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.
|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|