Despite Japan’s moribund economy and stagnant consumption, many foreign firms are still keen to enter the Japanese market, with some eyeing the pharmaceutical and distribution industries.

Foreign direct investment in the form of capital participation or acquisitions set a record in fiscal 2000, which ended in March, for the third year in a row, according to analysts.

Overseas firms are taking advantage of the drawn out economic slump that has knocked prices of stock and real estate down from their high-flying levels of the past.

FDI inflows to the financial, automobile and information and communications sectors appear to have peaked, according to industry officials. The next targets are distribution and pharmaceuticals, which are regulated by the government and only partially accessible to foreigners.

Japanese drug makers are comparatively small in capital terms, but many boast technological prowess in specific areas, prowess that makes them attractive to their giant European and U.S. counterparts, which have been realigning over the past few years. These firms could grab a share of the domestic market to the tune of 10 trillion yen a year.

Industry sources said Osaka-based Welfide Corp., an affiliate of Takeda Chemical Industries Ltd., got a tip last year about foreign moves to acquire it. In November, Welfide began talks with Tokyo-based Mitsubishi Tokyo Pharmaceuticals Inc. and announced in March that the two firms had reached a basic merger agreement to survive the intense international competition.

The announcement said early amalgamation would help them speed up production of new medicines and offer a better service.

Welfide has close ties with Mitsubishi Tokyo, and their quick decision to merge was designed to let them grow and protect themselves from foreign moves, including takeover bids.

“Japanese pharmaceutical manufacturers have not been drawn into a vortex of full-scale realignments because they produce some degree of profit,” said Kenji Kimura, general manager at Nomura Corporate Advisers Co., which specializes in M&As.

However, he warned that midsize and smaller makers could become the targets of foreign M&As in the future.

While Japanese drug firms have been able to make money under government protection, including drug price standards, European and U.S. drug firms have been spending enormous sums on research and development and forging ahead with gene-related technologies to make medicines to conquer global markets.

Sensing a crisis, some Japanese manufacturers have said they will not survive fierce international competition if they do not change.

On the distribution side, France’s Carrefour, which ranks second in the distribution industry in the world, opened its first outlet in Japan last winter under Carrefour Japan Co.

The launch of the bargain store in the city of Chiba’s Makuhari district comes as Japanese supermarkets are in the midst of a deflationary slump.

Carrefour has since increased the number of its stores in Japan to three. It also plans to open one near Kansai International Airport by December 2002. Domestic supermarkets such as Ito-Yokado Co. said they cannot determine what effect Carrefour will have on them until it opens more outlets.

Kanji Ishizumi, a representative of Chiyoda International Management Law Office in Tokyo, said foreign firms are training their sights on consumer-related companies under strong government regulation and that more overseas firms will move into Japan.

Analysts said that because of corporate restructuring in Japan and the introduction of market-based accounting methods, major firms are releasing large amounts of land at relatively low prices, another favorable factor for foreign firms hoping to get their foot in Japan’s door.

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