Japan

Executive Summary

Japan is the world’s third largest economy, the United States’ fourth largest trading partner,

and was the third largest contributor to U.S. foreign direct investment (FDI) in 2018.  The Japanese government actively welcomes and solicits foreign investment and has set ambitious goals for increasing inbound FDI.  Despite Japan’s wealth, high level of development, and general acceptance of foreign investment, inbound FDI stocks, as a share of GDP, are the lowest in the OECD.

Japan’s legal and regulatory climate is highly supportive of investors in many respects.  Courts are independent, but attorney-client privilege does not exist in civil, criminal or administrative matters.  There is no right to have counsel present during criminal or administrative interviews. The country’s regulatory system is improving transparency and developing new regulations in line with international norms.  Capital markets are deep and broadly available to foreign investors.  Japan maintains strong protections for intellectual property rights with generally robust enforcement.  The country remains a large, wealthy, and sophisticated market with world-class corporations, research facilities, and technologies.  Nearly all foreign exchange transactions, including transfers of profits, dividends, royalties, repatriation of capital, and repayment of principal, are freely permitted.  The sectors that have historically attracted the largest foreign direct investment in Japan are electrical machinery, finance, and insurance.

On the other hand, foreign investors in the Japanese market continue to face numerous challenges.  A traditional aversion towards mergers and acquisitions within corporate Japan has inhibited foreign investment, and weak corporate governance has led to low returns on equity and cash hoarding among Japanese firms, although business practices are improving in both areas.  Investors and business owners must also grapple with inflexible labor laws and a highly regimented labor recruitment system that can significantly increase the cost and difficulty of managing human resources.  The Japanese government has recognized many of these challenges and is pursuing initiatives to improve investment conditions.

Levels of corruption in Japan are low, but deep relationships between firms and suppliers may limit competition in certain sectors and inhibit the entry of foreign firms into local markets.

Future changes in Japan’s investment climate are largely contingent on the success of structural reforms to the Japanese economy. Efforts to strengthen corporate governance and increase female and senior citizen labor force participation have the potential to improve Japan’s economic performance.