Foreign Direct Investment

Ichiro Suzuki

According to the United Nations Conference on Trade and Development (UNCTAD), Japan consistently ranks 196th or lower. (198th out of 200 countries in some analysis in terms of total cumulative investments by foreign firms to GDP among the 196 countries surveyed in 2019/20. In fact, Japan was a notch behind North Korea. (Who invests in North Korea? China?)  At the end of 2023, FDI stock in Japan stood ¥50 trillion as opposed to ¥600 trillion as the size of the economy. Developed countries often have 30 to 40% of GDP in FDI. 

Not surprisingly, tight regulations are standing in the way of foreign firms’ greater activities in Japan. However, it is not the only factor. Difficulties of buying Japanese companies weigh heavily, too. The most straightforward way for a company anywhere to expand into foreign soil is to buy already existing operations. Mutual share-holding among Japanese companies has been notoriously famous for decades. Inter-locking a significant portion of shares outstanding has prevented Corporate Japan from unsolicited takeover. The system also gave management some leeway to think long-term, not troubled by short-term noises. It was once said to be one of the strengths of Japanese management. Overseas financial communities intensely criticized the system since it was a major stumbling block for foreign companies to make inroads into Japan. However notorious, the system made some sense in the old days, at a time when the Tokyo stock market was on a steady rising trend. Rising share prices boosted unrealized capital gains on the balance sheets of Corporate Japan, giving them financial strength that became an envy of the world at one point. 

The system’s fortune was reversed in the 1990s, as the Japanese market went into a prolonged period of adjustments from the excesses of the previous decades. Falling share prices weighted heavily on the equity base of the balance sheets at a time when profits were collapsing. Dissolving of the interlocking system began as a natural progression. Corporate Japan went into a period of large scale consolidation, with divestments of underperforming divisions that were not considered as strategically important. Divestiture brought massive new supply of shares, which few were interested in, hence exerting immense pressure on their share prices. Finally in the 2010s, the Financial Services Agency began to stress shareholders value, pressing Corporate Japan to focus on efficiency of assets. Then the Tokyo Stock Exchange made a move closely aligned with the FSA. The move contributed to revitalization of the long-afflicted Japanese market. Witnessing soaring share prices, the management class of Corporate Japan began to embrace asset efficiency. Institutional investors hailed to it. The mutual shareholding system may not be gone entirely, but has become unfashionable. 

Mutual shareholding’s setback, however, has not materially boosted inward mergers and acquisitions. Corporate Japan continues to be apprehensive about being bought out by foreign competitors, especially in a hostile takeover. M&As are often good for shareholders, but it doesn’t apply to them if their job is at stake. Some may still see it as a shame to sell themselves to foreigners, as well as Japanese activists. Such management class, therefore, commonly deploy tight takeover defense schemes. In the 21st century Japan, they can fend off hostile takeover but doing so has become costly. They might succeed in averting them, but that would require them to work hard to raise the value of the company. They can no longer sit back. Life is tough for management these days. 

Public sentiment against foreign capital and foreign ownership has been negative. Many view that foreign capital comes to Japan for exploitation. They find opportunities, make money, and then send profits back to their home country. This seems to be a perception shared among average men and women on the street. For them to be able to send profits back home, foreign corporations in the first place have to invest capital to get operation started, buy what’s necessary for business, rent office space, hiring employees, and pay taxes. (Even Chinese black market transportation services that serve Chinese tourists buy cars to begin with, pump gasoline, buy insurance though they don’t pay tax on profits.) Donald Trump thinks trade partners are screwing the United States, by sending  a flood of foreign-made goods. Nonetheless, he still understands foreign capital on U.S. soil is good for the U.S., creates jobs and paying taxes.

FDI inflows may fall far short of PM Sanae Takaichi’s lofty aspirations on this front. Nonetheless, inflows are expected to keep rising. China has ceased to be a major destination for foreign capital as multi-national corporations are realigning their global supply chains. Much of such capital is redirected to Southeast Asia and India to build factories. However, Japan is also receiving such money on high-end manufacturing. TSMC’s new factories in Kumamoto are cases in point. Other countries do not fill the requirement of hiring people with engineering skills. As it turned out, few people in Kumamoto are complaining about TSMC’s arrival. Some people are not happy to see sharp hikes in rent. Over all, TSMC has taught the Japanese public the virtues of FDIs. Accumulation of such examples can shift hostile public sentiment over the years. 

In the meantime, Foxconn’s emergence as the major shareholder of Sharp represents a case of foreigners buying into ailing, once proud, Japanese manufacturers that have suffered a setback in a changing world. Foxxconn also had to diversify away from excessive concentration of their investments in China. This is realignment of Japanese manufacturing that should have taken place much earlier. That said, better late than never. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.