There are several indications that the Japanese economy is recovering from a serious depression. It seems that a large number of people share the opinion that structural reform is necessary to continue this recovery and put the economy on a steady and sustainable growth path.

Structural reform can be discussed under many aspects: fiscal and monetary policy, corporate governance, industrial structure, and so on. To measure progress in each of these fields, we could use (respectively) statistics on fiscal deficit (or surplus), financial markets, state of competition, industrial production and the like.

I would add “openness of the country” as another important indicator of whether structural reform is succeeding or not. This issue seems to have been little considered since the Japanese economy fell into recession. However, I believe it represents an important measure. It shows how well a country is taking advantage of the merits of globalization. “Country openness” could be measured in terms of trade and investment, and I would like to suggest internal investment as a measure of “openness.”

report on foreign direct investment in Japan in fiscal year 1998, published Friday by the Ministry of International Trade and Industry, provides many statistical indicators of progress or otherwise in the “opening” of the Japanese economy. All the results indicate that the Japanese investment climate has not really improved, the level of internal investment has been low and the activities of foreign subsidiaries have stagnated.

Internal investment has still increased, however. This is mainly due to increased capital in existing small- and medium-size enterprises, as the number of new foreign subsidiaries has been declining continuously since FY1997 and the number of those closing their doors has been relatively high. As a result, the ratio of tabulated foreign subsidiaries’ sales to the sales of all manufacturing corporations has been at around 3 percent for the last five years. This is very low, about one-quarter of overseas Japanese subsidiaries’ sales ratio to total manufacturing corporations’ sales; in the United States, the two are almost equal. The ratio of internal investment based on stock to nominal GNP in Japan is 1 percent; in the U.S. and other countries, it is around 25 percent.

According to this research, many foreign subsidiaries in Japan complain about high business costs and corporate tax rates. This reflects the fact that foreign subsidiaries in Japan have higher costs than do Japanese subsidiaries overseas.

In addition to this structural factor, foreign subsidiaries in Japan faced a serious recession in FY1998, when their sales and physical equipment investment seriously declined.

It should be noted, though, that their sales-profit ratio has always been higher than that of all manufacturing companies over the last 10 years. Dependence on borrowing has been low and dividend rates have been high, which suggests that foreign subsidiaries have been pursuing sound management when compared with domestic companies.

Basically, Japan has not been successful in providing foreign subsidiaries with a positive investment climate. If that were not the case, the positive aspects of foreign subsidiaries that I just mentioned would have positively affected Japanese economic performance.

Of particular concern is the status of Asian subsidiaries in Japan. Although Japanese companies invest a lot in Asia, the number of Asian subsidiaries here is very small — only 13 percent of all the companies tabulated. The rest are American (43 percent) and European (41 percent) for FY1998.

hina, Singapore and Taiwan seem to be Japan’s main rivals as host countries for foreign direct investment. Other research tells us that FDI in China has increased about 15-fold over these last 10 years, whereas Japanese internal investment has increased by only 50-60 percent during the same period. Currently, the level of Chinese internal investment is nine times higher than the Japanese level, meaning that Japan is losing to China in the competition for FDI.

Some significant examples in the automobile industry (Nissan and Matsuda) seem to be creating optimism about FDI levels in Japan. However, MITI’s statistical research shows clearly that this optimism is unfounded and there is need for further structural reform, such as deregulation, to reduce business costs. In an era of globalization, a country should do its utmost to attract FDI for growth.

nother merit of FDI is that it exposes the Japanese to hard international realities. Japanese tend to respond slowly to such realities. Ten years after the Organization for Economic Cooperation and Development began discussions on the positive value of regional integration, Japan is only now ready to start discussing specific regional agreements.

More sensitive and quicker reactions to those realities can be expected if there is more involvement in the Japanese economy by foreign subsidiaries. Structural reform is necessary, not only for the information-technology revolution, but also for globalization.

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