Foreign direct investment (FDI) in Japan

FDI in Figures

Global foreign direct investment (FDI) flows in 2021 were USD 1.58 trillion, up 64 per cent from the exceptionally low level in 2020. The recovery showed significant rebound momentum, with booming merger and acquisition (M&A) markets and rapid growth in international project finance because of loose financing conditions and major infrastructure stimulus packages. However, the global environment for international business and cross-border investment changed dramatically in 2022. The war in Ukraine – on top of the lingering effects of the pandemic – is causing a triple food, fuel and finance crisis in many countries around the world. Investor uncertainty could put significant downward pressure on global FDI in 2022. The 2021 growth momentum is unlikely to be sustained. Indeed, world flows in the second quarter of 2022, the latest data available, were down 31% from the first quarter and 7% less than the quarterly average of 2021 (UNCTAD Global Investment Trends Monitor, October 2022). The negative trend reflects a shift in investor sentiment due to the food, fuel and finance crises around the world, the Ukraine war, rising inflation and interest rates, and fears of a coming recession. Expectations for the full year are for a marked slowdown. In developing Asia, despite successive waves of COVID-19, FDI rose to an all-time high for the third consecutive year, reaching $619 billion. Asia is the largest recipient region, accounting for 40 per cent of global FDI. However, inflows remain highly concentrated; six economies account for more than 80 per cent of FDI to the region (UNCTAD, October 2022).

FDI flows to Japan remain low compared to most other developed nations across the world and are relatively unstable. According to UNCTAD's 2022 World Investment Report, FDI declined by 30% to USD 10.70 billion in 2020, reflecting a 25% decline in FDI from MNEs in the United States. It reached 24.65 billion in 2021. Japan's FDI stock was estimated at about USD 232.31 billion in 2021 and 256.93 billion in 2021. The country is also one of the main investors worldwide, with an estimated stock of outward investments of USD 1,983.85 billion in 2021. 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. In the first half of 2022 FDI inflows were already reaching 14.78 billion USD (OECD FDI In Figures, October 2022).

The country is ranked 4th on the AT Kearney Foreign Direct Investment Confidence Index 2022 on the most attractive economy for foreign investment. 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. Japan'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.

The latest United NationAsia-Pacific Trade and Investment Trends Report provides additional information on FDI in Japan and Asia-Pacific in 2022 and 2023.

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.