AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies
IIPS

RIPSInstitute for International

The Japan Institute ofResearch Institute for

Policy Studies

International Affairs

Peace and Security

Editorial Advisory Board:

No. 209

Akio Watanabe (Chair)
Masashi Nishihara
Yoshiji Nogami
Taizo Yakushiji

10 February 2015

Editorial Committee:
Taizo Yakushiji
Hisayoshi Ina
Tsutomu Kikuchi
Shujiro Urata andToshiro Iijima
Editor & Online Publisher:

ACHIEVING ECONOMIC RECOVERY IN
JAPAN BY EXPANDING INWARD DIRECTINVESTMENT

Shujiro UrataYoshji Nogami
President, JIIA・ Inward direct investment benefitting theJapanese economy is extremely low incomparison with other countries.
・ High business costs stemming from high tax
rates, stiff regulations, and personnel shortages
are among the factors inhibiting inward direct
investment.
・ The government must vigorously push forwardwith deregulation and corporate governancereform to expand inward direct investment.

The views expressed in this piece are the author’s own and should
not be attributed to The Association of Japanese Institutes ofStrategic Studies.

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The Association of Japanese Institutes of Strategic Studies

Japan’s inward direct investment is extremely low compared with that ofother developed countries and even its Asian neighbors. In 2013, the ratio ofJapan’s inward direct investment stock to its GDP was 3.5%, the lowest amongmajor countries and far below the global average of 34.1%. Major developed
countries such as the US and Germany have ratios seven to eight times that ofJapan, and even those of China and South Korea are three to four times Japan’s.
Inward direct investment in developed countries is characterized more by M&A
investments involving buyouts of existing companies than by greenfield
investments entailing the establishment of new companies. In this context, M&A
by foreign companies in Japan is sluggish.
Receiving direct investment by foreign companies promotes economicgrowth by increasing investment, production, and employment. The benefits ofreceiving direct investment are not limited to these quantitative expansions,however, and they also include qualitative improvements through transfers ofadvanced technology and management know-how to Japanese companies byforeign companies and higher productivity at Japanese companies stemmingfromintensifiedcompetitive

pressureon

theseJapanesecompanies.

Furthermore, consumers benefit from the availability of new products andservices.
Aware of the contributions of inward direct investment to economic
recovery and medium- to long-term growth in Japan, the Abe administration in arevised version of its “Japan Revitalization Strategy” released in June 2014
advocated expanding inward direct investment, setting a goal of doubling the2012 year-end level of inward direct investment stock by 2020. Expanding
inward direct investment is a key part of the growth strategy constituting the third
arrow of Abenomics’ three-arrow approach.
What factors hinder inward direct investment in Japan? In opinion surveysof foreign companies conducted by the Japan External Trade Organization(JETRO), the Ministry of Economy, Trade and Industry and others, the problem
most commonly cited by foreign companies seeking to locate in Japan is thehigh cost of doing business, specifically the high corporate and other tax rates
applicable to businesses and high office rents. Among the other obstacles noted

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The Association of Japanese Institutes of Strategic Studies

were the closed/peculiar nature of the market, administrative procedures, thecomplexity of approval and licensing systems, the difficulty of securing neededpersonnel, and in particular the scarcity of personnel capable of communicating
in English. The surveyed companies pointed out that M&A in Japan is sluggish,
due in part to tax regimes and procedures that make it harder than in otherdeveloped countries to pursue M&A and in part to the significant barrier of closed
corporate governance at Japanese companies that inhibits M&A.
Recognizing the need to expand inward direct investment, the Japanese
government has since the 1980s been pursuing a variety of polices to encouragesuch investment, offering foreign companies low-interest loans, tax breaks, debt
guarantees and useful information. The second Abe administration inaugurated
in 2012 sought to reduce/eliminate factors inhibiting investment in Japan by
setting targets to double inward investment, creating a Council for Foreign Direct
Investment Promotion to help achieve these targets, and implementing
regulatory reforms.
These latest measures to promote direct investment in Japan featureseveral characteristic elements. One is the connection with National StrategicSpecial Zones actively introducing regulatory reforms in designated areas. The
Abe administration regards National Strategic Special Zones as an extremely
important policy measure, so the establishment of such Zones can be expected
to produce an expansion of inward direct investment. Another is the reforms tocorporate governance being undertaken to encourage M&A. Ensuring that
corporate governance is carried out openly and transparently will lead to greater
inward direct investment via M&A.
The obstacles impeding greater foreign direct investment in Japan thatwould assist in Japan’s economic recovery and increase the benefits forconsumers are apparent. The problem lies in developing and implementing thepolicies needed to reduce/eliminate these obstacles. Previous administrations
have devised policies needed to expand direct investment in Japan, but thesepolicies could not be implemented due to strong resistance from vested interests.
The Abe administration, which scored a major victory in the House ofRepresentatives elections at the end of last year and which now holds an

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The Association of Japanese Institutes of Strategic Studies

overwhelming majority of seats in both houses of the Diet, must overcome theresistance put up by vested interests prioritizing short-term gains and implement
the regulatory reforms needed to make Japan’s economy and society
prosperous and dynamic. If regulatory reforms can establish a businessenvironment that facilitates the participation of foreign companies in theJapanese economy, foreign companies will expand their direct investment inJapan. Greater direct investment in Japan will speed Japan’s economic recovery
and boost its future economic potential, resulting in further direct investment inJapan. Thus will be formed a virtuous cycle in which expanded direct investment
in Japan leads to economic recovery/growth that in turn attracts more direct
investment in Japan. Whether this virtuous cycle can be set in motion will
depend on the Abe administration’s determination and ability to get things
done.

Shujiro Urata is Professor of International Economics at Graduate School
Asia-Pacific Studies, Waseda University. He is also Specially Appointed Fellow at
the Japanese Centre for Economic Research (JCER), Faculty Fellow at theResearch Institute of Economy, Trade & Industry (RIETI), and Senior Research
Adviser for the Executive Director of the Economic Research Institute for ASEAN
and East Asia (ERIA) in Jakarta.

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