The election of Yasuo Fukuda, a mild-mannered political moderate, as Japan’s new prime minister bodes well for foreign investors seeking reassurance of continuity. Mr Fukuda, aged 71, was chosen by Japan’s governing Liberal Democrats to rescue the party from one of its deepest crises during its half-century grip on power. He takes over from Shinzo Abe, who resigned after only one year in office.

The initial indications are that Mr Fukuda is determined to press ahead with efforts to boost FDI in Japan. The government has made it clear that it intends to meet the investment targets set out four years ago.

Target setting

“The Japanese government started putting special emphasis on promoting FDI from 2003 and we have seen it account for a growing proportion of GDP,” says Michitaka Nakao, director of business development at the London office of the Japan External Trade Organization. “The current ratio is 2.5% of GDP and last year we set a new goal to double this to 5% by 2010.”

Japan wants to build on its service sector, with emphasis on areas such as financial services, healthcare, retail, software and other service industries, as well as ICT and technologies, which are driving new efficiencies and change. The service sector accounts for almost 70% of the Japanese economy and improving its lagging efficiency is crucial for domestic as well as global efficiency. Japanese policymakers stress the need to revitalise this sector, which they say will create opportunities for foreign businesses and investors to supply services and goods.

“As far as specific areas are concerned, we are working to promote high value-added sectors such as ICT and biotech,” says Mr Nakao. “The focus is on encouraging more FDI into areas outside the traditional population centres. We would like foreign investors to help revitalise our regions’ economies.” Local governments are now focusing on specific sectors for development and many have expressed interest in creating industrial clusters. Mr Nakao cites the example of Osaka, which is emphasising the development of a health-care cluster.

Strategic location

The new Japanese leadership has also expressed a wish to develop closer ties with neighbouring Asian countries, including China. The government recognises that Japan’s strategic location in east Asia is a key consideration for many businesses looking to invest in the region. This strategy works both ways, for while Japan is promoting itself as an export base to other Asian countries, its neighbours have been showing a growing interest in investing in the Japanese economy.

“We are seeing more investment from our regional neighbours in Asia and we wish to establish an intimate economic relationship with these countries,” says Mr Nakao. He acknowledges that some of these countries pose a competitive challenge but believes Japan’s history as a long-established business partner provides a key advantage.

“We still believe Japan has a competitive edge over countries such as China or Korea,” he says. “We’ve been a high value-added economy for several decades. Investors go into China or Korea looking for new frontiers. In Japan, however, they are looking for synergetic opportunities, such as R&D facilities to add to the existing high value-added industries.”