Following his party’s overwhelming victory in the Upper House election, Prime Minister Shinzo Abe’s administration is now expected to go full-throttle in its national growth strategy. In the basic policy for economic and fiscal management endorsed by the Cabinet in June, Abe expressed his determination to pull Japan out of deflation and revive its economy. One of the targets in the policy was to double the outstanding amount of foreign direct investments in Japan to ¥35 trillion by 2020, based on the belief that FDIs would play a major role in making the Japanese economy stronger.
From the days when I was with the Ministry of International Trade and Industry (now the Ministry of Economy, Trade and Industry), I have strongly advocated promoting FDIs in Japan because that would help enhance competition, accelerate technological innovations, strengthen corporate management and create job opportunities. I launched the Forum of Global Corporations in Japan, a specified non-profit corporation, in July 2012 in order to encourage investments by foreign firms from private-sector viewpoints.
FDIs in Japan are tiny by international standards. In 2011, outstanding foreign direct investments in Japan accounted for a mere 3.9 percent of its gross domestic product. The ratio is much lower than 23.3 percent in the United States, 20.0 percent in Germany, 34.7 percent in France and 49.8 percent in Britain. It is also far below 10.1 percent in China and 11.8 percent in South Korea. There were 125 foreign firms listed on the Tokyo Stock Exchange in 1990, but the number dropped to 41 in 2000 and declined to eight today.
There are some foreign corporations that favorably value the Japanese market. Surveys of companies that have invested in Japan show that they appreciate Japan’s high income standards, abundant potential customers, well-maintained infrastructure related to daily lives, social stability, consumers’ strong brand consciousness and a market where competitiveness can be verified. Their concerns heard in the past about the Japanese market’s allergic sentiment against foreign businesses seem to have almost disappeared.
Nevertheless, FDIs in Japan have not increased much. The biggest factor responsible for this situation is of course the declining growth potential of the Japanese market. But another major factor is the existence of various structural problems that remain unresolved.
First, the environment surrounding business activities here remains comparatively inferior. Japan still has a lot of strict regulations in a number of business fields although the Abe Cabinet says it will pursue deregulation. These regulations remain particularly strong in such sectors as medical care, pharmaceuticals, education, electric power and services.
Corporate tax also remains a heavy burden on business activities. The corporate tax rate was lowered slightly this year but the rate in Japan — along with that in the U.S. — remain the highest among the world’s advanced economies as well as emerging economies. The high costs of energy such as electricity as well as land and office rents continue to put pressures on companies operating in this country.
As for its trading environment, free trade agreements that Japan has either signed or put into effect represent only 17.6 percent of its overall trade — as against 18.0 percent for the U.S., 27.6 percent for the European Union, 21.5 percent for China and 35.8 percent for South Korea. In particularly, South Korea has already concluded FTAs with both the U.S. and the EU, prompting some Japanese businesses to consider taking advantage of the country’s such arrangements.
The second problem is the closed and exclusive nature of corporate behaviors and commercial practices that linger in Japan. As has long been pointed out from overseas, Japanese firms tend to irrationally stick to time-honored trading practices. Foreign businesses view this as a hard barrier to break as they try to enter the market here. To complicate matters, Japanese firms tend to favor bottom-up approach in decision making, which takes time before a conclusion is reached. In addition, foreign firms complain that they face disadvantages in access to information and administrative judgment as they compete in sectors where public regulations remain strong.
The third issue relates to the weak international awareness and adaptability of Japanese people in general. Communication skills of the people in this traditionally highly homogeneous society have tended to be poor. Relatively speaking, politicians, industrialists, academicians and journalists do not pay much attention to international issues.
In terms of English proficiency, Japan ranks 148th out of 167 nations in the average score on the TOEFL test — and 38th among 40 Asian countries. Lately Japanese youths appear to have become further inward-looking and tend to avoid studying and working abroad. People in foreign businesses often say that they find it very difficult to hire Japanese workers who have an international outlook. It is quite understandable that foreign firms tend to choose China, South Korea, Taiwan and Singapore as their investment destinations.
Japan needs to urgently turn this situation around. If it wants to regain international competitiveness, recover its innovative capabilities and play a major role in the global division of labor, this country must encourage leading foreign firms to come to the Japanese market. For this purpose, the corporate tax rate needs be lowered to levels on a par with other advanced economies.
The government should quickly conclude the Trans-Pacific Partnership free trade arrangement, conclude bilateral FTAs with many more countries, rectify regulations and business practices that constitute barriers to the entry of foreign enterprises, carry out education reforms to make the Japanese people more internationally minded, and introduce drastic incentives for foreign investments through such measures as special economic zones.
Japan is now being left behind in the waves of worldwide globalization. I strongly urge the Abe Cabinet to come out with radical steps to expand foreign direct investments in this country.
Shinji Fukukawa, formerly vice minister of the Ministry of International Trade and Industry (now the Ministry of Economy, Trade and Industry), is senior adviser of the Global Industrial and Social Progress Research Institute.
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