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Japan

Executive Summary

Japan is the world’s third largest economy, the United States’ fourth largest trading partner, and, as of 2020, the top provider of foreign direct investment (FDI) in the United States. The Japanese government welcomes and solicits inward foreign investment and has set modest goals for increasing inbound FDI. Despite Japan’s wealth, high level of development, and general acceptance of foreign investment, however, inbound FDI stocks, as a share of GDP, are the lowest among the OECD countries.

On the one hand, Japan’s legal and regulatory climate is highly supportive of investors. Courts are independent, but attorney-client privilege does not exist in civil, criminal, or administrative matters, with the exception of limited application in cartel anti-trust investigations. 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 fairly 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, 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, among other factors, has led to low returns on equity and cash hoarding among Japanese firms, although business practices are improving in both areas, at least among leading firms. Investors and business owners must also grapple with inflexible labor laws and a highly regimented system of labor recruitment and management 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.

A revised national Climate Law, which the National Diet passed unanimously in May 2021 and enters into full effect on April 1, 2022, will codify Japan’s decarbonization commitments under the Paris Agreement. The new legislation amends the law in three areas: requiring Japan to achieve net-zero greenhouse gas emissions by 2050, bolstering mechanisms to support and expedite decarbonization at the subnational level, and requiring digitalization and transparency of emissions-related information published by the Government of Japan (GOJ).

Levels of corruption in Japan are low, but deep relationships between firms and suppliers as well as between large business and the bureaucrats who regulate them may limit competition in certain sectors and inhibit the entry of foreign firms into local markets.

Future improvement in Japan’s investment climate is contingent largely on the success of structural reforms to raise economic growth.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 18 of 180 http://www.transparency.org/research/cpi/overview 
Global Innovation Index 2021 13 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2020 USD 131,643 https://apps.bea.gov/international/factsheet/  
World Bank GNI per capita 2020 USD 40,360 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

Japan has privatized most former state-owned enterprises (SOEs). Under the Postal Privatization Law, privatization of Japan Post group started in October 2007 by turning the public corporation into stock companies. The stock sale of the Japan Post Holdings Co. and its two financial subsidiaries, Japan Post Insurance (JPI) and Japan Post Bank (JPB), began in November 2015 with an IPO that sold 11 percent of available shares in each of the three entities. The postal service subsidiary, Japan Post Co., remains a wholly owned subsidiary of JPH. The Japanese government conducted additional public offerings of stock in September 2017 and October 2021, reducing the government ownership in the holding company to a little over one third. There were offerings in the insurance subsidiary in April 2019 and June 2021. JPH currently owns 88.99 percent of the banking subsidiary and 49.9 percent of the insurance subsidiary. Follow-on sales of shares in the two subsidiary companies will take place over time, but the government’s sale of JPH stocks in October 2021 is considered to be the last. The Postal Privatization Law requires the government to sell a majority share so that the government ownership would be “a little over one third” of all shares in JPH (which was completed in 2021), and JPH to sell all shares of JPB and JPI, as soon as possible.

These offerings mark the final stage of Japan Post privatization begun under former Prime Minister Junichiro Koizumi (2001-2006) and respond to long-standing criticism from commercial banks and insurers—both foreign and Japanese—that their government-owned Japan Post rivals have an unfair advantage.

While there has been significant progress since 2013 on private suppliers’ access to the postal insurance network, the U.S. government has continued to raise concerns about the preferential treatment given to Japan Post and some quasi-governmental entities compared to private sector competitors and the impact of these advantages on the ability of private companies to compete on a level playing field. A full description of U.S. government concerns regarding the insurance sector and efforts to address these concerns is available in the annual United States Trade Representative’s National Trade Estimate on Foreign Trade Barriers report for Japan.

8. Responsible Business Conduct

Japanese corporate governance has often been criticized for failing to sufficiently prioritize shareholder interests and detect wrongdoing by company executives in a timely way, due in part to a lack of independent corporate directors and to cross-shareholding agreement among firms. Previous governments made corporate governance reform a core element of their economic agendas with the goal of reinvigorating Japan’s business sector through encouraging a stronger focus by management on earnings and shareholder value. PM Kishida has pledged that his administration will facilitate reforms further, with an added emphasis on additional stakeholders, such as labor and the environment.

Progress has been made through efforts by the Financial Services Agency (FSA) and Tokyo Stock Exchange (TSE) to introduce non-binding reforms through changes to Japan’s Companies Act in 2014 and adoption of a Corporate Governance Code (CSR) in 2015. Together with the Stewardship Code for institutional investors launched by the FSA in 2014, these initiatives have encouraged companies to put cash stockpiles to better use by increasing investment, raising dividends, and taking on more risk to boost Japan’s growth. Positive results of these efforts are evidenced by rising shareholder returns, unwinding of cross-shareholdings, and increasing numbers of independent board members.  According to a TSE survey conducted in December 2018, 85.3 percent of companies had a compliance rate of 90 percent out of the 66 principles of the new code. As of August 2021, 97 percent of TSE First Section-listed firms had at least two independent directors, according to an August 2021 TSE report. In December 2019, the Diet approved a revision of the Companies Act, which will enable companies to provide documents for shareholders’ meetings electronically. Listed companies will be obligated to have at least one outside director. The bill went into effect on March 1, 2021.

Following Stewardship Code revision in March 2020, the TSE and FSA revised the Corporate Governance Code in spring of 2021 to reflect the realignment of the TSE segmentations, which will be implemented in 2022. The revised guidelines require companies, to be listed in the “Prime Section,” a top-tier TSE section, to have more than one-third external directors. As of October 2021, 72.8 percent had one-third external directors. The guidelines also urge listed companies to have more diversity in mid-level and managerial posts by hiring and training female and foreign workers. Awareness of corporate social responsibility (CSR) among both producers and consumers in Japan is high, and foreign and local enterprises generally follow accepted CSR principles. Business organizations also actively promote CSR. Japan encourages adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.

9. Corruption

Japan’s penal code covers crimes of official corruption, and an individual convicted under these statutes is, depending on the nature of the crime, subject to prison sentences and possible fines. With respect to corporate officers who accept bribes, Japanese law also provides for company directors to be subject to fines and/or imprisonment, and some judgments have been rendered against company directors.

The direct exchange of cash for favors from government officials in Japan is extremely rare. However, the web of close relationships between Japanese companies, politicians, government organizations, and universities has been criticized for fostering an inwardly “cooperative”—or insular—business climate that is conducive to the awarding of contracts, positions, etc. within a tight circle of local players. This phenomenon manifests itself most frequently and seriously in Japan through the rigging of bids on government public works projects. However, instances of bid rigging appear to have decreased over the past decade. Alleged bid rigging between construction companies was discovered on the Tokyo-Nagoya-Osaka maglev high-speed rail project in 2017, and the case was prosecuted in March 2018.

Japan’s Act on Elimination and Prevention of Involvement in Bid-Rigging authorizes the Japan Fair Trade Commission to demand that central and local government commissioning agencies take corrective measures to prevent continued complicity of officials in bid rigging activities and to report such measures to the JFTC. The Act also contains provisions concerning disciplinary action against officials participating in bid rigging and compensation for overcharges when the officials caused damage to the government due to willful or grave negligence. Nevertheless, questions remain as to whether the Act’s disciplinary provisions are strong enough to ensure officials involved in illegal bid rigging are held accountable.

Japan ratified the Organisation for Economic Co-Operation and Development (OECD) Anti-Bribery Convention, which bans bribing foreign government officials, in 1999. Japan detected only 46 allegations of foreign bribery, half of which the OECD brought to Japan’s attention, through 2019.

For vetting potential local investment partners, companies may review credit reports on foreign companies available from many private-sector sources, including, in the United States, Dun & Bradstreet and Graydon International.  Additionally, a company may inquire about the International Company Profile (ICP), which is a background report on a specific foreign company that is prepared by the U.S. Commercial Service at the U.S. Embassy, Tokyo.

10. Political and Security Environment

Political violence is rare in Japan. Acts of political violence involving U.S. business interests are virtually unknown.

11. Labor Policies and Practices

The Government of Japan has provided extensive and expanded employment subsidies to companies to encourage them to maintain employment during the COVID-19 pandemic. Despite the pandemic, worker shortages remain in sectors such as information service, restaurants, and construction. The unemployment rate as of January 2022 was 2.8 percent. The fact that Japan’s unemployment rate has risen so slowly during the pandemic is likely due to the social contract between worker and employer in Japan, as well as the continued government subsidies that expanded substantially under the pandemic. Traditionally, Japanese workers have been classified as either regular or non-regular employees. Companies recruit regular employees directly from schools or universities and provide an employment contract with no fixed duration, effectively guaranteeing them lifetime employment. Non-regular employees are hired for a fixed period. Companies have increasingly relied on such non-regular workers to fill short-term labor requirements and to reduce labor costs. The pandemic has particularly hurt non-regular workers whose employment was concentrated in hard-hit service sectors such as tourism, hospitality, restaurants, and entertainment.

Major employers and labor unions engage in collective bargaining in nearly every industry. Union members as of June 2021 made up 16.9 percent of employees (“koyo-sha”), down slightly compared to 2020 and in decline from 25 percent of the workforce in 1990. The government provides benefits for workers laid off for economic reasons through a national employment insurance program. Some National Strategic Special Zones allow for special employment of foreign workers in certain fields, but those and all other foreign workers are still subject to the same national labor laws and standards as Japanese workers. Japan has comprehensive labor dispute resolution mechanisms, including labor tribunals, mediation, and civil lawsuits. A Labor Standards Bureau oversees the enforcement of labor standards through a national network of Labor Bureaus and Labor Standards Inspection Offices.

The number of foreign workers has been rising but slowed down slightly during the past year due to the pandemic. At just over 1.73 million as of October 2021, they still represent a small fraction of Japan’s 68.6-million-worker labor force. The Japanese government has made changes to labor and immigration laws to facilitate the entry of larger numbers of skilled foreign workers in selected sectors. A revision to the Immigration Control and Refugee Recognition Law in December 2018, implemented in April 2019, created the “Specified Skilled” worker program designed specifically for lower-skilled foreign workers. Prior to this change, Japan had never created a visa category for lower-skilled foreign workers, and this law created two. Category 1 grants five-year residency to low-skilled workers who pass skills exams and meet Japanese language criteria and permits them to work in 14 designated industries, such as agriculture or nursing care, identified by the Japanese government to be experiencing severe labor shortage. Category 2 is for skilled workers with more experience, granting them long-term residency and a path to long-term employment, but currently permitted only in a few designated industries, such as construction and shipbuilding.

The Japanese government also operates the Technical Intern Training Program (TITP). Originally intended as an international skills-transfer program for workers from developing countries, TITP is currently used to address immediate labor shortages in over 85 designated occupations, such as jobs in the construction, agriculture, fishery, and elderly nursing care industries. As noted previously, the 2018 Immigration Control Law revision enabled TITP beneficiaries with at least three years of experience to qualify to apply for the Category 1 status of the Specified Skilled worker program without any exams.

To address the labor shortage resulting from population decline and a rapidly aging society, Japan’s government has pursued measures to increase participation and retention of older workers and women in the labor force. A law that entered into force in April 2013 requires companies to introduce employment systems allowing employees reaching retirement age (generally set at 60) to continue working until age 65. The law was revised again in March 2020 and entered into force in April 2021, asking companies to “make efforts” to secure employment for workers between 65 and 70.

Since 2013, the government has committed to increasing women’s economic participation. The Women’s Empowerment Law passed in 2015 requires large companies to disclose statistics about the hiring and promotion of women and to adopt action plans to improve the numbers. The COVID-19 pandemic has, however, had a disproportionately negative effect on women in Japan. Women were more likely than men to occupy non-regular positions, work in industries hardest hit by the downturn, and face greater pressure to prioritize family over work. As a result, women have experienced reductions in working hours, departure from the labor force, or furloughs in greater numbers than men, erasing part of the rise in their workforce participation through 2019. The Government of Japan has acknowledged this impact on women’s economic participation and convened a study group in September 2020 to consider solutions. Its final report, issued on April 28, 2021, urged that changes be made to systems and practices which persist in Japanese society, such as gender-based roles. The report also noted the importance of gender segregated data to be taken at the national and local government level, to help create effective measures.

In May 2019, a package law that revised the Women’s Empowerment Law, expanded the reporting requirements to SMEs that employ at least 101 persons (starting in April 2022) and increasing the number of disclosure items for larger companies (from June 2020). The package law also included several labor law revisions requiring companies to take preventive measures for power and sexual harassment in the workplace.

In June 2018, the Diet passed the Workstyle Reform package.  The three key provisions are:  (1) the “white collar exemption,” which eliminates overtime for a small number of highly paid professionals; (2) a formal overtime cap of 100 hours/month or 720 hours/year, with imprisonment and/or fines for violators; and (3) new “equal-pay-for-equal-work” principles to reduce gaps between regular and non-regular employees.

Japan has ratified 49 International Labor Organization (ILO) Conventions (including six of the eight fundamental conventions). As part of its agreement in principle on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership Japan agreed to adopt the fundamental labor rights stated in the ILO Declaration including freedom of association and the recognition of the right to collective bargaining, the elimination of forced labor and employment discrimination, and the abolition of child labor. The CPTPP entered into force on December 30, 2018.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $5,039,813 2020 $5,057,759 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 $62,930 2020 $131,643 BEA data available at https://apps.bea.gov/international/
factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2020 $563,367 2020 $647,718 BEA data available at https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2020 7.37% 2020 4.9% UNCTAD data available at https://stats.unctad.org/handbook/
EconomicTrends/Fdi.html
  

* Source for Host Country Data: *2020 Nominal GDP data from Economic and Social Research Institute, Cabinet Office, Japanese Government. February, 2022. (Note: uses exchange rate of 106.78 Yen to 1 U.S. Dollar and Calendar Year Average Data)

The discrepancy between Japan’s accounting of U.S. FDI into Japan and U.S. accounting of that FDI can be attributed to methodological differences, specifically with regard to indirect investors, profits generated from reinvested earnings, and differing standards for which companies must report FDI.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (IMF CDIS, 2020)
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 232,313 100% Total Outward 1,837,075 100%
United States 62,748 27% United States 561,736 31%
Singapore 35,629 15% China 138,566 8%
France 30,774 13% Netherlands 134,492 7%
Netherlands 20,886 9% United Kingdom 131,675 7%
United Kingdom 14,466 6% Singapore 92,886 5%
“0” reflects amounts rounded to +/- USD 500,000.

 

Table 4: Portfolio Investment
Portfolio Investment Assets (IMF CPIS, 2020 end)
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 5,073,686 100% All Countries 2,078,430 100% All Countries 2,995,256 100%
United States 2,072,497 41% Cayman Islands 777,816 37 United States 1,325,961 44%
Cayman Islands 990,422 20% United States 746,535 36% France 263,330 9%
France 300,213 6% Luxembourg 103,926 5% Cayman Islands 212,605 7%
Australia 189,649 4% Ireland 59,243 3% Australia 163,873 5%
United Kingdom 185,243 4% United Kingdom 39,338 2% United Kingdom 145,905 5%

14. Contact for More Information

Pam Pontius
Economic Section
U.S. Embassy Tokyo
1-10-5 Akasaka, Minato-ku, Tokyo 107-8420
Japan+81 03-3224-5035
pontiuspr@state.gov

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