Increasing FDI in Japan

The Abe administration’s updated growth strategy calls for doubling the outstanding amount of foreign direct investment in Japan to ¥35 trillion by 2020, with the government taking necessary policy steps and the prime minister and other top leaders using their overseas visits as opportunities to persuade foreign businesses to invest here. Foreign direct investment in Japan remains sluggish even as FDIs increase in other economies that are picking up. What ultimately matters will be the effort to improve foreign businesses’ expectations of the Japanese market’s growth potential.

According to the World Investment Report by the United Nations Conference on Trade and Development, global FDI flows in 2013 rose 9 percent from the previous year to $1.452 trillion. As cross-border investments such as opening or expansion of manufacturing plants or corporate acquisitions increase, the report forecasts the uptrend in worldwide FDI flows to continue, with the total reaching $1.6 trillion this year, $1.75 trillion in 2015 and $1.85 trillion in 2016.

Japan’s outbound direct investments also rose 10 percent to $136 billion in 2013. Last year, Japan was the world’s biggest source of FDI in the United States for the first time since 1992, with the amount reaching a record $40 billion led by large-scale acquisitions of American businesses by Japanese firms such as Softbank Corp.’s $21.6 billion purchase of mobile carrier Sprint Nextel. U.S. investments by Japanese firms are expected to maintain a similar level this year as major acquisitions — such as Suntory’s recent $16 billion buyout of Beam Inc. — continue to take place.

On the other hand, FDI in Japan stood a mere $2.3 billion in 2013, although the figure represented a 33 percent increase from the previous year. For years, the ratio of outstanding FDI in Japan to gross domestic product was the lowest among industrialized countries, and still trails many of the emerging economies in Asia and other regions.

Japanese firms are expanding their investments worldwide, and the return on such investments more than offset the nation’s ballooning trade deficit in fiscal 2013. However, the shortage of investments in Japan casts clouds over the prospect of domestic job creation, tax revenue and income.

Companies trying to survive global competition make their overseas investment plans based on their assessment of the growth potential of each market, as well as infrastructure development and cost and quality of local labor. Many Japanese firms with enough cash have invested actively in many parts of the world, creating jobs and contributing to the growth of the host economies. Companies from Japan and many other countries invest in the U.S. because they’re attracted by its huge market, along with the relative safety from the impact of currency exchange fluctuations.

The Abe administration says its plans to cut the corporate tax rate to levels common in many European and Asian economies will help attract more FDI in Japan, while persuading Japanese firms to invest more domestically. But what will count in attracting more FDI in Japan will be the effort to make the market here more attractive. One avenue of such effort lies in free-trade agreements which, by expanding regional trade and increasing inward investments, can drive up the nation’s growth potential.

In their recent summit talks in Seoul, Chinese and South Korean leaders agreed to make efforts to conclude a bilateral free trade accord by the end of the year, effectively shelving the prospect of a trilateral FTA that includes Japan. China later agreed with the U.S. to try to cement the core parts of a bilateral investment protection accord by the year’s end. Japan’s diplomatic chill with its two closest neighbors should not be allowed to result in it being left out of such developments in the region.