Diary Draft 4-7-06

Irasshaimasei Dozo

Enter, please! Japan has officially decided to attract foreign investors.

Prime Minister Koizumi’s administration has officially accepted the idea that Japan needs more capital investment, as well as foreign management and business concepts, to stimulate the still-lingering bad economy. Despite there having been 15 years since the end of the “good days” of the bubble economy, only recently does it seem that the government agrees that many existing fiscal and business practices are no longer valid and new ones, perhaps from outside Japan, are needed.

The failure of such practices, in my view, shows most dramatically outside Tokyo, in areas such as Kansai that have suffered more greatly. Local governments are in a terrible state, hopelessly in debt for expensive projects that no one other than bureaucrats (and interested parties) could believe were proper.

The economy, once based on a “convoy” relationship of large and small companies that has largely disappeared, desperately needs fresh investment and new businesses. Many of the biggest local companies have moved away, a result of the “double hollowing out” that has sent production to China and other parts of Asia and top management and headquarters offices to Tokyo. Yet the Kansai remains a center of precious resources including a vibrant community, historic culture, excellent educational facilities and a talented workforce, Its central location is a logistics asset and the quality of life is attractive.

I have been examining how to assist Kansai business and the Kansai public not only as a long-time resident with business experience in other countries, but also for the past four years as the head of the Kansai Chapter of the American Chamber of Commerce in Japan. The ACCJ, as many readers know, is the most influential foreign business group in Japan and it is also the leading American business group outside the United States.

The ACCJ has long argued for improving economic conditions in Japan and solving the lengthy recession through policy changes and financial stimulus. In 2002, it decided to commission an academic expert study of foreign direct investment in Japan, the myths and realities of FDI’s impact and what is really needed to improve conditions for the Japanese people.

This study was completed in 2003 by Professors Kyoji Fukao of Hitotsubashi University and Tomofumi Amano of Toyo University and is available in summary form on-line in both Japanese and English at http://www.accj.or.jp/content/offerings/pub. The study also was published as a book in Japanese.

FDI in Japan remains tiny compared to that in other developed nations. In January 2003, Prime Minister Koizumi set a goal of doubling FDI in Japan over five years, from its then-current level of 1.1% of gross domestic product, to 2%. In 2005, he set a new goal of increasing FDI by 400% by 2011. As of March 9, 2006, the Government now expects FDI to reach 2.5% of GDP by the end of 2006, and announced a new goal of 5% of GDP by 2010. Koizumi said ‘‘if we do not make Japan an attractive market for foreign businesses, the country will not become a better place,'' and that businesses coming to Japan are “not threats.”

It is fair to say, of course, that even 5% of GDP is still quite low compared with other countries and Japan could prosper even more if there were greater increases. However, there is still considerable fear of “foreign invaders,” especially among some Japanese company leaders who fear loss of control. In reality, there is little reason for fear of foreign hostile takeovers. There has never been a successful one in recent years. All recent hostile takeover efforts, such as those by Livedoor and Murakami Fund, have been by local companies, not foreign ones.

In addition, despite the press reports that a few aggressive foreign investors in Japanese golf courses, banks and real estate have made large windfall fortunes, it must be remembered that most of those were real financial gambles that no Japanese company wished to make. In addition, many of those investments were strongly encouraged by government, furthered government policies and had highly beneficial results for the economy.

Today we regularly read news stories about how lively the Japan market is for foreign investors. Indeed, I represent some of those investors myself who are looking for opportunities.

Many foreigners are extremely hesitant regarding investing in Japan. Most informed investors appreciate that Japan is unique. Markets are highly competitive. Consumers are demanding in ways unlike anywhere else in the world. Business relationships work differently from ways that many foreigners expect. Entrants know about many companies that tried to do business here and experienced utter failure. It is certainly possible for new investors to prosper in Japan, but to do that, they need support, services, advice, and cooperation from persons who know the country well.

That is why I tell businessmen in Kansai not to worry about FDI. The foreigners need them as partners and wise counsel, which can contribute to the benefit of everyone.