Japan flag Japan: Investing in Japan

Foreign direct investment (FDI) in Japan

FDI in Figures

FDI flows to Japan remain low compared to most other developed nations across the world and are relatively unstable. According to UNCTAD's 2021 World Investment Report, FDI declined by 30% to USD 10 billion in 2020, reflecting a 25% decline in FDI from MNEs in the United States. Japan's FDI stock was estimated at about USD 243 billion in the same year. The country is also one of the main investors worldwide, with an estimated stock of outward investments of USD 1,982 billion. In 2020, investment by Japanese multinationals fell 49% to USD 116 billion from a record USD 227 billion in 2019, partly due to the economic crisis triggered by the Covid-19 pandemic. The United States, Singapore, France, the Netherlands, and the United Kingdom were the main investing countries and represented nearly two-thirds of the FDI inflows. Investments are mainly oriented towards finance and insurance, transportation equipment production, electric machinery, communication, and chemicals and pharmaceuticals. According to the latest figures from OECD, in the first semester of 2021 FDI inflows to Japan totaled USD 16.8 billion, up by 215% year-on-year. In the same period, Japan recorded increases in FDI equity outflows of more than USD 15 billion, partly influenced by some large M&A transactions, such as the acquisition of the entire share capital of Nipsea Pte Ltd, a Singapore-based manufacturer of coatings, by Nippon Paint Holdings Co Ltd.

Japan ranked 29th out of 190 countries in the World Bank's latest Doing Business report, an increase from the previous edition when it ranked 39th. The country has a solid net foreign creditor position and external indicators are generally robust.  Japan is actively opening its doors to foreign business, as it's aiming to create the best possible environment for overseas investors. The country's key strengths are its position as a leader in advanced technology and R&D, the fact that it is the third-largest economy in the world, a big internal market with high purchasing power and a highly skilled workforce. The potential barriers to investment are essentially demographic, linguistic and cultural; with international competition restricted by a very insular local business culture. Moreover, the Foreign Exchange and Foreign Trade Act (the Forex Act) was amended, lowering the ownership threshold for pre-approval notification to the government for foreign investors from 10% to 1% in sectors that could pose a national security risk, and introducing a new prior notification exemption scheme for share acquisitions. Nevertheless, Japan remains a key market for investors.

 
Foreign Direct Investment 201820192020
FDI Inward Flow (million USD) 9,25614,55210,254
FDI Stock (million USD) 204,524223,810243,046
Number of Greenfield Investments* 253242221
Value of Greenfield Investments (million USD) 10,9838,4277,422

Source: UNCTAD, Latest available data

Note: * Greenfield Investments are a form of Foreign Direct Investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up.

 
Country Comparison For the Protection of Investors Japan OECD United States Germany
Index of Transaction Transparency* 7.0 6.5 7.0 5.0
Index of Manager’s Responsibility** 6.0 5.3 9.0 5.0
Index of Shareholders’ Power*** 8.0 7.3 9.0 5.0

Source: Doing Business, Latest available data

Note: *The Greater the Index, the More Transparent the Conditions of Transactions. **The Greater the Index, the More the Manager is Personally Responsible. *** The Greater the Index, the Easier it Will Be For Shareholders to Take Legal Action.

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What to consider if you invest in Japan

Strong Points
Advantages for FDI in Japan:

  • In addition to having the third largest economy in the world, Japan has very strong purchasing power and therefore strong domestic demand.
  • As a leader in high technology, research and development (with the largest number of patents in the world), Japan has had a steadily growing economy and rock solid stability for several decades.
  • Because of its geographical location, any foreign investor operating in the Japanese market has a facilitated entry to other Asian markets. 
  • The business environment is clearly favourable and reinforced by a stable political system.
  • The workforce is highly skilled and the Japanese are known as great workers dedicated to their company. 
  • The ageing of its population opens up great opportunities for products and services geared towards older age groups (health care technology, medical devices, entertainment, pharmaceuticals, etc.).
  • Japan has signed Trade agreement with the EU and Transpacific Partnership (December 2018).

Further arguments in favour of investing in Japan can be found on the website of the Japanese investment agency (JETRO).

Weak Points

 Here is a non-exhaustive list of the main obstacles to FDI in Japan:

  • Excessive regulation that hinders economic growth as it increases the cost of starting activities
  • The difficulties the country faces in restoring public finances and deflation 
  • International competition restricted by a very insular local business culture: Japanese prefer to do business (especially M & A transactions) with known partner companies. In the same way, it is preferable to establish networks and alliances with companies and national professional organizations. 
  • Cultural and linguistic challenges that can be complicated to overcome for an SME 
  • Low productivity of Japanese SMEs.
  • Still insufficient female labor participation, lack of child care
  • Ageing population at risk of jeopardizing the social security system
Government Measures to Motivate or Restrict FDI
Japan offers a number of national and local tax incentives that are available to foreign investors in Japan. These incentive schemes have been created for the benefit of both foreign investors and all Japanese companies. These incentives include the following:

  • Tax incentives for comprehensive special zones - The government offers tax benefits in the form of special depreciation rules and other deductions related to investment in equipment and plant related to special sectors.
  • Tax incentives for strengthening local business.
  • Tax incentives for wage and productivity improvement. These programmes offer tax incentives to increase employees' salaries and for investing in information technology.
  • Local tax incentives

For more information, visit the Japan External Trade Organization JETRO site.

Bilateral investment conventions signed by Japan
Japan is a signatory to 34 bilateral investment treaties. For a list of conventions signed by Japan, consult the list prepared by UNCTAD.

Find out more about Investment Service Providers in Japan on GlobalTrade.net, the Directory for International Trade Service Providers.

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Latest Update: May 2022

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