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Invest In Japan Drive: Japanese Affiliates Abroad Should Gear Up The Drive – Analysis

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Japan’s revitalization strategy for the upturn in the economy has been polarized on invest in Japan drive. Among various reforms, inward foreign investment gained prominence as a strategic approach to turnaround the lost paradise of Japan as a manufacturing hub in the world. Japan lost its power of manufacturing hub after the yen appreciation in the economic war with USA in late eighties and the China’s cheap cost since late nineties. Powered by market size and slip in the business costs , owing to downturn in the yen value, hopes are rising for an upward curve in inward foreign investment.

Inward foreign investment in Japan , which leapfrogged 19.4 percent up in 2014 and excelled the fence of 20 trillion yen for the first time , was cheered a big success of the revitalization drive. By 2014, for the first time, the stock of inward foreign investment reached 23 trillion yen .

Nevertheless, can this momentum ensure Prime Minister Shinzo Abe ‘s dream of 35 trillion yen stock to be achieved by 2020, given the slow pace of world economic growth?

Historically, Japan has been the only developed nation which was reticent to foreign investment. Despite it surged the 3rd biggest economy in the world, its’ ratio of inward foreign investment to GDP was 4.8 percent in 2014 – the lowest in OECD countries.

The average ratio of inward FDI among the OECD countries is 34.1 percent. USA and Germany, for instance , have ratios seven to eight times more than Japan. In other words, inward foreign investment never played a significant role in Japanese economy, or to say, Japan was never a nation of Rising Sun for the foreign investors.

Japan’s turnaround to inward foreign investment began with a renewed interest of Abe government. Various reforms were taken to eliminate formal restrictions governing foreign investment in Japan. But, these initiatives remained inconsistent , given the prevalent business culture in Japan.

According to US Department of State, “ the reform components of Abenomics, considered essentials for long term growth and competitiveness, has been slower to take a shape”. Unlike other countries, most of the obstacles and challenges faced by foreign companies in Japan relate more to prevailing social practices in the business culture than government regulations . These included insular and consensual business culture , which acted resistant to Merger & Acquisition, lack of independent Directors in most of the company boards, exclusive binding in the supplier’s networks and alliances between groups (popularly known as Keiretsu system), according to US Department of State.

The Abe Government set up a Council of Economy and Fiscal Policy, with an aim
of promotion of FDI in Japan. To this end, the Expert Group Meeting made a survey of foreign companies in Japan and unveiled the challenges faced by the foreign companies in Japan.

The Expert Group Meeting revealed two important obstacles to the foreign investors. Low profitability and high costs. Low profitability was catalyzed by systems and practices , lack in global competitive Human resources and lack in transparency in corporate governance compared to foreign companies . High costs were factored by complex distribution system, separate production line to meet the quality hunger of Japanese customers, high taxation and long time taken to start –up the business.

Well, all these obstacles and challenges are rather relative in terms of magnitude depending upon the types of foreign investors . They might have been deterrents to foreign investors. But, the magnitudes of the deterrents are low in case of Japanese investors, who went abroad after yen revaluation. This is because the Japanese affiliates abroad, or say, Non-Resident Japanese corporates, are immunized to these obstacles and challenges. They are well acquainted with typical business cultures in Japan.

In the pre-Plaza Agreement, these Non-Resident Japanese corporate contributed large to re-built Japan after World War II, despite the obstacles. They were the major role players to catapult the Japan ‘s economy as the second biggest global economy before China edged out Japan.

High yen appreciation, which led Japanese corporate shift from Japan and make the country a hollow investment zone , is no more a major obstacle to woo the Japanese affiliates abroad. The high cost of doing business in Japan slipped from top rank obstacle in 2013 to fifth position in 2015, according to a JETRO’s survey  “ JETRO Invest Japan Report 2015”. The yen has depreciated sharply since Mr. Shinzo Abe returned to power last year and promised for weakening yen to reflate the economy.

This unleashed an opportunity for the Japanese affiliates abroad to return to Japan since Abe’s promise will place Japan a new turf for export competitiveness
Given the opportunities on the anvil , which can attract the Japanese affiliates abroad to invest in Japan, it can be argued that why not they should be encouraged to invest in Japan and resurrect the sluggish inward foreign investment in Japan.

A separate promotion campaign should be made to woo the Non-Resident Japanese investors. Japan is the second biggest foreign investor abroad. Its overseas investment stock was US $ 1,259 .06 Billion at the end of 2015. Of these , the biggest stocks were held in USA and China. After the downturn in cheap cost in Chinese economy, Japanese overseas investors resorted to China +1 strategy or hunting for new nations to invest , such as India, Africa and South East Asia.

Against the backdrop of these new challenges faced by Japanese overseas investors in the wake of China loosing low cost manufacturing hub, Japanese affiliates abroad should be encouraged to invest in Japan with their profits reaped abroad, instead of reinvesting in overseas. To woo the Japanese affiliates abroad, special incentives should be granted to allure them. Followings are some of the incentives which can attract e the Japanese affiliates abroad.

First, given the high corporate tax in Japan, a dual corporate tax policy should be introduced. Japanese affiliates abroad investing in Japan from their profits earned in overseas should be bracketed in the lower corporate rate structure and with tax breaks initially for the period requiring for start-up.

Second, investment subsidy should be given for setting up mega projects like infrastructure, power , transportation and others.

Third, Japanese affiliates investing in Japan should be given preferences in the Government procurement, complying however WTO regulations.

Fourth, Single –Window clearances should be set up to simplify the start –up business. Despite Japan claiming an hassle –free investment destination, Japan ranked 35 th in the global survey of Ease of Doing Business by World Bank .

Therefore, Japan’s sluggish inward foreign investment can be overturned by the Japanese affiliates abroad only, given the prevalent business culture in Japan.

*S. Majumder, Adviser, Japan External Trade Organization (JETRO), New Delhi. Views expressed are personal.


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Subrata Majumder

Subrata Majumder

Subrata Majumder is an adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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