Provisional Translation by the Cabinet Office

Policy for Formulating a "Medium and Long-term Strategy for Promoting
Foreign Direct Investment in Japan 2021"
July 28, 2020
Adopted by the Council for Promotion of Foreign Direct Investment in Japan

1. Developments in foreign direct investment in Japan
Foreign direct investment (FDI) in Japan enhances its growth potential andreinvigorates regions around the country as it helps get resources in and out ofJapan fused for innovation and attract more investment and create jobs also inthe provinces.
In 2013, the Government of Japan set a target of "doubling the inward FDIstocks to 35 trillion yen by 2020" as a key performance indicator (KPI)1. The
Government has since been working to attract more FDI by, among others,finding and attracting foreign companies interested in investment in Japan,
improving the business environment and living conditions for foreign people
working in Japan, and offering foreign businesses opportunities to findJapanese companies working as a partner for them. The FDI stocks have grownsteadily, almost as planned, to 33.9 trillion yen by the end of 2019 2.
The said FDI stocks represent 6.1% of Japan's GDP, an increase from a levelof 4% in 2014 3 . However, the figure remains at a significantly low level,compared internationally, as the means stands at 46.0% among the OECDcountries 4.
Since 2018, the focus has been placed on measures to promote inward FDI inregions around Japan. However, a breakdown of inward investment byprefecture has revealed that capital inflows concentrate in several metropolitan
areas, specifically Tokyo, Kanagawa, and Osaka. This suggests that inward FDI
has only made a limited contribution to efforts to reinvigorate regions aroundJapan. For instance, more than 80 percent of the foreign-affiliated companies
operating in Japan are headquartered in one of these three prefectures, withalmost 60 percent of their employees working somewhere in these three 5.
Now, there is a worry that the spread of COVID-19 may have a significant impact,
resulting in sharp declines in FDI between countries 6, a situation that leaves no1
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6"Japan Revitalization Strategy" (Cabinet Decision, June 14, 2013)
The Ministry of Finance and The Bank of Japan, "International Investment Position of Japan"
The latest figure can only be compared with those from 2014 onwards as statistical standards were revised.
The average percentage of inward FDI to GDP among OECD countries comes from "FDI stocks" in OECD Data. The percentage ofJapan's inward FDI to its GDP is calculated using "International Investment Position of Japan" (The Ministry of Finance and The Bankof Japan) and "National Accounts of Japan" (The Cabinet Office).
The Ministry of Economy, Trade and Industry, "Survey of Trends in Business Activities of Foreign Affiliates"
For instance, UNCTAD estimates that the COVID-19 crisis may cause an up to 40 percent decrease in global FDI in 2020 on a yearon-year basis, with a further 5 to 10 percent decline in 2021 (UNCTAD, “World Investment Report 2020”).

optimism about successfully achieving the KPI.
2. Current environments for foreign direct investment in Japan and thedirection of actions to takeWith a view toward enhancing the growth potential of the Japanese economy
and to reinvigorate regions around the country, Japan should, placing emphasis
on efforts to increase inward FDI seen in the percentage to GDP and attract
more investment to regions, continue promoting FDI in Japan, beyond thecurrent KPI. Despite a growing trend of anti-globalization, Japan will refuse togive in to protectionism, and instead take the lead in realizing free and fair
investment while actively taking in vigor from the foreign economy. Then,however, amid the moves of some countries, especially in Europe and North
America, toward tightening controls over inward FDI for national securityreasons, Japan should give careful consideration to issues of potential harm tonational security, such as the leakage of national defense-related technologies.
Foreign direct investment is expected to bring benefits, such as advanced
technologies introduced to Japan, and sales channels developed for Japanesecompanies that foreign investors have some stake in. At the same time, there
are potential detriments, or national security concerns, as any of the defenserelated technologies Japan has may leak out. With both the pros and cons kept
in mind, Japan should strike the right balance between promotion of inward FDI
and security of the country 7.
For that purpose, as stated in the "Basic Policy on Economic and Fiscal
Management and Reform 2020" (Cabinet Decision, July 17, 2020), among
others 8, the Japanese Government will formulate a "Medium and Long-term
Strategy for Promoting Foreign Direct Investment in Japan 2021", which should
include next-phase KPIs, by the end of spring next year. After a full review of theinitiatives that have been made, the Strategy should be designed to respond tocurrent environments of FDI in Japan, that is (1) shrinking regional economies
and growing difficulty in business succession with a falling birthrate and aging
population, and (2) progress of the Fourth Industrial Revolution around the globeand intensifying competition between countries, under policies stated below asa starting point.
(1) Enhanced effort to attract more investment in regions(Current environments: Shrinking regional economies and growing
difficulty in business succession with a falling birthrate and aging
78For instance, Japan should (1) implement the Foreign Exchange and Foreign Trade Act in an appropriate manner from the viewpointof further promoting inward FDI that should encourage sound development of the economy while dealing with any investment thatmight harm national security or other interests of Japan, and (2) collect relevant information helpful for universities, research
institutions, businesses, and other parties concerned to adopt enhanced measures to prevent leakage of technologies they haveespecially from the viewpoint of securing and maintaining advantage Japan should have in technology.
"Follow-up on the Growth Strategy" (Cabinet Decision, July 17, 2020)2population)
Amid a shrinking population due to a falling birthrate and aging population,
together with the continuing unipolar concentration of population in the Greater
Tokyo Area, concerns are further growing that other regions may see theirworkforce decrease as well as their consumer markets contracting and theireconomy dwindling.
Small and medium-sized enterprises (SMEs) and small-scale businesses that
underpin regional economies have greater difficulty in business succession due
to the aging of business owners and managers and a shortage of successors.
By 2025, 2.45 million owners of SMEs will pass the age of 70, the average forretirement. Some 1.27 million of them have no prospective successor, and about
half of them may close their business despite profitability it maintains 9.
(Direction of actions to take: Enhanced effort to attract more investment
in regions)
Despite growing difficulty in issues, such as a shrinkage of local economies andsuccession of SMEs and small-scale businesses, regions around Japan own arange of local resources, including agricultural, forestry, and aquatic products,
tourism resources, and many SMEs with technical capabilities. To combine
these and the other advantages that they have with sales channels,
technologies, human resources and know-how from foreign companies, efforts
should be enhanced to attract more inward FDI in regions, as described below.
At the same time, care should be fully taken to prevent technologies and humanresources flowing out of SMEs and small-scale businesses capable ofgenerating high added value.
l Continued efforts should be made in an integrated manner in three areas inbound tourism to Japan, the export of agricultural, forestry, and aquaticproducts, and direct foreign investment in Japan - through, for instance,
initiatives for combining a range of tourism experiences offered to visitors toJapan with "food" to generate new value that helps promote export, andthose for leveraging foreign capital to develop goods and services based on
the needs and perspectives of visitors to Japan and use them to attract moreinbound tourists.
l As a solution to the growing difficulty in business succession, somemechanisms should be developed to help local SMEs and small-scalebusinesses find foreign companies that may match them and facilitatebusiness transfer between third-parties (merger & acquisition), so that thebusiness resources that they own, including technologies and know-how,and jobs they have created will not be lost.
9Estimates made by the Small and Medium Enterprise Agency based on the "Unincorporated Enterprise Survey" (The Ministry ofInternal Affairs and Communications, 2016) and "COSMOS 2" (Teikoku Databank, 2016).

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(2) Effort to attract start-ups(Current environments: Progress of the Fourth Industrial Revolution
around the globe and intensifying competition between countries)
Today in the world, progress of the Fourth Industrial Revolution is gaining further
momentum with some emerging technologies with great versatility, such as
artificial intelligence (AI), quantum technology, Internet of things (IoT), robotics,and blockchain. For instance, along with development of mobile
communications networks, Europe, the United States, and Israel, as well as Asia
and Africa, see a rapid rise of start-ups that deliver a range of innovation helpful
to solve challenges local societies are faced with, such as environment,
healthcare, and energy.
In this context, competition is intensifying between companies and countries
around the globe for cooperation with, and invitation of, start-ups, venture
capitals, and accelerators. However, they often see Japan and Japanesecompanies less attractive as investment destination and partner in terms ofgeographical conditions, market scale, growth potential, depth of human capital,and, most of all, maturity of the ecosystem for start-ups.
(Direction of actions to take: Effort to attract start-ups)
With a view to promoting open innovation and enhancing growth potential,
Japan has also developed its investment environments with some investmentrelated treaties, including the Comprehensive and Progressive Agreement forTrans-Pacific Partnership (TPP 11). On the basis of the achievements, Japan
will actively encourage innovative foreign companies, especially start-ups
operating with a cutting-edge business model, to make direct investment inJapan, as well as help Japanese companies invest in foreign enterprises andstart-ups to deliver fruit of their innovation back to Japan through actions
mentioned below.
l Japan will assign a focus sector to regions in and out of Japan to attract
start-ups from overseas to regions around Japan in a selective manner anddevelop a "glocal" hub that can win over venture capitals, accelerators, local
financial institutions, research institutions, and other parties. Through theprocess, cooperation and partnership should be promoted between foreigncompanies and technology-oriented local SMEs and start-ups to secure
Japan a clear position as innovation field for foreign companies.
In addition to what has been stated above, continued effort should be made tofind and attract investment projects to Japan as well as improve business andliving conditions for foreign people working in the country. As part of strong
commitment now being pursued for digitalization in every aspect of the society
in Japan, movement triggered by the spread of COVID-19, initiatives should be4

accelerated to go online and set up one-stop-service centers, spread once-onlyprinciple for formalities businesses need to complete at government agencies,
matching between Japanese and foreign companies to help them form
partnership, and grants and subsidies local governments could receive.
3. Next steps to take
A working group should be set up under the Council for Promotion of Foreign
Direct Investment in Japan to formulate a "Medium and Long-term Strategy for
Promoting Foreign Direct Investment in Japan 2021", which should include nextphase KPIs, by the end of spring next year. It will deliberate on the Strategy
based on this Policy.

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