2004 JETRO WHITE PAPER
ON
INTERNATIONAL TRADE AND FOREIGN DIRECT INVESTMENT(Summary)

JAPAN EXTERNAL TRADE ORGANIZATIONCONTENTS
I.

The world economy, trade and foreign direct investment (FDI).............................................. 1
A. Global economy, trade and FDI ....................................................................................................... 1
B.

Japanese trade with China expands while stagnating with the US ............................................ 7

C.

Outward FDI from Japan .................................................................................................................. 9

D. Inward FDI in Japan......................................................................................................................... 10E.

The WTO and other international trade issues ............................................................................ 11

II. Free trade agreements (FTAs) in East Asia and Japanese companies .................................. 12
A. Growing worldwide trend toward FTAs and impact on Japanese companies ....................... 12
B.

New business strategies of Japanese, US, European andAsian companies in East Asia......................................................................................................... 16

C.

Rebuilding Japan’s manufacturing base andthe challenges of an East Asian free business area ...................................................................... 21

III. Revitalization of the Japanese economy through globalization .......................................... 26
A. Increasing soft power and regional economic revitalization ..................................................... 26
B.

Action to attract FDI to Japan begins in earnest .......................................................................... 29

IV. Conclusion: Formation of an East Asian free business area andnew opportunities for Japanese companies................................................................................ 33

This same information can be viewed on JETRO’s website atwww.jetro.go.jp

I. The world economy, trade and foreign direct investment (FDI)
A. Global economy, trade and FDI
1.

The world economy grew 3.9% in 2003, fueled by activity in the US and China- The US and China continue to be the main engines of growth in the world economy, which grew
3.0% in 2002, 3.9% in 2003 and is projected to grow 4.6% in 2004, according to IMF data (Table I-1).
Of the 3.9% growth in global GDP in 2003, China contributed 27.7% and the US 16.3%. Broken
down by expenditure components, Chinese investment (gross fixed capital formation) accounted
for 22.8%, and personal consumption in the US accounted for 12.3%. Investment in China grew
23.0% in nominal terms in 2003, accounting for over 40% of the country’s GDP. Consumption in
the US, meanwhile, held steady, underpinned by tax cuts introduced by the Bush administrationand low interest rates.
- The US and Chinese-led growth of the world economy is not free of risk. The Chinese economy, forexample, is overheating, with investment up 43.0% in the first quarter of 2004 (compared to thesame period a year earlier), led by growth in the real estate, metal and electric power industries,
and a 9.8% overall growth (in real terms) of the economy (of which investment contributed 77.9%).
Over-investment in five specific industries—iron and steel, aluminum, cement, real estate andautomobiles—and inflows of capital from overseas (in expectation of a revaluation of the yuan),
are the two major driving forces behind this high growth in investment. In response, the Chinese
government has imposed investment controls, such as suspending fresh financing in four of theabove five industries (automobiles being the exception). While these curbs on investment are
expected to ease fears of the country overheating, growth in China will remain high, comparedwith Japan, the US and Europe. China will remain the engine of growth for the world economy
and trade in 2004.
- In the US, on the other hand, employment is recovering and the economy is expected to enjoy
steady growth of between 3.5% and 5%, provided that a policy of moderate monetary restraint ispursued that does not upset the present virtuous circle of consumption and investment. However,
the twin deficits—i.e., the trade deficit, which totaled US$547.6 billion in 2003 (of which China
accounted for 22.7%) and the budget deficit, which stood at US$375.3 billion in 2003—together
with the possibility of simultaneous steep rises in the price of oil and natural gas leave theeconomy exposed to risk. The world economy thus continues to depend on growth in the US andChina, even as these two economies face their own risks.

2.

The value of world trade grew by an 8-year high of 16.1%- Growth in world trade (in volume terms) accelerated from 3.2% in 2002 to 5.6% in 2003, while theworld export price index rose from 1.6% in 2002 to 10.5% in 2003. As a result, the value of world
trade (based on the combined exports of 205 countries and regions, according to JETRO estimates)grew by an 8-year high of 16.1%, to reach US$7.5 trillion. China was the leading contributor toworld trade growth in 2003. Its 10.9% contribution to export growth was second only to Germany(12.8%), while its 11.2% contribution to import growth exceeded even Germany’s (10.5%) (Table
I-2).
- China registered strong growth in trade in 2003, with growth well in excess of 30% in both imports(up 39.9% to US$412.8 billion) and exports (up 34.6% to US$438.4 billion). The two main reasonsfor this were: (1) a simultaneous growth in exports of both finished IT products and components(up 53.6% to US$128.7 billion) and imports of IT components (up 43.8% to US$91.1 billion, due inparticular to a 49.2% surge [totaling US$52.6 billion] in imports of semiconductors and othercomponents, taking China [with US$ 76.0 billion in 2003] past the US to become the world’s largest
importer of IT components), as well as the expansion of output in China by Japanese, US andEuropean IT manufacturers of products such as personal computers and cellular phones; and (2)growth in imports of capital goods, iron and steel, and auto parts fueled by the surge in automobile
output (Table I-3).

1

- Behind the rise in the world export price index was the rise in the export price of agricultural andmining products, and the depreciation of the dollar. A breakdown of the index by industry reveals
export price rises of 12.0% in agricultural products, 20.0% in mining products (such as fuels), and10.0% in manufactured products, accounting for 10.0%, 30.0% and 60.0% of the overall rise,
respectively (Table I-4). A major factor underlying the rise in the price of manufactured products
was the depreciation of the US dollar. Whereas the export price of US agricultural products rose
8.8%, the rate of increase in the export price of manufactured products (i.e., non-agricultural
products) was just 1.0%. In line with a weaker dollar, EU trade grew 18% in US dollar terms, butdipped 1.5% in euro terms.
- Growth in world trade (based on the exports of 29 countries and regions) accelerated at the start of2004, growing 19.8% from a year earlier in the first quarter.
3.

World trade in services (exports) grew 11.7% in 2003
World trade in services grew by 11.7% in 2003, over the previous year, to reach US$1,762.6 billion;transportation grew 12.7%, travel 8.8%, and "other services" 13%.
“Other services” accounted for over 50% of the 2003 trade growth in services. Figures for four key
economies (Germany, Japan, Italy and the US) reveal a 14.8% increase in “other business services”(excluding finance, construction and information services, etc.), which make up a little under half of“other services”, and a 10.2% increase in “royalties and license fees”, which accounts for over 20%.

4.

Primary commodity prices rise sharply for the first time in 20 years
The 20-year slump in the CRB Futures Index—the leading international commodity market index
that measures the prices of 17 commodities in six fields—came to an end in March 2004, when it
reached 283.8 (its highest level since March 1984), triggering memories of the sharp rise of the late1970s. Underlying this surge were: (1) the persistence of high oil prices; (2) the increasing flow ofcapital to the commodities market due to the weak dollar; and (3) the growth in demand for energy
and mineral resources in line with China’s surge in industrial output. One reason for oil prices
remaining high is the existence of varying environmental regulations in different states in the US,
resulting in there being over 100 types of gasoline standards. As a consequence, shortages of refining
capacity among suppliers act to push up costs.

5.

World inward FDI shrank for the third straight year, falling 21.1% in 2003
- World FDI measured in terms of inward FDI on a balance of payments basis shrank for a third year
running, falling 21.1% to US$538.9 billion, according to JETRO estimates of inward FDI for 82
economies (Table I-5). Broken down by country and region, inward FDI declined 44.9% in the US,
23.7% in the EU, and 4.5% in China (the first decrease there since 2000, due mainly to the effect ofsevere acute respiratory syndrome (SARS).
- This three-year decline in world inward FDI is due to a prolonged period of adjustment ininvestment, which had ballooned to excessive proportions during the so-called IT bubble (US$1.5
trillion in 2000, with M&As in the same year amounting to US$1.3 trillion). Cross-border M&As in
2003 are returning to the level seen in 1996-1997, before the start of the IT bubble and the rise in US
share prices.
- The world value of cross-border M&As in 2003 (based on completed deals) declined 21.1% to
US$320.4 billion, while the number of deals fell 0.4% to 5,176 (Table I-6). Playing a large part in the
decline were the dramatic falls in M&As by EU acquirers of US companies (down 34.5% to US$39.3
billion) and cross-border M&As within the EU region (down 55.5% to US$62.4 billion). Within
specific industries, there was a continued decline in the value of M&As in the IT sector (down
30.6% to US$46.6 billion). Total world cross-border M&As in the first six months of 2004 (alsobased on completed deals) registered an upturn of 12.9% from the same period a year earlier, toUS$176.2 billion, fueling expectations of a recovery in global FDI in 2004.

2

Table I-1

Global economy, trade and investment indices (year-on-year percentage change)(Units: US$ billion, %)1998

3

Global economy% changeJapan% changeUS% change
EU15% change
East Asia% change
Global industrial production index
Global merchandise trade
Value(exports)% change
Real growth rate
Global merchandise trade price
Crude oil price (US$/barrel)
Global service trade
Value(receipts)% change
Global FDI
Value(inward flow)% change
Global cross-border M&As
Value
% change
Notes:

1999

2000

2001

2002

2003

Q1
2004

2004
Notes
(projected)
4.6
The global growth rate calculated by the IMF using PPP
3.4 weights of the corresponding country and year, except
4.6 for East Asia for which the 1990 PPP is used. Projected
2.0 figures are according to the European Commission for
EU15 in 2004, and the IMF for other economies.
7.4
11 major countries and regions

2.8
3.7
4.7
2.4
3.0
3.9
−1.1
−0.3
0.1
2.8
0.4
2.5
5.6
4.2
4.5
3.7
0.8
1.9
3.0
5.0
2.9
2.9
3.6
1.7
1.0
0.8
1.6
1.8
6.3
7.5
5.3
7.0
7.3
8.4
−1.7
2.3
3.8
5.3
0.5
1.6
3.7
5,450.7 5,649.6 6,360.9 6,129.2 6,419.6 7,486.5 1,677.4
JETRO estimates for 2003 (based on 205 countries and regions)
−1.6
3.6
12.6
−3.6
4.7
16.1
19.8
29 major countries and regions for Q1 2004
4.2
4.3
10.6
−0.1
3.2
5.6
19.8
−5.8
−0.7
−3.5
2.0
1.6
10.5
0.0
13.1
18.0
28.2
24.3
25.0
28.9
32.1 Average price of WTI, Dubai and UK Brent
1,344.1 1,392.1 1,480.7 1,482.7 1,578.6 1,762.6
147.7
US, UK and Japan only for Q1 2004
1.4
3.6
6.4
0.1
6.5
11.7
15.8
705.2 1,094.4 1,509.0
805.1
683.4
538.9
JETRO estimates for 2003 (based on 82 countries and regions)
−46.6
−15.1
−21.1
47.1
55.2
37.9
632.0
867.9 1,258.6
645.1
406.3
320.4
176.2
First half for 2004
−48.7
−37.0
−21.1
92.7
37.3
45.0
12.9

1. EU15 includes Austria, Belgium, Denmark, Germany, Greece, Finland, France, Ireland, Italy, Luxembourg, Portugal, Spain, Sweden, the Netherlands, and the UK.
2. East Asia includes Asian NIEs (Republic of Korea, Taiwan, Hong Kong and Singapore), ASEAN 4 (Indonesia, Malaysia, Philippines and Thailand), and China.

Sources: Prepared by JETRO from IFS, WEO April 2004 (IMF), WTO, Thomson Financial data and national statistics.

Table I-2

Trends in global trade by country and region(Units: US$ million, %)World

Value of exports(nominal)% change
Real % change

EU15

Germany

East Asia

China

Japan

US

Note:

Value of exports% change% contribution
Value of imports% change% contribution
Value of exports% change% contribution
Value of imports% change% contribution
Value of exports% change% contribution
Value of imports% change% contribution
Value of exports% change% contribution
Value of imports% change% contribution
Value of exports% change% contribution
Value of imports% change% contribution
Value of exports% change% contribution
Value of imports% change% contribution

2001
6,129,230

2002
6,419,600

2003
7,486,504

−3.6
−0.1

4.7
3.2

16.1
5.6

2,317,099
0.5−4.9
2,265,321−2.0
20.1
571,3943.9−9.3
486,001-1.8
3.9
1,093,769−7.0
35.7
1,006,491−7.1
33.1
266,403
6.9−7.4
243,5638.2−8.0
403,247−15.8
32.7
349,235−8.0
13.1
729,100−6.8
22.8
1,140,999
−6.3
33.3

2,461,930
6.3
49.9
2,360,662
4.2
40.2
616,0777.8
15.4
491,6421.2
2.4
1,200,543
9.8
36.8
1,105,452
9.8
41.7
325,596
22.2
20.4
295,17021.2
21.7
415,862
3.1
4.3
336,832−3.6−5.2
693,103−4.9−12.4
1,161,366
1.8
8.6

2,904,171
18.0
42.7
2,817,328
19.3
43.4
749,055
21.6
12.8
602,18122.5
10.5
1,427,343
18.9
21.9
1,306,105
18.2
19.1
438,371
34.6
10.9
412,83639.9
11.2
469,86213.0
5.2
381,52813.3
4.3
724,771
4.6
3.1
1,257,121
8.2
9.1

JETRO estimates for the value of world exports (nominal) in 2003, percentage changes
and percentage contributions by country and region. IMF data for the value of world
exports (nominal) in 2001-2002. Percentage contributions of countries and regions arepercentage contributions to the growth of the total value of world imports and exports.

Sources: Prepared from WTO, IMF and national statistics.

4

Table I-3

Trends in global trade by major categories of goods (value of exports)(Units: US$ million, %)IT-related products% change% contribution
Semiconductors and other electronic components% change% contribution
Chemicals% change% contribution
Automobiles% change% contribution
Iron and steel% change% contribution
Mineral fuels% change% contribution
Note:

2000
1,216,854
22.0
30.9
314,59128.9
9.9
722,7308.4
7.8
364,6443.0
1.5
209,80711.5
3.0
607,159
62.9
33.0

2001
1,072,753
−11.8
62.2
249,289−20.8
28.2
732,690
1.4−4.3
367,2480.7−1.1
196,271−6.5
5.8
542,240
−10.7
28.0

2002
1,088,424
1.5
5.4
262,3635.2
4.5
811,82310.8
27.3
405,892
10.5
13.3
217,096
10.6
7.2
540,091
−0.4
−0.7

2003
1,218,143
11.9
12.5
291,660
11.2
2.8
962,291
18.5
14.5
468,492
15.4
6.0
267,157
23.1
4.8
677,32925.4
13.2

Estimates for percentage contributions in 2003.

Sources: Prepared from IMF and national statistics.

Table I-4

Global trade in primary commodities(Units: US$ million, %)Value of imports of primary commodities (world)% change
Value of imports of primary commodities (China)% change
Export price of agricultural products (% change)
Export price of mining products (% change)
Export price of manufactured products (% change)
Note:

2000
653,660
55.5
23,666
129.5
−3.5
39.5
−2.5

2001
597,428−8.6
21,210
−10.4
−2.2
−8.4
−2.5

2002
591,146−1.1
22,200
4.7
2.4
−0.9
1.3

2003
744,853
26.0
36,300
63.5
12.0
20.0
10.0

Imports of primary commodities indicate the combined imports of 17 goods included in the CRB index.

Sources: Prepared from IMF, WTO and national statistics.

5

Table I-5

Inward FDI of major economies(Units: US$ million, %)2002
72,411
372,521117,088
48,95036,04827,802
9,245

US
EU15
Luxembourg
FranceGermany
UK
Japan

2003
% growth rate
−44.9
39,890−23.7
284,098
73,191−37.5
47,026−3.9−64.3
12,878−47.6
14,5746,325−31.6% contribution
−4.8
−12.9
−6.4
−0.3
−3.4
−1.9
−0.4

% share
7.4
52.7
13.6
8.7
2.4
2.7
1.2

East Asia
China
Asian NIEs
ASEAN4Latin America (19 countries)
10 new EU members

74,65149,30819,2496,094
44,212
23,02679,70147,07728,623
4,001
35,99812,719

6.8
−4.5
48.7
−34.3
−18.6
−44.8

0.7
−0.3
1.4
− 0.3
−1.2
−1.5

14.8
8.7
5.3
0.7
6.7
2.4

Developed countries
Developing countries
World

497,570
185,786
683,356

360,018
178,897
538,915

−27.6
−3.7
−21.1

−20.1
−1.0
−21.1

66.8
33.2
100.0

Notes:

1. Net flows are based on balance of payments.
2. JETRO estimates for developed countries, developing countries and world.
3. “Latin America” consists of the following 19 countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica,
Dominica Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama,Paraguay, Peru, Uruguay and Venezuela.

Sources: Prepared from IMF, OECD, Economic Commission for Latin America and the Caribbean data and balance of
payments statistics for each country and region.

Table I-6 Global cross-border M&As (by country and region)(Units: US$ million, no. of deals, %)Target country/region
2002
2003
Value
No. ofValue% changedeals

No. of
deals

2002
Value

Acquirer country/region
2003
No. ofValue% changedeals

No. of
deals

World

406,279

5,199

320,400

−21.1

5,176

406,279

5,199

320,400

−21.1

5,176

US
EU15
UK
FranceGermany
Netherlands
Japan
East Asia
Asian NIEs
ASEAN4
China

79,493
216,384
61,11331,49048,928
11,576
7,279
17,532
9,882
4,728
2,922

827
2,053
486
250
390
122
105
514
245
129
140

70,168136,235
35,35018,83026,921
9,371
12,605
19,245
12,526
2,599
4,119

−11.7
−37.0
−42.2
−40.2
−45.0
−19.0
73.2
9.8
26.8
−45.0
41.0

769
1,955
536
239
358
119
107
638
255
147
236

86,386
243,023
61,82837,201
58,61728,869
8,114
13,213
7,875
2,814
2,524

1,053
2,485
647
325
378
245
137
376
250
78
48

87,155139,057
72,704
9,497
19,455
9,830
7,457
16,214
7,738
3,846
4,631

0.9
−42.8
17.6
−74.5
−66.8
−66.0
−8.1
22.7
−1.7
36.7
83.5

1,190
2,174
627
257
333
179
148
502
352
93
57

Note:

As of July 8, 2004.

Source: Prepared from Thomson Financial data.

6

B.

Japanese trade with China expands while stagnating with the US
1.

Exports grow for a second straight year, while imports grow for the first time in three years
Japanese trade, measured on a customs-clearance basis, saw exports grow for a second straight year
(up 13.0% in 2003 to US$469.9 billion), while imports grew for the first time in three years (up 13.3%
to US$381.5 billion). In volume terms, exports rose 4.9% and imports 7.1% (Table I-7). The trade
surplus grew for a second year running, rising US$9.3 billion (11.8%) to US$88.3 billion. In the firstsix months of 2004, the growth rate increased further, with exports up 23.3% and imports up 17.0%,
from a year earlier.

2.

Exports to China grow 43.5% on the back of a surge in automobile output and robust growth incapital investment, while exports to the US decline for a third consecutive year
Exports to China grew 43.5% in 2003 to US$57.2 billion. A breakdown by category reveals a 53.8%
surge (to US$35.5 billion) in exports of machinery and equipment, such as automobile components(up 104.6%), precision instruments (up 69.7%) and general machinery (up 53.0%), due to a sharp risein automobile production and capital investment in China.
Meanwhile, exports to the US fell for a third straight year (down 2.7% in 2003 to US$115.4 billion), asa result of declines (also the third straight) in exports of machinery and equipment (down 3.6% to
US$92.4 billion). Automobile exports to the US slumped 7.9% to US$32.8 billion. Exports of
IT-related products were also sluggish, slipping 5.2% to US$24.6 billion. Overall, there was anarrowing in the gap in exports of machinery and equipment (excluding transport equipment) to
China (US$31.7 billion) and the US (US$48.1 billion).

3.

China accounts for 19.7% of Japanese imports; the US accounts for 15.4%, as the gap between thetwo increases, compared with 2002
The story was the same regarding imports in 2003: Chinese imports grew a robust 21.9% to US$75.2
billion, while imports from the US edged up a mere 1.8% to US$58.7 billion. China first overtook the
US as Japan’s primary source of imports (in value terms) in 2002. The gap widened further in 2003, as
China’s share of the value of Japanese imports grew to 19.7% in 2003 from 18.3% in the previous
year; conversely, the US share shrank from 17.1% in 2002 to 15.4% in 2003. In the first six months of
2004, growth in imports from China was again higher, increasing 26.0% on a year earlier, comparedwith just 6.5% for the US.
One of the reasons for the widening gap in imports from the US and China is the trend in imports ofmachinery and equipment: such imports from China grew 35.4% to US$28.0 billion, while thosefrom the US shrank 1.4% to US$27.2 billion. Roughly two-thirds (or 66%) of machinery andequipment imports from China are IT-related products.

4.

Surge in exports of LCD TVs to the US and EU markets, as Japanese manufacturers reap the
benefits of developing digital consumer electronics products in JapanAt the core of Japan’s IT-related trade are imports and exports of IT components, semiconductors inparticular. In 2003, there was a rise in exports of finished IT products, such as telecommunications
devices and video equipment. For many years, the majority of exported finished IT products werecomputers and peripherals. Since 2002, however, the largest category of exports has been video
equipment, which grew 19.0% in 2003 to US$16.0 billion. This is due to the growth in exports ofproducts such as digital and other cameras (up 23.8% to US$9.6 billion) and LCD TVs (up 82.5% to
US$1.0 billion), reflecting the impact of the development of new digital consumer electronics
products in Japan for the home market. Exports of TVs from Japan began to decline after peaking at
US$1.8 billion in 1994 (by 2001, the figure had fallen to just US$400 million). In 2002, however,exports began to pick up, recovering to US$1.2 billion in 2003 (Fig. I-1), led by a surge in exports of
LCD color TVs to the US (up 74.3%) and a twofold rise in such exports to the EU. LCD panels, a corecomponent of LCD color televisions, are also being supplied (i.e., exported) to overseas assemblyplants.

7

Table I-7

Japan’s trade(Units: US$ million, %)
2003

2003
Total exports(YOY change)
US
EU15
China
Asian NIEs
ASEAN4% change in export volume index (2000=100)
Total imports(YOY change)
US
EU15
China
Asian NIEs
ASEAN4YOY % charge in import volume index (2000=100)
Proportion of oil imports
Proportion of imports of manufactured products
Real GDP growth rateGDP
% contribution to exports

I
109,092
16.7
27,866
17,737
12,20425,0799,733
7.5
92,35320.2
14,057
11,696
16,8109,061
11,565
8.2
14.1
59.0
0.1
0.1

469,862
13.0
115,41271,89357,219110,415
43,293
4.9
381,52813.3
58,65848,78975,19338,84747,751
7.1
12.0
61.5
2.5
1.1

II
112,495
11.3
28,415
17,435
13,54625,64910,445
2.6
92,575
15.4
15,253
11,59917,8899,401
11,602
8.4
11.7
61.0
0.9
0.2

III
116,980
7.9
28,16417,096
14,754
27,175
11,226
2.3
94,382
7.3
14,12912,15819,041
9,390
12,033
5.0
11.1
62.4
0.7
0.4

IV
131,295
16.4
30,967
19,625
16,71632,512
11,8897.3
102,218
11.3
15,21913,33721,454
10,994
12,552
7.1
11.1
63.3
1.8
0.6

2004
I
II
134,874
138,346
23.6
23.0
30,57430,943
21,74920,144
16,585
18,42332,921
34,617
12,091
12,63713.1
13.9
106,679
109,607
15.5
18.4
14,995
16,20914,50813,462
21,246
22,467
11,225
11,648
12,952
13,238
9.0
6.6
11.8
11.2
62.5
61.6
1.5
0.5
-

Sources: Prepared from Trade Statistics (Ministry of Finance, Japan), National Accounts (Cabinet Office).

Fig. I-1

Japan’s exports of color TVs(US$ million)
2000
1,738

1800

1,608

1,836
1,665

1600 1,430

LCD color TVs
Color TVs (CRTs)
All color TVs

1,438

1400
1200

1,174

1,047
972

1000
800

704

715
483

600

738

488

400

437

200
0
1990

Notes:

1991

1992

1993

1994

1995 1996

1997

1998

1999

2000

2001

2002

1. LCD color TVs are TVs under HS code 8528-12-190. Data are for 1996 only.
2. “All color TVs” is the combined total for LCD and CRT TVs.

Source: Prepared from Trade Statistics (Ministry of Finance, Japan).

8

2003
Jan-May 2004

C. Outward FDI from Japan1.

Outward FDI in fiscal 2003 declines 2.1%
Japanese outward FDI (based on reports and notifications) remained almost unchanged in fiscal year
2003 (April-March) in value terms, edging down just 2.1% to US$36.1 billion, compared to theprevious year. In terms of the number of investments, however, investment activity grew for a third
straight year, rising 247 to 2,411 (Table I-8). Broken down by industry, investment in manufacturing
grew for a third consecutive year, rising 10.6% to US$16.2 billion. Investment in non-manufacturing,on the other hand, declined 10.3% to US$19.6 billion.

2.

Growth in investment by Japanese automakers and auto components makers in China and Central
and Eastern Europe
Japanese FDI in the US grew 28.8% in 2003 to US$10.6 billion, fueled by increased investment in thechemical industry. FDI entering China rose 78.0% to US$3.1 billion (the fourth increase in as many
years), with particularly marked growth in investment by automakers, resulting in a 4.4 times
increase (to US$800 million) in FDI in transportation equipment, over the previous fiscal year.
Growth in investment in Central and Eastern Europe (based on data for five countries) was alsofueled by investment in the automobile sector, which grew 2.3 times in 2003 to US$500 million.
Growth in FDI in the ASEAN4 nations of Indonesia, Malaysia, Philippines and Thailand, which rose
27.1% to US$1.9 billion, was likewise fueled by investment in the automobile sector.

Table I-8

Japan’s outward FDI (based on reports and notifications)(Units: US$ million, %)FY2002

North America
US
Latin America
Cayman Islands
BrazilEU15UK
Netherlands
FranceGermany
Luxembourg
Central and Eastern Europe (5 countries)
East Asia
China
Asian NIEs
ASEAN4
Oceania
Other
Total
Notes:

8,449
8,215
5,746
4,036
406
15,067
4,412
3,295
3,574
381
271
201
5,250
1,766
1,961
1,523
1,335
810
36,858Value
10,680
10,577
5,262
2,123
1,551
12,034
1,785
6,869
1,561
694
190
472
6,233
3,143
1,154
1,936
1,006
406
36,092

FY2003% change
26.4
28.8
−8.4
−47.4
281.8
−20.1
−59.5
108.5
−56.3
81.9
−29.7
134.4
18.7
78.0
−41.2
27.1
−24.7
−49.9
−2.1

% share
29.6
29.3
14.6
5.9
4.3
33.3
4.9
19.0
4.3
1.9
0.5
1.3
17.3
8.7
3.2
5.4
2.8
1.1
100.0

1. Figures announced in yen converted to US dollars using the Bank of Japan interbank averageexchange rate for the period. Conversions were made at US$1=¥121.90 for FY2002 andUS$1=¥113.03 for FY2003.
2. The total for “East Asia” is the combined total for China, the Asian NIEs and ASEAN4. The fivecountries of Central and Eastern Europe are Romania, Hungary, Poland, the Czech Republicand Slovak Republic.

Sources: Prepared from Outward and Inward Foreign Direct Investment (Ministry of Finance, Japan) andForeign Exchange Rates (Bank of Japan).

9D. Inward FDI in Japan1.

FDI entering Japan grows 4.4% in fiscal 2003
FDI entering Japan in fiscal 2003 (based on reports and notifications) was somewhat flat, rising 4.4%
to US$18.7 billion (Table I-9), while the number of investments fell by 34 to 1,431. Broken down byindustry, there was a 36.1% fall in investment in manufacturing (to US$4.3 billion), but a leap of
28.8% to US$14.4 billion in non-manufacturing. Within manufacturing, investment in the food sector
grew 6.6 times to US$400 million, while in non-manufacturing, finance and insurance investment
increased 69.7% to US$9.0 billion; investment in trade and commerce grew 54.2% to US$3.3 billion.

2.

Total stock of inward FDI at year-end 2003 up 1.4 times from year-end 2001
The total inward FDI stock into Japan as of the end of 2003 was up US$11.3 billion (14.5%) from theprevious year, to US$89.8 billion (a 2.6% increase in yen terms to ¥9.7 trillion), while the total
outward FDI stock rose US$30.3 billion (9.9%) to US$335.9 billion (a 1.5% decrease in yen terms to¥35.9 trillion). Japan’s total inward FDI stock is now 1.4 times what it was in 2001 (¥6.6 trillion),
which is well on the way to achieving the Japanese government’s stated goal of doubling its inward
FDI stock in the five year period between the end of 2001 and end of 2006.

Table I-9

Japan’s Inward FDI (based on reports and notifications)(Units: US$ million, %)FY2002

North America
US
Latin America
Cayman Islands (UK)
Bermuda (UK)EU15
Netherlands
FranceGermanyUK
East Asia
China
Asian NIEs
Oceania
Japan
Other
Total
Notes:

5,380
4,876
1,837
1,671
70
5,256
3,221
90
980
257
373
3
370
48
4,462
580
17,935

Value
3,893
3,090
4,075
2,586
1,431
6,018
2,800
193
1,173
230
1,427
3
1,425
14
3,181
113
18,722

FY2003% change
−27.6
−36.6
121.9
54.7
1,934.8
14.5
−13.1
114.3
19.7
−10.7
282.9
2.8
284.8
−70.0
−28.7
−80.5
4.4

% share
20.8
16.5
21.8
13.8
7.6
32.1
15.0
1.0
6.3
1.2
7.6
0.0
7.6
0.1
17.0
0.6
100.0

1. Inward FDI from Japan is by foreign affiliates in Japan.
2. Figures announced in yen converted to US dollars using the Bank of Japan
interbank exchange average rate for the period. Conversions were made at
US$1=¥121.90 for FY2002 and US$1=¥113.03 for FY2003.
3. The figure for East Asia is the combined total for China, the Asian NIEs and
ASEAN4.

Sources: Prepared from Outward and Inward Foreign Direct Investment (Ministry of
Finance, Japan) and Foreign Exchange Rates (Bank of Japan).

10

E.

The WTO and other international trade issues
1.

Progress in WTO negotiations and issues to be addressed
From the beginning of 2004, negotiations regarding the Doha Development Agenda appeared as if
they would be back on track, as countries moved toward compromise. And, as the EU indicated its
willingness to meet demands for the phased abolition of agricultural export subsidies, and prospects
for negotiations on trade facilitation seemed likely to get underway, the WTO seemed to be taking a
step further toward reaching a framework agreement at its General Council meeting in July. The
three key issues in agricultural negotiations are the improvement of market access, cuts in domestic
subsidies, and the abolition of export regulation (subsidies). The biggest point of contention regards
how the tariffs should be cut, with interest currently focused on a tiered formula applied to eachcategory of goods, according to the size of tariffs. At the center of agricultural negotiations are the US,
EU, Australia, Brazil and India (Japan has been unable to make its presence felt in this arena). In
negotiations on market access for non-agricultural goods (mining and industrial goods, and forestry
and fishery products), discussion has focused on either: (1) allowing flexibility in application of tariff
reduction in certain categories of goods—those subject to high tariffs—based on a proposal to apply
a formula for reductions to each individual category without exception; or (2) selecting certain
sectors for application of zero tariffs in advance of others. Unless major progress is made in thesenegotiations, however, it is unlikely that a detailed agreement will be reached by July. There has also
been little progress in opening up trade in services, with only 44 countries having submitted initialoffers regarding sectors for liberalization as of the end of June. Actions are being taken by
developing countries, who are pushing for improvements in the liberalization offers from developed
countries concerning the “movement of service providers”. In membership negotiations, it isexpected that Saudi Arabia’s accession will be accepted within the year, and negotiations regarding
Russia’s accession are also making progress. In addition to progress in negotiations on services,
Russia has indicated its willingness to accede to demands for a reduction in automobile tariffs (until
now a stumbling block) in bilateral negotiations with Japan, with some analysts believing that
Russia’s accession will be achieved as early as the end of 2005.

2.

The opening of China’s markets and state of liberalization since accession to the WTO
The Chinese government is actively implementing commitments in fields such as tariff reductions
and legal reforms, in accordance with its WTO accession protocol. Regarding controls on foreign
investment, the fine print regarding liberalization of the trade and distribution sectors (until now abone of contention) has been clarified through an amendment in April 2004 to the Foreign Trade
Law, which sits at the apex of legislation regulating foreign trade in this sector. Also, the recently
adopted “New Management of Commercial Enterprises with Foreign Investment” provides for theentry of foreign affiliates to China’s domestic retail and wholesale markets. How this legislation will
actually be applied, however, is another matter. And concerns remain among Japanese companies
regarding whether liberalization will be achieved according to schedule. The WTO has aTransitional Review Mechanism (TRM) for reviewing China’s fulfillment of its obligations under theaccession protocol, which is being used by Japan and other countries to demand that their concerns
are properly addressed. Using this mechanism, Japan submitted comments and questions to China
in 2003 regarding, among other things, the schedule for government procurement agreement
membership applications, the schedule for the amendment of the tariff rate on photographic
products, unreasonableness and poor objectiveness of data in anti-dumping investigations, andopacity of standards on application of criminal penalties against parties infringing Intellectual
Property Rights (IPR).

11

II. Free trade agreements (FTAs) in East Asia and Japanese companies
A. Growing worldwide trend toward FTAs and impact on Japanese companies
1.

Growing worldwide trend toward FTAs
a. Working on the basis of the number of agreements reported to the WTO, there are currently 107
FTAs in effect around the world. In Europe, the EU has expanded to include 25 countries, with a
combined GDP of approximately US$11 trillion and exports worth US$2.5 trillion (Table II-1). In
the Americas, the 34-nation Free Trade Area of the Americas (FTAA)— which would make a
combined GDP of US$13.6 trillion and exports totaling US$1.3 trillion—is under negotiation.
Across the world, moves are also underway to create intercontinental FTAs. The EU, for example,
is in negotiations with Mercosur, while the US has reached an agreement with Morocco andentered negotiations with Thailand, after concluding FTAs with Singapore and Australia.
b. East Asia (the Asian NIEs countries of the Republic of Korea [ROK], Taiwan, Hong Kong andSingapore; the ASEAN4 countries; China and Japan), devoid until recently of FTAs, has seen
activity in this area pick up since 2000. Moves to create a free trade area have begun, first of all, in
ASEAN, with six original member countries bringing tariffs down to 0-5% on almost all
categories of goods in 2003, under the Common Effective Preferential Tariffs for the ASEAN Free
Trade Area (CEPT-AFTA). The six will be joined in 2006 by Vietnam, which will bringintra-regional tariffs down to the same level (0-5%). The signing of FTAs between Japan andSingapore in 2002, and between China and Hong Kong and China and Macau in 2004 are further
examples of the removal of trade barriers in the region. FTA negotiations have also started
between China and ASEAN, Japan and ASEAN, and Japan and, individually, Thailand, thePhilippines, Malaysia and ROK. Under these agreements, tariffs will be progressively phased out
between 2005 and around 2012. Thus, in just another ten years, East Asia will be a completely free
trade area, with the exception of trade between Japan and China, China and ROK, and various
combinations of trade with Taiwan.
c. While world trade grew fourfold between 1985 and 2003, trade in East Asia surged ahead 7.8
times, during when intra-regional trade in the North American Free Trade Agreement (NAFTA)
and EU grew 4.4 times and 4.2 times, respectively. Thus, despite the absence of economic
integration at the institutional level, the East Asia region has had the world’s highest rate of
growth in intra-regional trade. And by making the transition to institutional integration,
economies in the region will have the opportunity to enjoy a fresh round of economic
development.

12

Table II-1

1955-59
1960-64
1965-69
1970-74
1975-79
1980-84
1985-89
1990-94
1995-99
2000Total
Notes:

Total number of FTAs currently in effect by region and period
Europe, Middle East,
Africa1
1AmericasAsia-PacificInter-regional

Total

16
22
22

1
1
2
2
4

3
1
6

1
8

1
2
1
4
5
4
3
21
26
40

67

12

14

14

107

1
3
1

1
1
2

1
2
2

2

1. The above figures are based on the 208 regional trade agreements (RTAs) listed on the WTO
website (defined as RTAs reported to GATT or the WTO and currently in effect) minus 101
agreements that were excluded due, for example, to (1) becoming void with the expansion of
the EU on May 1, 2004; (2) double counting of agreements arising from new accessions toexisting FTAs; and (3) double counting due to reporting to both GATT and GATS.
2. FTAs are allocated to a period according to their effective date, or the year of reporting to
GATT or WTO where the date of entry into effect is unknown (GCC: 1984, ECO: 1992).
3. The figures indicate the number of agreements.

Source: Prepared from the list given on the WTO website(http://www.wto.org/english/tratop_e/region_e/eif_e.xls), as of May 1, 2004.

2.

East Asian FTAs and their impact on Japanese companies
a. The formation of AFTA and the response of Japanese companies
Beginning in January 2003, intra-regional tariffs among the six original member countries of
ASEAN were lowered to 0-5% (with the exception of certain goods), sparking a rise inproduction concentration in the ASEAN region and reorganization among Japanese automobileand consumer electronics manufacturers operating in the region. Due to the establishment of
AFTA, production activity in the ASEAN region has entered a new era, as region-wide
production and sales networks develop throughout the region.
[Opinions of Japanese automakers (in response to AFTA)]
To date, the strategy of Japanese automakers has been to treat the ASEAN market as a numberof segmented markets, and work to meet demand in each country individually. But due to thelowering of intra-regional tariffs on finished vehicles (apart from in Malaysia), intra-regional
export of finished vehicles is spreading. Sourcing of auto parts from within the region isincreasing as well—even ahead of finished vehicles—using schemes such as ASEAN Industrial
Cooperation (AICO), which, like others, has its drawbacks, such as the need to obtain approval
for each individual project. This trend is gathering pace as AFTA develops and the need forcomplex procedures is eliminated.
b. ASEAN-China FTA and the impact on Japanese affiliates: the situation in Thailand
The ASEAN-China FTA brought the maximum tariff rate on agricultural products down to 10%
as of January 1, 2004, while tariff reductions on manufactured products and other goods are
expected to enter into force on schedule (July 1, 2005). With the exception of certain “sensitive”
categories of goods, the FTA is to be completed by 2010. In the automobile and consumer
electronics sectors, Japanese affiliates are expected to prepare for the realization of theASEAN-China FTA in the following ways:
1) Japanese automakers are ramping up capacity in both China and ASEAN, which it regards13

as separate markets. Within ASEAN, these automakers, under CEPT, have begun exporting
finished cars between their operations in countries throughout the region, and may in the
future include operations in China. However, as the lowering of tariffs on finished cars is
expected to be still some ways off, the country’s inclusion has yet to be considered in detail.
2) Automobile parts manufacturers operating in East Asia are moving to boost local
procurement (including from within ASEAN). In some countries, such as Thailand, parts
manufacturers are investing in new or expanded facilities to try to raise capacity to meet theneeds of these automakers. Thai tariffs on imports of auto parts from China are relatively
high (5-30%), so the elimination of tariffs through conclusion of an FTA between the twocountries may well lead to an increase in sourcing of mass-produced parts, in particular,from China.
3) The main effects on Japanese consumer electronics manufacturers are likely to be as follows:(i) a new trend in some companies toward an internal division of labor between their
ASEAN and Chinese operations; and (ii) an increase in competition as a result of the FTA inthe consumer electronics sector, as Chinese brands enter the Thai market.
[Opinion of Japanese consumer electronics manufacturers (in response to the FTA between
ASEAN and China)]
Some manufacturers are starting to increase their internal division of labor between their
ASEAN and Chinese operations. Many Japanese consumer electronics manufacturers are
splitting up tasks, along the lines described by one company based in Thailand, which says,“Despite some differences depending on the product, we generally use China as a center for
production for the domestic market, and use operations in Thailand as an export base for the
rest of the world.” However, some companies are also starting to divide up production in themanner described by another manufacturer in Thailand, which says, “Depending on the model,
some export production is being swapped between China and Thailand, with some microwave
oven production being shifted from China to Thailand, and some fax machine production being
moved from Thailand to China.”
In the consumer electronics sector, an FTA is expected to accelerate the rise in competition from
Chinese brands in the Thai market. At 15-20%, Thai tariffs on finished consumer electronics
products are high and, as one Japanese affiliate in Thailand explains, “The Thai domestic
market is protected by high tariffs, and the influx of Chinese products is currently low.” Thus,
there is a strong likelihood that, if tariffs were abolished, Chinese-made products would flood
the Thai market. As another Japanese affiliate based in Thailand points out, “Over the past
couple of years, there has been a rapid surge in Chinese products entering the market. At
discount stores such as Carrefour and Lotus, half-price washing machines and similar products
have begun to appear. Volume retailers account for around 60% of the Thai retail market, andso their impact is considerable.”3.

Economic partnership agreements (EPAs) involving Japan, and their impact on Japanese affiliates
overseasa. Effects of the Japan-Singapore Economic Partnership Agreement (JSEPA)
At a review meeting on December 11, 2003, it was confirmed that trade in goods on whichtariffs have been abolished under JSEPA was steadily growing, and that bilateral economic
relations between Japan and Singapore were growing stronger. Under JSEPA, a total of 69
Singaporean companies have obtained Certificates of Origin for customs-free exports to Japan,
resulting in a savings (for the companies) of $US4.8 million in customs duties. In the service
sector, haircut specialist QB Net (QB House) launched a “10-minute express haircut for S$10” inSingapore in July 2002 under a licensing agreement with a local partner, and established awholly owned subsidiary, QB Shell, in December 2002.
b. Japan-Mexico EPA (scheduled to enter into force in April 2005) and the likely effects it will have14

on Japanese companies investing in Mexico
Mexican tariffs on automobile imports from Japan are a high 23%. And although companies
that manufacture in Mexico qualify for a tariff-free import quota, the number of vehicles thatcan be imported from Japan (just 30,000 units in 2003) is much smaller than that from the EU(150,000 units in 2003) and Brazil (140,000 units in 2003), as these countries have larger quotas
under FTAs and automobile agreements with Mexico. The Japan-Mexico EPA, however, will
allocate to Japan a fresh quota equivalent to 5% of domestic unit sales in Mexico (approximately
one million units), which will be usable by companies that do not have production operationsin Mexico as well. An increase in exports equivalent to this quota is therefore expected. After six
years, tariffs on units in excess of this quota will be abolished, greatly improving future accessto the Mexican market.
Tariffs on auto parts and materials will also be scrapped, so they will no longer be subject to thehigh level of general duty (currently between 13-23%), making them easier to source fromJapan.
Japanese-affiliated maquiladora companies producing products such as TVs and audio
equipment for the US market make extensive use of non-Japanese supplies that will not becovered by the Japan-Mexico EPA, such as Chinese-made parts. Thus, many companies are
expecting to benefit more from improvements in the business environment than the removal oftariffs. Mexico’s business environment has been faced with several difficult issues in recent
years, such as rising production costs due to increasing labor costs, deteriorating public safety,
and frequent changes to the legal system. Thus, the Japan-Mexico EPA, unlike traditional FTAs,
includes a provision for bilateral consultation mechanisms, the use of which should give
Japanese investors in Mexico a voice in improving the business environment there, while also
increasing the country’s attractiveness as a production base for export to North America.
c. Overseas Japanese affiliates’ expectations of Japan-East Asia EPAs currently under negotiation
While not yet at the stage of initiating any form of action in response, Japanese affiliates(especially in the countries concerned) have high expectations of the FTAs currently being
negotiated between Japan and a number of countries in East Asia, including Thailand, Malaysia,
the Philippines and ROK. Some of the concrete benefits they expect to reap are:1) Tariff reductions, for example, would allow for a large-scale switch to imports of parts fromJapan instead of locally produced parts, and also lead to growth in exports from Japan offinished products2) Growth in investment from Japan, in particular in the service sector (where FDI is regulated
under foreign business control laws)
3) Facilitation, streamlining and improvement of transparency of procedures (such as customs,
approvals and mutual recognition procedures) and reduction of non-tariff measures4) Improvement of the business environment as a result of EPAs, such as infrastructure
improvements (new highways, port facilities and the like), and a reduction of electricity
costs

15

B.

New business strategies of Japanese, US, European and Asian companies in East Asia
1.

Investment in East Asia by Japanese, US and European companies
a. As the formation of FTAs in East Asia gathers pace, investment in the area is increasing, led by
Japanese, Korean and Taiwanese firms. US and European firms are also attracted to East Asia,
owing to the area's improved investment conditions and favorable tariff arrangements covering
movement of products/goods between economies with FTAs in place. According to statistics on
FDI made in ASEAN countries by Japanese, European and US companies, the cumulative
amount of FDI made in ASEAN between 1985 and 2003 was US$100.5 billion from Japan, US$49.4
billion from the US, and US$72.2 billion from four European countries (UK, Germany, France and
Italy), putting Japan in first place (Table II-2). This is a reflection of the formation of deep-rooted
production networks in ASEAN by Japanese companies, especially manufacturers, as theytransplanted their mass-production operations from Japan to ASEAN in the wake of theappreciation of the yen in the 1980s. If we look at the distribution of overseas production bases
established by Japanese electronics manufacturers over time, we find that investment wasconcentrated in ASEAN in the 1980s, where 126 subsidiaries were formed compared with just 19
in China. In the 1990s, investment in ASEAN and China proceeded in parallel, with 189
subsidiaries being established in ASEAN and 249 in China during this period. From 2000,
however, investment in China gained the ascendancy, with 61 new subsidiaries compared withjust nine in ASEAN.
b. According to Chinese statistics on inward FDI, the cumulative value of investment received
between 1979 and 2003 was US$40.7 billion from Japan, US$43.6 billion from the US and US$28.6
billion from four European countries (UK, Germany, France and Italy). Japan and the US werethus level pegging, with the European four somewhat behind. The value of inward FDI into
China by Japan, the US and Europe between 2000 and 2003 was US$4.6 billion from the US,
US$4.1 billion from Japan, and US$2.8 billion from the European four (Table II-3).

Table II-2

Receipts of FDI by the ASEAN4 from Japan, US and Europe (based on approvals)(Unit: US$ million)
Cumulative value of FDI

Japan
US
EuropeNotes:

100,522
49,40872,165

Value of FDI (annual average value)
1990-95
1996-99
2000-03
6,399
8,516
3,959
3,427
4,185
2,111
3,956
7,414
3,403

1. The value of FDI is based on approvals for each country.
2. “Cumulative value” indicates the cumulative value from 1985 to 2003.
3. The industries covered are mainly manufacturing, of Thailand and Malaysia, andalso including some non-manufacturing for Indonesia and the Philippines.
4. “Europe” consists of the UK, Germany, France and Italy combined total.

Source: Prepared from national statistics.

16

Table II-3

Receipts of FDI by China from Japan, US and Europe(Unit: US$ million)
Cumulative value of FDI

Japan
US
EuropeNotes:

Contractvalue
57,23086,19048,136

Implemented
value
40,74843,61928,583

Value of FDI (annual average value)
1990-95
1996-99
2000-03
Contract Implemented Contract Implemented Contract Implemented
value
value
value
value
value
value
3,071
1,376
3,468
3,595
5,588
4,127
4,053
1,488
6,088
3,699
8,458
4,610
2,542
707
3,994
3,085
3,836
2,845

1. “Cumulative value” of FDI is the cumulative value of contracts from 1979 to 2003 (including compensation
trade from 1979 to 1985) and the cumulative value of investments implemented from 1985 to 2003.
2. “Europe” consists of the UK, Germany, France and Italy combined total.

Source: Prepared from Almanac of China’s Foreign Economic Relations and Trade for each year.

2.

Establishments of operations in East Asia by leading Japanese, US and European companies
How then do the Japanese, East Asian, US and European companies—those hoping to takeadvantage of the future expansion of business opportunities in East Asia—intend to expand theiroperations there? Attracting the most interest among leading companies in electronics, automobile,
chemicals and iron and steel sectors are the following two points:
a. Firstly, big players in these sectors are very eager to expand their presence in the Chinese market,
even while recognizing the risks involved, such as possible infringements of IPR and arevaluation of the yuan (Table II-4). Inward FDI into China, aimed at the domestic market, willcontinue to follow an upward trend, despite being affected, to a greater or lesser extent, by
cyclical factors. US high-tech companies are striving to acquire first-mover advantage in China’s
giant market of 1.3 billion people, with each company adopting their own defenses to protect
themselves against IPR infringements. The strategy adopted by US companies is to compete
against Chinese companies while avoiding head-on encounters and seeking out a cooperative
way forward—a trend that is expected to grow more pronounced as the Chinese economy
continues to develop. Among European companies, leading players in fields such as electronics(Phillips), heavy electrical machinery (Siemens), automobiles (Volkswagen) and chemicals are
expanding their operations in China as domestic consumption there increases and massive
investment is plowed into the country’s infrastructure. Meanwhile, Taiwanese IT manufacturers,
to meet orders taken at home, are pursuing growth by further bolstering their production
operations in China. Of Taiwan’s US$50.52 billion output of IT products in 2003, 63.3% wasproduced in China. In response, leading US vendors are establishing R&D operations in Taiwan.
And due to the increase in outsourcing of production in the form of original design
manufacturing (ODM), Taiwanese firms have begun to pour resources into developing their own
R&D capabilities. The Korean firm Samsung Electronics is targeting sales of US$40 billion by 2010
for its China unit—a fourfold increase from their 2004 level. Japanese electronics manufacturers
and firms in the iron/steel and chemical industries are stepping up their local production andforming mergers with Chinese companies in order to meet increased local demand in China, andas a response to anti-dumping actions. In the area of semiconductors, which make up China’s
largest category of imports, Taiwanese foundries (contract manufacturers specializing infront-end processing) and companies engaging strategically in front-end processing (diffusion
processing such as printing of design circuits), such as Motorola and NEC, are entering China.
b. Secondly, leading Japanese, US and European automakers and consumer electronics
manufacturers (predominantly Japanese) are increasing their emphasis on the ASEAN region asa production base (Table II-5). Automakers from these economies are focusing their sights on the
rapidly growing Chinese market, while at the same time viewing Thailand—which is continuing
to attract concentrations of automakers—as an emerging center for automobile production for theregion. In fact, Japanese, US and European automakers have come to view Thailand in particular17as a global center of production for one-ton pickup trucks, and they are consequently stepping up
their production capacity there. At the same time, automakers are currently supplying passenger
cars to the host markets in which their production operations are based, in line with a strategy to
produce vehicles where demand exists, while some companies, after the reduction of tariffs
brought by the CEPT agreement, are beginning to export finished cars between their operations
in different countries. Others still are embarking on developing broad production, development
and sales networks, centered around production operations in Thailand, to cover a wider area ofAsia, which includes India as well as East Asia (Fig. II-1). Toyota, meanwhile, announced in
September 2002 its “IMV Project” to produce “innovative international multipurpose
vehicles”—a catchall term for pickup trucks and multipurpose vehicles—developed for
emerging markets in regions such as Asia, South America and Africa. The project, which began inAugust 2004, puts Thailand at the center of pickup truck production for the world market, andcalls for an increase in annual production (of pickup trucks) from 88,000 units in 2002 to 200,000
units. Of these, half are to be exported to over 90 countries in and outside the East Asia region.
Thailand is the first location outside Japan to be chosen by Toyota for the production of strategic
vehicles for the world market. Furthermore, leading consumer electronics manufacturers—inparticular those from Japan—see ASEAN as being at the core of export operations. Leading
producers of home appliances (e.g., air conditioners, refrigerators and washing machines) inparticular continue to expand their export operations in Thailand. One of Thailand’s advantages,
as a Japanese consumer electronics manufacturer operating in the country points out, is that “thesupporting industries for production of home appliances are, in some respects, the same as thoserequired by the automobile industry, and these are already clustered in Thailand.” Regarding
production of audio-visual equipment, on the other hand, Malaysia has become a key base forexports, due to its concentration of electronic parts manufacturers. According to one Japaneseaudio-visual equipment manufacturer in Malaysia, “the transplantation of production fromJapan has resulted in a large increase in production of video cameras over the past few years.”

18

Table II-4

Desire to expand operations in China

Chemical industry
Due to, among other things, accelerating investment in China by leading user industries, such as automakers and consumer
electronics manufacturers, the stream of large new plants being built by leading European and US companies, and the increase in
implementation of anti-dumping actions against exports, Japanese companies are stepping up production in China in order to reap
economies of scale due to demand growth. At the same time, however, they are also taking into account the risks of investment inrelation to supplies of raw materials and potential stability of operations.
Iron and steel industry
As a result of the rise in demand generated by China’s rapid economic growth, the country is now leading the East Asian iron andsteel market both in terms of production and imports. Asian steelmakers (including Japanese) are reorganizing their production
and development networks to cater to Chinese demand. Leading Japanese steelmakers Nippon Steel Corporation and JFE Steelhave launched joint ventures with local Chinese partners, while, Korea’s POSCO and Taiwan’s China Steel are pursuing astrategy of active expansion in China. Leading Chinese steelmakers are also pursuing a more active investment strategy.
Development of operations in China by Samsung Electronics
Samsung Electronics regards China as more than just a production base and emerging market. Following its establishment of
three distributors in Beijing and elsewhere in 2003, the company plans to follow up with the creation in 2004 of new distributors in
Shenyang and Chengdu to strengthen its sales in the northeast and northwest of the country. It has set a target of achieving salesof US$40 billion by 2010, or four times the level in 2004.
Volkswagen (automobiles)
Recognizing its importance in fueling auto demand, Volkswagen has positioned China as its top priority market. It has invested 10
billion yuan (US$1.2 billion) in the domestic market in developing a new plant (currently under construction) with an annual
capacity of 330,000 units, and also plans to expand production capacity in Shanghai. While recognizing that the Chinese market
has sufficient demand to absorb output, Volkswagen’s Chinese operations will be assigned even greater strategic importance inthe future as a base for exports.
Source: Based on interviews with companies.

Table II-5 State of development of operations in China and ASEAN by automakers

19Fig. II-1

Position of Thailand in automobile development, parts procurement and production

Development

Raw material
procurementParts
production

Assembly

JAPAN

Sales

World
Thailand

ASEAN

ASEAN
751,000
units

Japan
Japan

252,000
passenger
cars
Thailand
ASEAN

ThailandExpansion of
R&D functions

499,000
commercial
vehiclesThai
Domestic
market533,000
units
179,000
passengercars
354,000
commercial
vehiclesThailand

ASEAN

Expansion of partsprocurement centers
Exports of parts
35.4 billion baht

Japan, US
and Europe

Imports offinished vehicles
22,000 units

Source: Prepared from The Situation of Japanese Companies in the Automobile and Motorcycle Industries in Thailand (JETRO,
Hiroshi Yoneya) and The State of Establishment of Operations in Thailand by American and European Light Automobile Parts
Manufacturers and the Response of Japanese Automobile Parts Manufacturers (JBIC Institute, Japan Bank for International
Cooperation).

20

C. Rebuilding Japan’s manufacturing base and the challenges of an East Asian free businessarea
1.

Rebuilding Japan’s domestic development and production infrastructurea. Development of global products in the Japanese market
Japanese manufacturing witnessed a hollowing out as the electronics industry—which
represents Japan’s manufacturing core—continued shifting its production operations overseas,and Japanese companies saw their global market shares shrink. In response, Japanesecompanies have begun rebuilding their development and production systems within Japan,
through management reforms (such as adopting a policy of “select and focus”), development of
new products, improvement of high-mix low-volume production methods (through theintroduction of cellular manufacturing systems), reduction of product development anddelivery times and costs through the introduction of supply chain management (SCM), andincreased domestic production of semiconductors, a core high value-added component. Owing
to this, manufacturers of digital consumer electronic products (e.g., flat screen TVs and digital
cameras) have succeeded in capturing large global market shares by bringing to market new
products that were first experimentally manufactured and then mass produced in Japan (Table
II-6). To acquire a high share of world markets, production in China and other parts of East
Asia is essential (Fig. II-2).
b. The advantages of Japan as a production base
Japan is an advantageous location for mass production as well as the development and test
production of digital consumer electronics products. When comparing the relative advantages(as a production base) of China and Japan, China does not necessarily come out as being morecompetitive, if costs and lead times are taken into account (Fig. II-3-4).
Japan’s strengths include: (1) a well-established market for end products; (2) resources thatenable core design functions to be conducted entirely within Japan; (3) a strong infrastructure
for production of advanced components; and (4) companies’ efforts to improve their production
technologies by such means as the introduction of cellular manufacturing system.
These strengths apply equally to that prime example of a core industry: the automobile industry.
An examination of Toyota’s automobile production and development structure reveals that its
R&D, technology development and product development operations are all located in Japan,
from which the company launches its products onto world markets. Development operations in
Asia consist primarily of technologies adapted to local procurement.

21

Table II-6

Japanese consumer electronics manufacturers’ share of world production and ratio of domestic production

Ratio of domestic production of Japanese manufacturers (%)
100

2000
Desktop PCs [52.5%]
and one other product

TFT liquid crystal [100.0%]
LCD monitors [100.0%]
PDAs [100.0%]
Cordless phones [92.2%]
Notebook PCs [65.6%]
Washing machines [64.0%]
Vacuum cleaners [58.1%]

2003
Car navigation systems[100.0%]VTR cameras [87.2%]
Digital cameras [81.2%]
DVD ROMs, etc. [73.2%]

Digital audio equipment [66.7%]
LCD monitors [51.1%]

PDAs [100.0%]
TFT liquid crystal [91.7%]
PDP TVs [88.5%]
Notebook PCs [66.0%]

Car navigation systems [99.7%]
PDPs [99.1%]
VTR cameras [84.6%]
LCD TVs [81.5%]
Compact/Small and medium
color liquid crystal parts [78.1%]
DVD recorders [65.4%]
Digital cameras [57.7%]

50

10

22

Scanners [8.2%]
Cellular phones (GSM)[8.5%]

Refrigerators [48.7%]
Room air conditioners [44.5%]
Cellular phones (CDMA) [37.6%]
CRT monitors [35.5%]
Hard disk drives [23.9%]
Microwave ovens [18.8%]
CRT TVs [11.7%]
and four other products

Optical pickups [37.5%]
DVD players [35.1%]
Portable CD players [25.1%]
Fax machines [23.2%]
Copiers [22.5%]
Car audio equipment [22.2%]
Inkjet printers [20.5%]
Laser printers [17.2%]
VTRs [10.4%]

Desktop PCs [39.4%]
CRT monitors [25.7%]

Radio-cassette players [7.2%]
Keyboards [1.9%]

Stereo systems [4.6%]
Floppy disk drives [2.0%]

Cellular phones (GSM) [5.0%]
and one other productWashing machines [47.0%]
Cellular phones (CDMA) [45.5%]
Room air conditioners [39.2%]
Refrigerators [33.8%]
Home game consoles [31.0%]
Vacuum cleaners [24.9%]
Microwave ovens [14.1%]
and four other productsRadio-cassette players [9.6%]
Keyboards [1.7%]
CRT TVs [1.5%]
DVD players [0.8%]
Hard disk drives [0.0%]
Scanners [0.0%]
and three other products

Combo drives [24.8%]
Copiers [19.6%]
Optical pickups [17.0%]
Car audio equipment [13.8%]
Laser printers [10.0%]

Fax machines [9.1%]
DVD ROMs, etc. [4.9%]
Inkjet prineters (MFP) [2.9%]
VTRs [2.0%]
Rear projection TVs [0.8%]
Floppy disk drives [0.6%]
Inkjet printers (SFP) [0.2%]

0
0

10

50

100 0

World share of Japanese manufacturers (%)
Note:

Figures in [ ] indicate the ratio of domestic production by Japanese manufacturers (%).

Source: Editions for each year of Worldwide Electronics Market Research (Fuji Chimera Research Institute).

10

50

100

Fig. II-2

Division of labor between Japan and East Asia (conceptual scheme)
Technical
difficulty
100%Japanese plants
in China/ASEAN
Plants in Japan

50%

Locally-owned
plants in China

Locally-owned
plants in ASEAN

0%
0%

50%
Global market penetration rate

100%

Source: Prepared by JETRO.

Fig. II-3

Division of roles between Japanese and Chinese operations of digital equipment manufacturers

Market (Japan, US, etc.)

Assemblers

Market data

Sale

After-sales
service

Parts manufacturers (Japanese)

Design and trial
production

Cooperation at design
stage of core components

Determination ofparts andmaterials suppliers

DesignProduction
Japan

Production
directions

DeliveryHigh value-added
products madedomestically

Provision of dataon locallyprocured partsand materials

Order of parts andmaterials

Production

Delivery
Production
Limited domestic
sales

China
(localaffiliate)

Export For items produced in China, design and test production—-as well as determination of parts and material suppliers—usually occurs
in Japan, as there is a strong tendency among Japanese firms to designate their China operations as "offshore".
Source: Prepared by JETRO.

23

Fig. II-4

Manufacturing costs of Chinese production operations (outline)

Personnel costs, etc.
10-30%

LSI, liquid crystal, etc.
(imported from Japan, etc.)

Costs
Imports
Parts andmaterials
70-90%

Manufacturing costs

40-50%

Local
procurements
50-60%

Japanese, Taiwanese andHong Kong manufacturers
Local manufacturers

Limited role

Procurement of parts and materials(value terms)

Only around 10-20% cheaper than producing in Japan

Source: Prepared by JETRO based on interviews with Japanese affiliates in China.

2.

Challenges for Japan in an East Asian free business area
In order for Japanese companies to make fresh new strides in an East Asian free business area, which
will have intra-regional freedom of movement of people, goods, capital, services and other resources,
the following challenges must be faced:a. Firstly, Japan must lead East Asia in the development of technologies in cutting-edge fields andthe development of new high value-added products.
Japan has a well-established market for end products that has, over the years, met the needs ofworld’s most demanding and discerning consumers. The country also boasts a domestic
manufacturing infrastructure underpinned by outstanding production technology andcutting-edge component development capabilities. In the digital consumer electronics sector inparticular—where markets and the competitive environment are subject to rapid change andspeed is of the essence—Japan is at an advantage in that it can offer the flexibility needed for
manufacturers to respond quickly to consumer needs and a swiftly changing market, by
working closely with parts and materials suppliers to design even complex product easily. The
rise, however, of companies from ROK, Taiwan, China, and even Europe and North America,
will result in a further intensification of competition. Amid this, Japan must develop
products—from among those that succeed in the domestic market—capable of competing inworld markets. The ability of Japanese companies to produce cutting-edge components must be
strong. The Japanese market (i.e., consumer needs in Japan) must first of all be taken into accountat the design stage for semiconductors, which are core components in digital consumer products.
And in order for Japan to further strengthen its industrial base and maintain its position as a hubof development and production of high value-added products, it needs to reinforce incentives(such as through investment in cutting-edge technologies, training of high-level engineers andincreased R&D) of locating in Japan, so as to win the international competition of attracting
companies—both from Japan and abroad.
b. Secondly, Japan needs to engage in cross-border global approaches to combat IPR infringements,
which hinder the free distribution of goods and technologies in East Asia.
24

In the past, Japanese companies have had to pay expensive patent licensing fees to US andEuropean companies, while only a few have been fully exploiting the acquired IPR. Only in
Asia do Japanese companies’ receipts from technology licenses exceed expenditures. And basedon their experience with companies in US and Europe, Japanese companies need to develop a
strategic approach regarding how best to exercise their IPR against Asian companies.
In fact, the biggest challenge regarding intellectual property in East Asia is the difficulty of
exercising rights. It is often the case that the lack of judicial and administrative remedies against
infringements in a host country gets in the way of Japanese companies protecting their IPR,
causing them to lose considerable amounts of time and money. To combat this problem, there
has been a recent shift toward pursuing the enforcement of IPR via a third country, as seen, forexample, in cases of patent litigation being brought against ROK and Taiwanese companies in
US courts. Meanwhile, Japan’s recent pro-patent policy has had its effect on the country’s courts
and legal systems: Japanese firms can now expect speedier and more effective remedies against
IPR infringement. And in some cases, which were taken to Japanese courts, settlements werereached after the court issued provisional injunctions preventing the violator from selling
pirated goods—or after Japanese customs officials issued injunctions at the border.
c. And thirdly, it is essential that Japan attract and welcome human resources from East Asia, inorder to revitalize its economy and assist Japanese companies in their efforts to globalize.
Important agenda items in EPA negotiations with East Asian countries are the freer movementof business human resources (strongly called for by Japanese firms) and liberalization of
movement of nursing and care workers (sought by East Asian governments). At current, Japan's
basic policy is to "actively promote acceptance of foreign workers in specialized and technicalfields." To enable high-caliber human resources from East Asia to play an active role inrevitalizing the Japanese economy and assist Japanese firms in their globalization efforts, thefollowing Status of Residences, among others, will be important: "investor/business manager,""intra-company transferee" and "skilled labor". The easing of residence status requirements andextensions of periods of stay, as well as the streamlining and expedition of residence statusacquisition procedures will be equally important.

25

III. Revitalization of the Japanese economy through globalization
A. Increasing soft power and regional economic revitalization
1.

Increasing soft powera. East Asia is home to a diverse range of people and languages, cultures and societies. Thus, theformation of an East Asian free business area, and the resultant economic benefits, will depend
upon the fusion of non-economic elements, including the adoption of shared values. In order forJapan to play a leading role in the formation of such an area through FTAs, the country must
work to enhance its “soft power”, i.e., its co-optive, non-coercive appeal to others. There are twosides to measuring Japan’s soft power. The first is the extent of the spread and popularity ofelements of Japanese culture and information overseas, such as the popularity of Japanese films,
music and fashion, as well as Japanese brands and international aid. The other measure is thelevel to which Japan invites overseas human resources, students, capital (FDI into Japan) andtourists. In order for Japan to increase its soft power stock, the country also needs to promote a
positive and welcoming image abroad, by advertising its appeal in other countries.
b. Viewed as a whole, Japan’s content industry (including the film and video software industries) is
still relatively small by international standards, accounting for just 2% of GDP, compared with
5% in the US and a world average of 3%. The industry’s share of exports is also extremely low, atjust 3%, compared with 17% in the US. Because the content industry can make such a major
contribution to improving a country’s image overseas, countries in Europe as well as the US and
ROK, have included the strengthening of the content industry in their national strategies toincrease soft power.
c. Valued at ¥196.8 billion in 2002 (based on box-office receipts), the Japanese film market is one
sixth the size of the US’s. Nevertheless, Japan is still the world’s second largest film consumer,
ahead of France (¥146.5 billion) and ROK (¥32.0 billion). However, the ratio of domestic to foreign
films in Japan is small at 1:3, compared with 3:7 in France and 5:5 in ROK. And with film imports
in 2001 standing at ¥90.98 billion, compared with exports of ¥10.75 billion, Japan is a major net
importer.
d. In many countries, such as France and ROK, large injections of public funding are provided, as amatter of national policy, to assist the development of domestic/home-grown film industries. In
France, the National Center of Cinematography (CNC), backed by the Ministry of Culture andCommunication, provides a variety of tax credits and loans, while Unifrance promotes Frenchfilms around the world. ROK, meanwhile, has adopted a raft of measures to boost support for theindustry, including enactment of the Basic Law on the Promotion of Cultural Industries in 1999,
establishment of the “Content Korea Vision” program in 2001, and the introduction of the Law
for the Promotion of the Online Digital Content Industry in 2002. The Korean Film Council(KOFIC), established in 1999, also supports the country’s film industry, by assisting thedevelopment of human resources and funding domestically, arranging subtitled translations andproviding support for exhibition at international film festivals overseas.
e. Japan is now moving in a similar direction, as reflected in JETRO’s participation in the American
Film Market (AFM) in February 2004 and the Cannes Film Festival in May, in order to help
develop a market for Japanese films overseas. At Cannes, many countries have their own national
pavilions, giving them a major presence. Japan was able to follow suit this year, through acollaborative effort by JETRO, Japan’s Ministry of Economy, Trade and Industry, the Cultural
Affairs Agency, and the Association for the Diffusion of Japanese Films Abroad (UniJapan Film).
The result was the industry’s first all-Japan promotion of Japanese films, including a Japan Boothfor film exhibitors and a Japan Pavilion where appearances were made by leading figures in theJapanese and international film industries, including Hirokazu Kore-eda, director of Dare mo
Shiranai (Nobody Knows), and Mamoru Oshii, director of Innocence.
f. The Content Task Force, set up by the Intellectual Property Policy Headquarters within Japan’s

26

Cabinet office, has identified the following issues that Japan’s content industry must address: (1)the lack of transparency and rationality in fund administration, contracts and working conditions,etc.; (2) the poor social and economic recognition of the content industry and the people whowork in it; and (3) inadequate marketing to develop overseas and new domestic markets. Even in
the world-beating Japanese animation industry, the majority of companies are small businesses,
and there are problems arising from the slow uptake of digital technology, the exodus andshortage of human resources, and a hollowing out of the domestic animation industry due to thetransplant of production to other countries in Asia.
2.

Regional revitalization through globalization
a. Export of regional agricultural, forestry and fishery products under the “Nippon Brand” label
In May 2003, 33 Japanese prefectures came together to establish a convention to promote theexport of agricultural products under “Nippon Brand”. The purpose of the convention is toorganize independent action to promote exports of signature local products through, forexample, participation in food trade fairs and the organization of exhibitions and food sampling
events. Responding to these developments at the regional level, the central government has also
dramatically expanded its budget for promoting agricultural exports. And, in April 2004, anExport Promotion Office was established in Japan’s Ministry of Agriculture, Forestry and
Fisheries.
Regarding products that are already being exported, JETRO is working to further expand
exports, and has instituted a special program to develop the overseas market for Japanese foods,
primarily in East Asia, and to identify products, especially primary commodities, that havepromising export potential. In fiscal 2004, support was provided to create concrete
opportunities for business negotiations by, for example, organizing Japanese food seminars andfood tasting events, inviting foreign buyers to production areas in Japan, conducting surveys
regarding the implementation of import procedures, arranging trial export of products to
identify potential problem areas, and producing pamphlets in foreign languages about productswith export potential. Some of the areas that have been identified as needing to be addressed inorder to successfully market Japanese agricultural, forestry and fishery products in East Asia
include: researching marketing methods suited to consumer tastes (which differ from those ofJapanese consumers); reducing selling prices in overseas markets; establishing Japanese brandawareness; expanding distribution channels to include local supermarkets; and differentiatingproducts from those of other countries through the development of attractive designs andpackaging.
b. Measures to attract foreign tourists to Japan’s regions
The number of foreign travelers to Japan in 2003 was 5.21 million, an increase of 1.5 times
compared with 1993. Of this number, 67.4% were tourists from areas of Asia such as ROK,
Taiwan, Hong Kong and China. In view of the growing number of Asian tourists visiting Japan,
one effective means of generating further growth is by attracting wealthy tourists from Asia. In
Kyushu, for example, where tourists from Asia accounted for 90% of foreign tourists in 2002,
the Kyushu Association of Corporate Executives unveiled a strategy in February 2004 entitled“Proposals Regarding New Tourism in Kyushu”, in a bid to turn tourism into one of Kyushu’s
leading industries. The plan laid out concrete strategies for promoting international tourism
through: (1) boosting marketing of tourism in Kyushu through inviting foreign journalists tovisit the area and polling the views of foreign tourists and students; and (2) lowering the cost of
tourism by, for example, reducing the cost of travel within Japan (Table III-1).
c. Exchanges between industrial clusters and globalization of regional economies
As business activities become more globalized, industrial networks that had until now formed
exclusively within regions are also growing increasingly global in nature. In order to make up
for resources lacked locally, and to overcome the current problem of industrial hollowing out
faced by regional economies, it is necessary to actively attract foreign firms and research27

institutes, and to promote collaboration and exchanges of human resources and technologies
with local enterprises and organizations. In other words, the development of collaborations
with regional clusters overseas is required.
The keys to promoting international exchange between regional clusters are: (1) rediscoveringand reinforcing local strengths, so as to boost regional innovativeness and originality; (2)exploiting the attractions of local clusters, through attracting foreign investment and leveraging
international exchanges between clusters; and (3) developing structures that enable local
governments and other regional bodies to exercise greater initiative, such as through therecruitment and training of high-caliber human resources and integration of budgets and power,
as in Germany and the US, where regional clusters have been vitalized through independent
initiatives developed as a result of giving local governments more discretionary powers.

Table III-1

Concrete measures to promote international tourism in Kyushu
Require adjustment period before
implementation

Achievable in the short term

Require considerable preparation
before implementation

Proposal 1: Measures to increase the number of tourists drawn from overseas- Develop packaged tours that tie in Kyushu
with large scale tourist attraction events or
facilities in neighboring countries- Organize invitational tours for foreign
media- Attract school trips from overseas- Set up duty-free shops- Draft a Kyushu-wide action plan toattract foreign tourists- Reduce fees on air/sea port
facility usage to bring downtransportation costs- Identify the needs of foreign tourists andstudents through monitoring survey- Conduct market research and develop
tourism products that cater to market
needs- Attract golf visitors from ROK- Introduce East Asia-wide unlimited riderail/bus passes- Expand services covered by "welcomecard" (discount pass for foreign tourists)- Develop Japan tours that include Kyushu
on itineraries (to attract foreign visitors
entering Japan via Tokyo and Osaka)- Develop excursions for foreign businessvisitors, including spouse tours- Establish a model "Visit Japan" zone

- Offer incentives to tourists who take partin "monitor tours", i.e., tourists evaluate
aspects of tourism in Japan in exchange
for various incentives.
- Increase the number of stores accepting
credit cards and payment in foreign
currencies- Develop infrastructure to enable use ofoverseas cell phones- Bring together foreigners who had lived
in Kyushu as students/expats

Proposal 2: Measures to raise tourism infrastructure to international levels (tangible and non-tangible)- Increase and standardize multilingual(four languages) signposts- Set up tourist information offices(marked with an "I") staffed bymultilingual attendants- Introduce ticket machines and faretables with multilingual support- Promote foreign language
education for younger age
groups

Proposal 3: Measures to promote deregulation- Obtain approval to make Kyushu a
special "visa free" zone
Source: Prepared from Proposals Regarding New Tourism in Kyushu (Kyushu Association of Corporate Executives, February 2004).

28

B.

Action to attract FDI to Japan begins in earnest
1.

Full-fledged action to attract FDI to Japan gets underway
In his January 2003 policy speech, Japanese Prime Minister Junichiro Koizumi, announced a target of
doubling Japan’s total stock of inward FDI in five years (from ¥6.6 trillion at the end of 2001).
Following the adoption of the “Program for the Promotion of Foreign Direct Investment in Japan” by
the Japan Investment Council (chaired by the prime minister) in March 2003, concrete action to
attract FDI to Japan began in earnest (Table III-2), and these measures are now steadily yielding
results. In fiscal 2003, JETRO’s Tokyo Invest Japan Business Support Center (IBSC) handled 93 cases
leading to FDI in Japan (compared with 39 in fiscal 2002), resulting in a total investment of ¥3.27
billion and the creation of an estimated 350 new jobs. There were also two cases of cash mergers (i.e.,the merger and creation of wholly owned subsidiaries using cash as compensation) by foreign firms:
the acquisition of Kito Corp. by the Carlyle Group, and the acquisition of Chinon by Kodak.
Investment in Japan is steadily rising, with the total value of inward FDI stock, as of the end of 2003,
totaling ¥9.6 trillion—a 40% rise from the ¥6.6 trillion figure at the end of 2001. The expansion of
inward FDI into Japan over the past few years is due in large part to M&As involving foreign firms.
The current number of M&As in Japan, however, is still small compared with other major developed
countries (Table III-3).

2.

Foreign-led M&As in the UK and Germany
Since the mid-1980s, the UK has experienced what has come to be called the “Wimbledon
phenomenon,” in that, just as most of the leading players at its famous tennis tournament are foreign,
so too are many companies in core industries, such as finance, automobiles and computers. Despite
domestic opposition, the Thatcher government of the time was firmly committed to a laissez-fairepolicy, and never voiced any negative criticism concerning the acquisition of British firms by foreign
investors. Instead, it regarded all companies doing business in the UK as British companies. The Blairgovernment has inherited this laissez-faire approach to M&As by foreign firms. Underlying this has
been a recognition that foreign investment contributes to the UK economy through, among otherthings, the creation of employment and generation of export growth. The Confederation of British
Industry (CBI) was initially critical of allowing unregulated acquisition of British firms by foreign
investors, but changed its stance in the 1990s to advocate the institution of arrangements similar to
those in the UK at the EU level (Table III-4).
Germany, meanwhile, witnessed a surge of M&A activity in the 1990s, recording the world's biggest
ever M&A in 2000: the hostile takeover of Mannesmann by the UK’s Vodafone. Traditionally, M&As
involving foreign investors in Germany were unregulated. However, there was little activity due tocross-shareholdings and the domination of industry by the banks. In particular, it was believed that
hostile takeovers would rarely occur. The Mannesmann takeover symbolized the radical changes
that had occurred in the environment surrounding M&As involving foreign firms: firstly, a series ofreforms had been made to the capital markets following the privatization of Deutsche Telekom in
1996, including the entry of individual investors to the stock market and establishment of the Neuer
Markt for growth stocks; secondly, the executives of leading German companies had begun to adopt
the American “shareholder value” approach to business; and thirdly, companies were having tofight harder to survive in the face of intensifying competition arising from German unification,
globalization, and the deepening and expansion of the EU. Throughout the 1990s, there was a rise in
the equity culture that Germany had lacked in the past.

3.

Creating further M&A opportunities for foreign firms in Japan
Four key reasons behind the relatively low level of foreign-involved M&A activity in Japan, as
compared to that in the UK and Germany, are: (1) short experience in liberalizing capitaltransactions and in attracting foreign investors; (2) the lack of tolerance and appreciation of foreign
firms (who are in fact contributing to the Japanese economy); (3) the shortage of M&A service
providers capable of handling cross-border M&As, and the concentration of the few that there are inTokyo; and (4) the absence of external pressure, such as that exerted on the UK and Germany as a29

result of European integration.
The environment for M&As in Japan, however, is changing rapidly, marked by: (1) the introductionof new M&A legislation (e.g., the lifting of the ban on pure holding companies in 1997, introductionof equity-swap and share transfer systems in 1999 and a corporate split-up system in 2001, and therecognition of triangular mergers and cash mergers in 2003 [as special measures under the Revised
Industrial Revitalization Law], which is likely to be later incorporated into amendments to theCommercial Code); (2) irresistible pressure on Japanese companies to reorganize, due to growing
competition as a result of deregulation and a prolonged economic recession; (3) the collapse ofcross-shareholdings and decline of long-term shareholders; and (4) the rise of more vocal
shareholders, such as foreign investors, institutional investors and investment funds (who are quick
to voice their concerns and demands) and an increase in hostile take over bids. Against thisbackground of change, out-in M&A activity in Japan is expected to rise further.
Inviting foreign capital is an effective option to help Japanese companies survive, strengthen theircompetitiveness and continue to grow, as competition intensifies around the world. And crucial tofurther expanding opportunities for out-in M&As in Japan and ensuring more M&A success stories
will be: (1) more aggressive action to attract inward FDI into Japan; (2) increasing the number ofsuccessful M&As resulting from such investment and breaking down resistance to FDI; and (3)developing organizations and human resources capable of handling cross-border M&As.

30

Table III-2

Main measures to promote inward FDI into Japan implemented from FY2003 onward(1) Dissemination of information
within Japan and abroad- Total of 76 seminars and symposiums staged in 13 foreign countries to attract inward
FDI into Japan- TV spot featuring Prime Minister Koizumi broadcast approximately 130 times in the US
and Europe(2) Improvements in the businessenvironment- Introduction of triangular mergers and cash mergers under the Revised Industrial
Revitalization Law (April 2003), and incorporation and permanent adoption of these
M&A measures under amendments to the Commercial Code, scheduled to besubmitted as a bill in 2005, under consideration(3) Reviewing administrative
procedures (clarify, streamline
and speed-up)- JETRO Invest Japan Business Support Center (IBSC) established in Tokyo and the"FDI general information and consultation office (Invest Japan)" established in eachministry and agency, creating one-stop shops for information and expedition ofadministrative procedures (May 2003)- Establishment of IBSCs in Yokohama, Nagoya, Osaka, Fukuoka (April 2004) andKobe (July 2004)(4) Create favorable employment
and living environments- Legal clarification of the doctrine of “abuse of right of dismissal” by amendment of theLabor Standards Law (effective from January 2004)- Maximum period of contracting of temporary workers extended from 1 year to 3 years
and employment of temporary workers in manufacturing permitted throughamendment of the Labor Dispatch Law (effective from March 2004)- Development of system regarding international schools (e.g., to allow graduates
meeting certain conditions to qualify for university entrance)- Promotion of employment in Japan of overseas students (e.g., permitting “short stay”
residence status for a maximum of 180 days)- Conclusion of social security agreements (signed with the US and ROK, undernegotiation with France and Belgium)(5) Improve local and national
structures and systems- Launch of “Project on Selected Area to Promote FDI” (adopted by 5 regions in FY2003
and 4 regions in FY2004)- Involvement of top officials of several local governments in attracting FDI andmeasures to create one-stop shop for information services

Note:

When 100% of the shares in a company are acquired through a merger, etc. to create a wholly owned subsidiary, a triangularmerger occurs where shares in the parent company (including a foreign company) are used as compensation, and a cash
merger occurs where cash is used.

Source: Prepared from Japan Investment Council (JIC) Expert Committee, Follow-up "Program for the Promotion of Foreign Direct
Investment in Japan" (May 19, 2004) and other sources.

Table III-3 Out-in M&As in major developed countries and value of inward FDI(cumulative total, 1999-2003)(Units: no. of M&As, US$ billion)
Japan
Number of M&As by foreign companies (Out-in M&As)
Out-in M&A rate (%)
Value of M&As by foreign companies (Out-in M&As)
Out-in M&A rate (%)
Value of inward FDI
Notes:

583
10.7
72.9
15.2
42.9

Germany
2,276
36.0
417.3
69.4
324.5

US

UK

5,722
15.5
957.1
18.2
890.0

3,454
25.9
510.0
43.4
301.8

France1. The Out-in M&A rate indicates the proportion of the M&A market in each country accounted for by
M&As where the ultimate parent company of the acquirer is foreign.
2. Figures for inward FDI indicate the cumulative net flow on a balance of payments basis.

Sources: Prepared from Thomson Financial data (as of March 18, 2004) and OECD data.

31

1,800
37.8
136.1
33.3
236.3

Table III-4

1945-60s

Changes in UK’s attitude toward M&As by foreign companies

Some intervention by
the government“English disease”
1970s

Advent of theThatcher government“The Wimbledon
phenomenon”

Mid-1980s
onwardOpposition fromindustry, unions andopposition parties

Government
committed tolaissez-faire- Inward FDI in the UK by foreign companies welcomed (strict controls on outward
FDI against the background of the “sterling crisis” and decline of exchange
reserves).
- Foreign investment in the UK required prior approval under the 1947 Exchange
Control Act. However, hardly any investment applications were refused.
- Some cases of government intervention (e.g., US Ford’s conversion of Ford UK into
wholly owned subsidiary in 1961, and acquisition of Rootes by Chrysler, also of theUS).
- UK suffers from what is known in Japan as the “English disease”: high inflation,high unemployment, frequent strikes, decline in international competitiveness of
British firms, deterioration of trade balance, increase in budget deficit, etc.
- Conservative Thatcher government (1979-90) introduces market principles,
pursues deregulation, and promotes other economic reforms such as privatizationof state-owned enterprises.
- Active solicitation of investment in UK through Invest in Britain Bureau (IBB),
established in 1977 specifically for job creation and regional regeneration.
- Wave of foreign acquisitions of British firms in traditionally important industries,
such as the automobile and financial sectors.
Automobiles: Large number of automaker affiliates acquired by foreign firms fromthe mid-1980s with the privatization of British Leyland. With the exception of Rover(sold by BMW of Germany to a UK investment company in 2000), every British
automaker is currently affiliated to a foreign parent.
Finance: Wave of acquisitions of British financial institutions by foreign firms as aresult of the "Big Bang" financial reforms of 1986 (the "Wimbledon phenomenon").
In particular, most of the merchant banks, which symbolized the history andtradition of the City, were made subsidiaries of foreign companies.
Other: Leading British confectionery maker Rowntree acquired by Nestlé of
Switzerland (1988), while ICL, the UK’s only computer manufacturer, became an
80%-owned subsidiary of Fujitsu due to poor business results (1990).
- Some opposition emerged from the opposition parties, industry and unions, etc. tothese acquisitions of British firms in key industries by foreign investors.
- However, the Thatcher government was unwavering in its commitment tolaissez-faire, leaving acquisitions by foreign companies to the market.
- Announcement of the “Tebbit Doctrine” by then Minister of Trade and Industry
Norman Tebbit in July 1984, which eliminated “public interest” from the grounds
for review of a takeover.
- Regarding the Wimbledon phenomenon, the British government stated that thequestion was one of “who does what” rather than “who owns what”, and asserted
the importance of raising London’s competitiveness as a financial center.
- Formulation of City Code (1985). Self-regulation of corporate acquisitions by theCity (London’s financial district). This allowed highly untrammeled acquisition
activities, with companies able to take hardly any action against hostile acquisitions.

From
mid-1990s

Decline in resistanceto M&As by foreign
investors- Weakening of aversion/resistance to acquisitions by foreign companies (due tospread of acceptance of competition through the market throughout the 1980s
among businesses and the public, and a recognition of the contribution to UK
economic reconstruction of inward FDI).
- The Blair government (from 1997) inherits this laissez-faire approach to acquisitions
by foreign companies.
- The CBI and other representatives of industry switch from a traditionally critical
attitude to acquisition activities. Advocate development of hands-off acquisition
system similar to the UK’s at the EU level.

Source: Prepared from various sources.

32

IV. Conclusion: Formation of an East Asian free business area and newopportunities for Japanese companies
Since reaching a trough in January 2002, the Japanese economy has been in recovery, fueled by dramatic
across-the-board improvement in corporate profits and an upturn in formerly lackluster capital
investment. Major manufacturers are leading the way, thanks in large part to strong automobile sales in
the North American market, strong sales of hit digital consumer electronics products such as LCD TVs
and DVD recorders, and growth in exports to the still rapidly growing Chinese economy. The recovery inthe corporate sector is also now gradually spreading to the household sector. In addition to strong
external demand coming from the US and China, growth in domestic demand, based on an upturn inpersonal consumption, is also now acting as an engine of recovery. One of the main factors underlying
the recovery in domestic demand is the revival now being enjoyed by Japanese companies. The digitalconsumer electronics and automobile industries, among others, have witnessed a dramatic improvementin their international competitiveness. This is a product of improvements in manufacturing resulting
from: (1) intense competition to develop new products for the well-established domestic market for end
products; (2) the capacity for core design functions to be handled entirely within Japan; (3) the strong
manufacturing base in cutting-edge parts; and (4) corporate efforts to improve production technologies,
such as through the introduction of cellular manufacturing system. While at the macro-level, the so-called“three-excesses” that have beset Japanese companies for over a decade since the collapse of the bubble
economy—namely, excessive facilities, employment and corporate debt—have been almost entirely
eliminated through the efforts of the companies themselves. Nevertheless, the recovery among small andmedium-size enterprises, middle-ranking enterprises and non-manufacturers has not appeared as robust
as that enjoyed by large manufacturers; further restructuring is required if profitability improvements areto be achieved.
In order for the present recovery not to stall and the Japanese economy to continue to enjoy sustained
growth, there must be no let-up in the series of economic recovery measures being taken, such as: (1)accelerating the disposal of non-performing loans, which allows financial institutions to once again playtheir proper role in creating credit; (2) introducing further management reforms, such as “select andfocus”, to keep companies profitable in the face of global competition; and (3) continuing with monetarymeasures aimed at defeating deflation.
A longer-term challenge facing Japan is the rapid pace at which the country is moving toward an aged
society. Swift action to head off a resulting decline in Japan’s economic vitality is required. Alongside thisis having the East Asian market on Japan’s doorstep—a market that, with injections of Japanesetechnology, capital, management know-how and human resources, has the potential to grow by leaps
and bounds. If Japan is to maintain its economic vitality without falling into a state of diminishingequilibrium, structural reforms must be made in the Japanese economy, so as to position the country to
fully absorb the dynamism of East Asia, which is now on the brink of full-scale development, and wherean economic network is forming to create what is in fact—if not in name—an East Asian free businessarea. If the transition can be made to a more advanced level of institutional integration, the region canenter a new era of fresh economic development. Japan and East Asia therefore need to pursue
institutional integration in earnest.

Japan in an East Asian free business area
Formerly a region devoid of FTAs, East Asia has witnessed a growing trend toward their formation since
2000. Following first-round talks with ROK, Japan has also entered into negotiations to sign bilateral
economic partnership agreements with Thailand, Malaysia and the Philippines, after the ASEAN-Japan
Commemorative Summit Meeting in Tokyo in December 2003. At the same time, negotiations to sign acomprehensive economic partnership agreement—with ASEAN as a whole—were also slated to begin in
2005. China is paving the way in negotiations with ASEAN. Another focus of interest is on ties between
Southwest and East Asia. Discussions are already underway between ASEAN and, individually,
33

Pakistan, India, Sri Lanka and Bangladesh; China and India too have entered discussions on an FTA.
As noted, East Asia has, until now, seen the development of de facto economic networks, rather thaneconomic integration at the institutional level. Despite this, the region has experienced the world’s
highest rate of growth in intra-regional trade: while world trade grew fourfold between 1985 and 2003, aspreviously noted, East Asian trade (consisting of the ASEAN4, Asian NIEs, China and Japan) grew 7.8
times. By comparison, growth in intra-regional trade in NAFTA and the EU was just 4.4 times and 4.2
times, respectively. If tariffs can be eliminated, the movement of people and trade in services liberalized,
and intellectual property protected in the region, then East Asia has the potential to exhibit the world’s
most dynamic economic growth. China in particular, which continues to enjoy high growth, has a market
that is rapidly growing both in size and attractiveness, as income levels rise. For example, unit
automobile sales reached 4.39 million in 2003, putting it in third place behind only the US and Japan.
Companies from East Asian countries and regions such as Japan, ROK and Taiwan, as well as those fromthe US and Europe, are all aware of the risks inherent in China (e.g., IPR infringements and revaluation of
the yuan), but are still eager to expand their presences there. Further expansion of FDI in China is
expected as foreign investors seek to tap into the Chinese market. The perception of China has changed
from “threat” to “opportunity”. To make the most of this opportunity, investors must keep a close watch
on China’s efforts to open up its rapidly growing market and move quickly in response, while at the sametime working to minimize risks through, for example, increased collaboration with Chinese companies.
In order for the Japanese economy to grow through integration into this East Asian free business area,
two things in particular are necessary. First of all, Japanese companies need to develop an outlook that
lifts the distinction between “domestic” and “foreign”, and instead treat the East Asian market, as far as
possible, as an extension of their own domestic market. It is necessary therefore to develop
geographically broad-based research, production and sales networks in East Asia by making full use of
the region’s business resources. In more concrete terms, this means expanding production and sales
operations throughout East Asia—from the Japanese archipelago to the Korean peninsula, Beijing,
Shanghai, Hong Kong, Shenzhen, Taiwan and the ASEAN economies—so as to incorporate thecompanies and human resources of East Asia into their own growth strategies. Moves to develop
production, development and sales networks within Asia, including India and East Asia, are now afoot,with automakers leading the way. Secondly, East Asian companies need to utilize the Japanese market.
As East Asian companies seek to increase their competitiveness in the future, the Japanese market canplay the role of a test market for entering the markets of other developed countries, and as a source of
information on the development of new products. In the market for welfare-related and other services as
well, East Asian human resources will likely have an important role to play. For these and other reasons,
it is important that East Asian companies be drawn to Japan.

What Japan needs to do
Firstly, EPA negotiations currently in progress with Thailand, the Philippines, Malaysia and ROK need tobe concluded as swiftly as possible. Japan should also explore economic collaboration with China, whose
presence is essential to the development of an East Asian free business area. Japan, as East Asia’s largest
economy, needs to take the lead and set an example in breaking down national borders by, for example,
developing investment rules, harmonizing standards and mutual recognition arrangements, protecting
IPR, and removing restrictions on international movements of people, as well as by removing tariffs andliberalizing trade in services.
Secondly, Japan’s economic structure must be changed so as to improve productivity. This will require:(1) more R&D in cutting-edge fields such as biotechnology, nanotechnology, IT and environmental
technology; (2) a greater focus on the development and production of high-value added products such as
digital consumer electronics products; (3) the development of service industries suited to an aged society;and (4) improvements in productivity. Particularly necessary are injections of foreign capital,technologies and management know-how to provide the “push” to raise productivity, stimulatecompetition, and create new business opportunities in Japan. Also, as economic integration progresses,
34these opportunities in Japan can then lead on to rapid growth in East Asia as a whole.
Attracting human resources, business know-how and technologies to Japan on a sustained basis requires
expanded inward FDI into Japan. In light of this, Japan set the aggressive target, as previously noted, ofdoubling the country’s total stock of inward FDI in five years time. By the end of 2003, the figure (¥6.6
trillion in 2001) had already grown 1.4 times, to ¥9.6 trillion, signaling that FDI is steadily growing. The
expansion of inward FDI into Japan in the past few years is due in large part to M&As involving foreign
firms. Techniques widely used in the US that make it easier for foreign investors to engage in M&As, suchas triangular and cash mergers, are presently only permitted under the Industrial Revitalization Law. But
in order for these measures to function more effectively and attract more foreign investors, it is crucial
that: (1) inward FDI be actively courted; (2) the number of successful out-in M&As as a result be increased
and resistance to foreign investment broken down; and (3) agencies and human resources capable ofhandling cross-border M&As be developed.
Thirdly, if Japan is to play a leading role in the formation of an East Asia free business area while also
increasing the country's appeal and image globally, it must develop its soft power, the potential of which,many argue, is enormous. Japan's content industry, whose animation productions dominate world
markets, is an example of one industry that can help toward this goal. Through its contribution to soft
power, this industry is thus a key field from the point of view of national strategy: not only does it
outweigh industries such as the iron and steel industry as an economic resource, but it is also an
important cultural and tourism resource. Japan must therefore learn from countries in Europe and North
America and adopt measures to develop the content industry as a part of national strategy. Obstacles tothe development of Japan's content industry overseas, however, are the weak involvement ofgovernment (which currently lacks such a national strategy) the shortage of opportunities to garnerpublicity for the Japanese content industry at film festivals in Japan and overseas, insufficient support formeans of transmitting information and generating publicity, and the impediments to distribution of
genuine products, in the absence of effective measures to combat rampant content pirating. These andmany other issues will have to be surmounted first.
Whether or not Japan can retain its leadership in East Asia—and continue to display leadership alongside
the US and Europe in the global economy—will depend on how successful Japan’s structural reforms are
and how well Japanese companies incorporate themselves into East Asia over the next few years.

35

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