflows within Five Years

Since ancient times, the Japanese people have demonstrated a strong ability to adopt technology and know-how from abroad, adding additional value and achieving success as a result. As times change and cross-border inputs become increasingly vital in business and financial activities, Japan will once again rise to the challenge and demonstrate its ability to build a future by introducing foreign investment and the skills of capable foreigners.

The JIC, in close cooperation with the IJF and a wide range of other public and private sector entities, are determined to meet the Prime Minister’s objective to double the amount of FDI in Japan within the next five years. The measures noted above, as well as others that will be developed over time, will facilitate this process. This will help to promote greater awareness of Japan’s underlying potential. It will also serve to provide foreign companies with even more compelling reasons to select Japan as a venue of choice for their international investment and business needs.

While much remains to be done, substantial progress is being achieved – both in terms of regulatory and structural improvements to facilitate FDI inflows as well as the views and actions of foreign investors. One notable announcement that demonstrates increased investor interest in Japan includes the recent decision of the California Public Employee’s Retirement Fund (CalPERS) to invest $200 million in The Taiyo Fund. This fund will be managed by a joint venture between Monterey, California-based Taiyo Pacific Partners LLC (TPP) and WL Ross & Co. (WLR), a New York-based investment firm. TPP/WLR have plans to raise $1 billion and to employ corporate governance activism to turn around underperforming publicly traded companies in Japan.

Focus: Mergers & Acquisitions
Focus: Entrepeneurship
Focus: Economic Revitalization 
Focus: Industrial Revitalization 
Focus: Foreign Investment 
Focus: Bush Visit
Focus: Koizumi Visit
Focus: Economic Rebirth
Focus: Hiranuma Plan
Focus: Foreign Direct Investment
Focus: Emergency Economic Package
Focus: Action Plan
Focus: Economic Reform
Focus: Okinawa Summit
Focus: Small Business Development
Focus: New Enterprise Development
Focus: Industrial Revitalization
Focus: Economic Recovery 4
Focus: Steel
Focus: Economic Recovery 3
Focus: Economic Recovery 2
Focus: Economic Recovery

This material is published and disseminated by JETRO New York in coordination with KWR International, Inc. JETRO New York is registered as an agent of the Japan External Trade Organization, Tokyo, Japan and KWR International, Inc. is registered on behalf of JETRO New York. This material is filed with the Department of Justice where the required registration statement is available for public viewing.