Why (Almost) Nobody Invests in Japan - VisualPolitik EN

Summary

The video script highlights Japan's resurgence in economic and political influence, underscored by its strategic alliance with the US and leadership in the CPTPP. Despite challenges like demographic decline and yen weakness, Japanese firms have ascended the value chain, becoming indispensable in high-tech supply chains. However, Japan's paradoxical low foreign direct investment (FDI) is attributed to its closed corporate ecosystem, legacy policies, and Keiretsu structure. Recent shifts in social attitudes, demographic pressures, and corporate governance reforms may signal an impending transformation, raising questions about Japan's future as a hub for multinationals.

Takeaways

• 🌏 Japan is regaining prominence in both economic and political spheres, highlighted by its strategic importance to US security policy in Asia.
• 🤝 High-level visits from US officials Antony Blinken and Lloyd Austin, and the reception of Japan's then Prime Minister Yoshihide Suga, underscore the strengthening Tokyo-Washington ties.
• 📈 Japan's economic strategy includes leading the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), positioning it as a trusted power in Southeast Asia.
• 💼 Despite demographic and currency challenges, Japanese companies have adapted by moving up the value chain, becoming key suppliers of high-tech materials and components globally.
• 🔍 Japanese firms' market dominance in advanced tech components often goes unnoticed by consumers but is crucial to the high-tech industry.
• 📊 Japan's real per capita growth has been on par with the US since 2009, outpacing countries like France and the UK, despite a shrinking working-age population.
• 💼 Japan's economy is attracting multinational attention as the third-largest consumer market, yet it lags in attracting Foreign Direct Investment (FDI).
• 🏆 The UN ranks Japan near the bottom for FDI as a percentage of GDP, primarily due to historical restrictions and corporate structures that deter foreign takeovers.
• 🔒 Post-WWII policies and Keiretsu conglomerates have created a closed ecosystem in Japan, limiting foreign corporate footholds and affecting productivity and innovation.
• 🌐 Changes in social attitudes, demographic pressures, and corporate governance reforms may soon alter Japan's stance on FDI and international talent.
• 🔑 Japan's low immigrant population contributes to its demographic crisis and labor shortages, with potential implications for economic growth and multinational interest.

Q & A

Why is Japan considered the linchpin of US security policy in Asia?

Japan is considered the linchpin of US security policy in Asia because it has a strong alliance with the US, as evidenced by high-level visits from US officials like Secretary of State Antony Blinken and Secretary of Defense Lloyd Austin, and the Japanese Prime Minister Yoshihide Suga being the first foreign guest received by President Joe Biden at the White House.

What is the significance of the Trans-Pacific Partnership Agreement (CPTPP) in Japan's economic strategy?

The CPTPP is significant in Japan's economic strategy as it is one of the largest free trade and economic integration agreements in the world, which Japan is leading. This positions Japan as a key player in the global economy and enhances its influence in the fastest-growing economic region, Southeast Asia.

How have Japanese companies adapted to increased competition from South Korea, Taiwan, and China?

Japanese companies have adapted to increased competition by moving up the value chain and focusing on producing high-tech, highly innovative materials and components that are indispensable in the global production chain.

What is the role of Japanese companies in the high-tech industry's advanced components and supplies?

Japanese companies control more than 50% of the market share in many of the advanced components and supplies of the high-tech industry, including specialty glass, semiconductor manufacturing equipment, and complex chemicals.

How has Japan's real per capita growth compared to other developed countries since 2009?

Since 2009, Japan's real per capita growth has grown almost at the level of the United States and risen above countries like France or the United Kingdom, despite its overall GDP growth being relatively low due to a shrinking working-age population.

Why does Japan rank second to last in the world in terms of Foreign Direct Investment (FDI) received as a percentage of GDP?

Japan ranks second to last in terms of FDI received as a percentage of GDP due to its closed ecosystem of corporate operations, legacy restrictions on FDI post-World War II, cross-shareholdings, and the influence of large conglomerates known as Keiretsu, which make it difficult for foreign corporations to gain a foothold.

What is the average percentage of FDI in GDP for developed countries, and how does Japan compare?

The average percentage of FDI in GDP for developed countries is 44%. In contrast, FDI accounts for just over 4% of Japan's GDP, indicating a significantly lower level of foreign investment.

What are the three main reasons that could lead to a change in Japan's FDI situation?

The three main reasons that could lead to a change in Japan's FDI situation are increasing social acceptance of foreign control of local companies, the demographic decline forcing many SMEs to close due to lack of successors, and changes in corporate governance policies to raise economic growth and profitability.

How does Japan's immigrant population compare to other developed countries, and what implications does this have?

Japan has a fairly small immigrant population, barely 2% of the total, compared to over 13% in the United States. This has implications for the country's talent pool and contributes to the deepening demographic crisis, with a shrinking working-age population and labor shortages.

What measures has the Japanese government introduced to address the labor shortage and encourage foreign labor?

The Japanese government has introduced changes to encourage the arrival of foreign labor, although it is indicated that more rapid changes may be necessary in the future to address the labor shortage, which is projected to reach about 6.5 million workers by 2030.

Outlines

00:00

🌏 Resurgence of Japan's Global Influence

The script discusses Japan's renewed significance in both economic and political spheres. Since Joe Biden's presidency, Japan has been reaffirmed as a keystone in US security policy in Asia, evidenced by high-level visits from US officials and the Japanese Prime Minister being the first foreign guest at the White House. The country's economic strategy includes leading the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), positioning itself as a trusted power in Southeast Asia. Despite demographic and currency challenges, Japanese companies have adapted by moving up the value chain, becoming suppliers of indispensable high-tech components, which has contributed to Japan's real per capita growth being on par with the US. However, there is a paradox in that international companies invest very little in Japan, despite its status as the third-largest consumer market.

05:01

🏢 Japan's Corporate Ecosystem and FDI Anomaly

This paragraph delves into the reasons behind Japan's low levels of Foreign Direct Investment (FDI), ranking it second to last globally in terms of FDI as a percentage of GDP. The script explains that Japan's corporate structure, with its Keiretsu conglomerates and cross-shareholdings, creates a closed ecosystem that is resistant to foreign takeovers. This has resulted in a lack of mergers and acquisitions, which are typical drivers of FDI in other developed countries. The government's attempts to encourage foreign investment have been largely unsuccessful, with policies such as lowering the threshold for government approval in corporate transactions making it difficult for foreign entities to invest in Japan. However, there are signs of change on the horizon, with increasing social acceptance of foreign control, demographic pressures leading to potential opportunities for foreign investment in SMEs, and shifts in corporate governance policies that may open up the market to foreign capital.

Keywords

💡Economic and Political Arena

This phrase refers to the broad context of economic and political activities and decisions that influence a country's position and relationships globally. In the video, it is used to highlight Japan's resurgence in international importance, especially in its relations with the US and its role in economic agreements like the CPTPP.

💡Linchpin

A 'linchpin' is a crucial element or person on which the success of an endeavor depends. The video uses this term to emphasize Japan's strategic importance to US security policy in Asia, indicating that Japan is a key component of the US's geopolitical strategy.

💡Trans-Pacific Partnership Agreement (CPTPP)

The CPTPP is a significant free trade agreement among Pacific Rim countries, excluding the US. The video mentions it to illustrate Japan's leadership in economic integration and trade, positioning itself as a driving force in the global economy.

💡Value Chain

The 'value chain' concept refers to the sequence of activities a company undertakes to deliver a valuable product or service. The script discusses how Japanese companies have moved up the value chain by producing high-tech, innovative materials and components, showing their strategic adaptation to global market changes.

💡Demographic Decline

This term describes a situation where a population is decreasing in size, often due to factors like low birth rates and aging populations. The video script uses this to explain one of the challenges Japan faces, which affects its economic growth and labor force.

💡Yen

The 'yen' is the official currency of Japan. The script mentions the weakness of the yen as one of the limitations faced by the Japanese economy, which can impact international trade and investment.

💡Foreign Direct Investment (FDI)

FDI refers to an investment made by a firm or individual in one country into business interests located in another country. The video discusses Japan's low ranking in FDI as a percentage of GDP, indicating a lack of international investment in the country despite its economic potential.

💡Keiretsu

A 'keiretsu' is a type of business group in Japan with interlocking business relationships and shareholdings. The script explains how keiretsu can limit foreign investment in Japan by creating a closed ecosystem of interconnected companies that are difficult for outsiders to penetrate.

💡Cross-Shareholdings

This term refers to the practice where companies within a business group hold shares in each other. The video mentions cross-shareholdings as a strategy used in Japan to maintain control over companies and make it harder for foreign investors to gain influence.

💡Small and Medium-sized Enterprises (SMEs)

SMEs are businesses that fall below a certain size threshold, typically in terms of number of employees or annual turnover. The script discusses the potential closure of many SMEs in Japan due to demographic decline and lack of successors, which could open opportunities for foreign investment.

💡Corporate Governance

Corporate governance involves the system of rules, practices, and processes by which a firm is directed and controlled. The video suggests that changes in corporate governance policies in Japan could be a catalyst for increased foreign investment and economic growth.

Highlights

Japan's resurgence in economic and political influence, highlighted by its central role in US security policy in Asia.

High-level US officials' first international visits to Japan, signaling its importance in US foreign relations.

Japan's proactive stance in economic agreements, leading the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Japan's status as the most trusted power in Southeast Asia according to public opinion polls.

Japanese companies' strategic shift to high-value manufacturing and innovation, moving up the value chain.

Transcripts

Both in the economic and political  arena, Japan is coming back into fashion.

Want an example? Since he  arrived in the Oval Office,  

Joe Biden has made it clear that Japan remains  the linchpin of US security policy in Asia.

Proof of this is that both Secretary of State,  Antony Blinken, and Secretary of Defense,  

Lloyd Austin, visited Japan on their first  international trip. And not only that,  

the Japanese Prime Minister of the time,  Yoshihide Suga, was the first foreign  

guest Biden received as President at the  White House. Quite a statement of intent.

And, of course, it's not just about the  relationship between Tokyo and Washington.

Increasing economic competition from China  is causing the Japanese government to step  

up its game. There is, for example, the  Trans-Pacific Partnership Agreement,  

the CPTPP, one of the largest free trade  and economic integration agreements in the  

world that is being led, by none other than Japan.

A country that, according to public opinion polls,  

is the most trusted power in Southeast Asia,  the world's fastest-growing economic region.

But we’re not only talking  about the political field.

The truth is that Japan is also  becoming fashionable economically.

Despite all its limitations, such as its eternal  crisis, the demographic decline or the weakness  

of the yen, the Land of the rising sun, or rather  Japanese companies, are reinventing themselves.

Starting in the late 1990s when, first  South Korean and Taiwanese companies,  

and then Chinese ones, began to compete  head-to-head with many Japanese manufacturers,  

they were gradually forced to produce goods that  

were more difficult to make and imitate.  In other words, move up the value chain.

And that is exactly what they  did. Many Japanese companies  

have transformed themselves  into suppliers of high-tech,  

highly innovative materials and components that  are indispensable in the global production chain.

To give you an idea, although for us end consumers  it may be somewhat invisible, Japanese companies  

control more than 50% of the market share in  many of the advanced components and supplies  

of the high-tech industry. From specialty  glass, to semiconductor manufacturing equipment,  

to complex chemicals. If you use high-tech  products, Japan probably has a lot to do with it.

In many ways this explains how, since 2009,  Japan's real per capita growth has grown  

almost at the level of the United States and risen  above countries like France or the United Kingdom. 

Yes, yes, that’s right.

Japan's GDP is barely growing but we have  to take into account that its population,  

particularly that of working age, has  been shrinking for years. In other words,  

with a lower population they produce more. In  per capita terms, Japan’s economic performance  

over the last decade has been reasonably good. And if we also take into account that it is  

still the third largest consumer market in the  world after the United States and China, we can  

get an idea of why Japan's economy is once again  attracting the attention of many multinationals.

However, hold on just a minute,  because something is not adding up.

Despite all its attractions, the truth is that  international companies barely invest in Japan.

Check it out.

But, having said that, let's move on.

(WHY IS NOBODY INVESTING IN JAPAN?)

Well, to say that nobody invests in  Japan is obviously an exaggeration.

But surely you won't think it's  such an exaggeration if I tell  

you that the United Nations ranks  Japan second to last in the world  

only to North Korea in terms of Foreign Direct  Investment received as a percentage of GDP.

This is a huge anomaly.

The bottom line is that: FDI accounts for just  over 4% of Japan's GDP. To give you an idea,  

the average for developed countries is 44%.

Normally countries that want to boost  their economic growth would encourage  

foreign companies to locate there, to open new  facilities, such as new factories or new offices,  

to buy local companies or to invest in  the country's public or private bonds.

However, this is not the case in Japan,  

which remains completely disconnected  from foreign direct investment flows.

But does that mean it is forbidden to make  

a productive investment in  the Land of the rising sun?

Not at all. In fact, Japan's politicians  have been talking about encouraging foreign  

investors for almost 20 years. And  in a way they have done just that.

When Junichiro Koizumi took office as Prime  Minister in 2001, FDI in the country was a  

mere 1.2% of GDP, prompting this government  to set a target of 5% by 2011. At first  

things went smoothly and the percentage  of foreign investment increased to 4%  

in 2008. Since then, however,  things have remained stagnant.

So the question is, what is the reason for this  anomaly? Why does Japan not attract productive  

investment? Why does nobody – or almost nobody  – want to invest in this country? How is it  

possible that in this race, the only country  the Land of the rising sun beats is North Korea?

Well, VisualPolitik fans, the key  seems to lie in corporate operations.

Let me explain. In a typical developed  country, up to 80% of FDI inflows take the  

form of corporate mergers and acquisitions.  However, that is not the case in Japan.

This seems to be a legacy of the  immediate post-World War II era.

At that time Tokyo restricted FDI to  

prevent foreign companies from  taking control of the market.

Years later, when entry into the OECD forced  the Japanese government to overturn these  

restrictions, Japanese policymakers  devised countermeasures of sorts to  

make it more difficult for multinationals  to buy Japanese companies. A large part of  

these countermeasures had to do with the  promotion of cross-shareholdings between  

companies and above all with the return  of the large conglomerates, the Keiretsu.

To give you an idea, today these  conglomerates continue to exercise  

enormous control over the national economy.  The Keiretsu control 26,000 parent companies,  

56,000 subsidiaries and employ about 18 million  people, almost a third of all Japanese employees.

And this is not even counting many companies that  

act as subcontractors and suppliers  closely linked to these groups.

The Toyota group, for example, has some 1,000  subsidiaries and 40,000 suppliers, most of which  

are closely linked to this group. In other words,  in practice, they are not entirely independent.

In this way, the Keiretsu exercise  such great control over Japanese  

companies that they leave little room for foreign  

corporations to gain a foothold. It is  something like a very closed ecosystem.

The problem is that the ecosystem is so  closed that in many fields it has fueled  

enormous inbreeding that comes at the expense  of productivity and change. For example,  

the digital transition in Japan lags  far behind its counterpart countries.

To make matters worse, despite its intentions,  

the government has introduced  even more control mechanisms.

For example, in 2020 it pushed through  parliament a change in the Foreign  

Exchange and Foreign Trade Law to lower the  threshold by which a corporate transaction  

requires government approval: from 10%  of the shares it dropped to around 1%.

The result is that buying a company in Japan  can be almost an impossible mission. And  

that explains the very little FDI that  enters the country in relative terms,

However, this is something that could start  to change very soon, for three main reasons.

Firstly, surveys are beginning to show greater  social acceptance of foreigners taking control  

of local companies. This is something that  traditionally generated dread in the country.

Secondly, demographic decline is forcing  many Small and Medium-sized Enterprises  

to close as their owners retire and have  no successors. Along these lines, in 2020,  

a report published by the FDI Promotion  Council, a government advisory body,  

argued that foreign capital  inflows could be the solution.

We are talking about more than 600,000  profitable SMEs that might have to  

close within the next three years.  There are six million jobs at risk.

And thirdly, plans to raise the economic growth  and profitability of the Tokyo Stock Exchange  

are driving changes in the corporate governance  policies of companies. We'll tell you all about  

this in an upcoming video, so don't forget to  subscribe to VisualPolitik to stay in the loop.

However, as we have mentioned on other  occasions, this is not the only area  

where Japan's economy has become the odd  one out in terms of economic globalization.

Check it out.

(A COUNTRY THAT IS ALSO CLOSED TO TALENT)

In contrast to most developed countries,  Japan has a fairly small immigrant population:  

barely 2% of the total. In the United  States, for example, this figure exceeds 13%.

Not only has this meant excluding a lot of talent,  

but it has also contributed to deepening the  demographic crisis the country is experiencing.

Its population first began to decline in 2005  and has been steadily shrinking since 2011,  

which is taking a major toll  on the working-age population.

For example, in 2019, more than 28 percent of the  population was over the age of 65, and only about  

60 percent of Japanese residents were between  the ages of 15 and 64. This explains why this  

country suffers from one of the highest levels  of labor shortages of all developed countries.  

According to the Japanese government itself,  

we are talking about a shortage of  about 6.5 million workers by 2030.

So far, some changes have already been  introduced to encourage the arrival of  

foreign labor. But everything indicates that  things will have to move faster in the future.

And so, VisualPolitik viewers, you can see  that in some fields, the Japanese economy is  

the most closed to international flows but that  it is about to undergo a huge transformation.

The question is, will it be enough to balance  all the problems the country is facing? Will  

Japan become the new fashionable  destination for multinationals?

These are questions that only  time can answer. For now,  

leave us your thoughts below in the  comments and, very, very important:  

if you have found this video that we have made  in collaboration with our friends from Value  

School interesting, don't forget to like it  and leave us your impressions in the comments.

All the best and see you next time.