fDi reports on the latest regulatory and trade changes that will affect foreign direct investors.

Prime minister Junichiro Koizumi announced earlier this year that the government aims to double foreign direct investment in Japan in five years to stimulate its stagnant economy and create employment. The government’s Japan Investment Council (JIC), which is chaired by Mr Koizumi, announced the programme would focus mainly on the barriers faced by foreign companies in entering the Japanese market.

International Monetary Fund statistics show that FDI flows into Japan remain low compared to other major economies. The ratio of inward FDI compared to nominal GDP in 2000 was only 1.1% in Japan. This compares to 27.9% in the US, 32.4% in the UK and 22.4% in Germany. The outstanding balance of FDI in Japan is only one-sixth that of the country’s direct investment overseas. The balance of foreign direct investment in the US exceeds that of US investment in other countries. In Britain, Germany and France, the inward foreign investment balance is about half the amount of the outward foreign investment balance.

Market potential

According to UNCTAD, Japan’s inward FDI potential index is 14th among 140 countries, although its performance index is 131st. The Japan External Trade Organisation (JETRO) sees that it is “essential to create a globally competitive investment environment. It will help Japan to advance beyond the domestic precedents and structures that have constrained economic growth over the past decade.”

Despite the huge market potential, there are fundamental problems associated with doing business in Japan, ones that cause even domestic companies to shift operations overseas. The most obvious of these is the expense. A survey by Japan’s Economy, Trade and Industry Ministry shows that the cost of services for industries in Japan is 2.7 times higher than in the US, 2.2 times higher than in Germany and nine times higher than in China. Airport usage charges in Japan are 2.5 times higher than in the US. The JIC recognises that increased costs are a result of outdated and complicated regulations.

The programme includes plans to:

modify administrative procedures by clarifying legislation;

facilitate mergers and acquisitions by improving domestic rules and regulations;

allow the employment of foreigners;

improve the living environment;

and promote greater autonomy at local government level.

These plans are essentially aimed at removing problems that foreign companies face.

Attempt to change

Japan is trying to modernise its view towards foreign investors. When it joined the Organisation for Economic Co-operation and Development in the 1960s, the government – wary of foreign companies’ takeover attempts – set limits on foreign investors’ stock ownership in Japanese companies. Even in cases where applications for establishing companies would have been automatically approved under existing law, foreign companies were required to obtain advance authorisation of automatic approval. Twelve criteria were applied on the procedure, such as “there should be no adverse effects on Japan’s interests”.

The European Business Community in Japan still says that a decision on entering the market is complicated by regulatory authorities’ detailed “guidance” on product approval, complicated application procedures, government-procurement procedures that exclude competition, and a lack of transparency in regulation. It appears that although the JIC aims to ‘promote’ deregulation, nothing has been done to deregulate.

At JIC meetings, it was suggested that local corporate enterprise tax should be cut by 90% for new companies for five years (the standard national corporate tax rate is 30%) and there should be a cut in the national corporation tax. This would provide a competitive incentive in attracting foreign capital. However, the council’s programme only mentions that tax is an important consideration for companies selecting investment sites, and the tax system “should be reviewed as required”.

In the fiscal 2003 tax reform, the proposed cut in national corporation tax was shelved. Instead, a factor-based local corporate tax on capital and wages was introduced. The American Chamber of Commerce in Japan had warned the Japanese government of its adverse impact on FDI and on the Japanese economy. Yet the Koizumi administration, while calling for an increase in FDI in Japan, is implementing policies that would hinder such investment – with local taxes, the standard corporate tax rate is effectively 40.9%.

Programme aims

1 To improve domestic rules and regulations to facilitate cross-border M&A;

2 To enhance transparency and the reliability of corporate information and otherwise promote improvements in corporate governance;

3 To make it easier to start-up new business ventures;

4 To maximise use of the abilities and resources of foreign companies in a wider range of sectors, including public services; and

5 To improve access to legal and other services that support FDI in Japan.