Japan needs fresh capital and workforce
- Promote FDI into Japan to invigorate its economy

Haruo SHIMADA (Professor, Keio University)

What Japan needs now are fresh capital, fresh workforce, fresh management, and fresh technology. Japan needs foreign capital because the days of its rapid growth are past and it has entered the phase of matured economy.

Doubling investment into Japan in five years

Direct investment into Japan has become a prime policy issue. Prime Minister Koizumi in his General Policy Speech to the 159th Session of the Diet in January this year declared, "We will make Japan an attractive market for foreign companies in order to achieve the goal of doubling the amount of investment within the next five years."

The Prime Minister's declaration was a reconfirmation--a formal pledge to the world--of his policy objective publicized earlier, which the government and its arms, along with regional governments and related institutions such as JETRO had already been working on.

"No growth without reform" has been the dictum of the Koizumi government. Structural reform, put simply, is to establish a society where people can feel fulfilled through utilizing industrial resources, manifesting individuals' abilities, increasing productivity, and raising income levels. It is for the sake of Japan's industry and economy to realize structural reform and make it easier for foreigners to invest. It is also worth noting that investment and tourism are the same in terms of movement of people, goods, and money. Promotion of investment and tourists into Japan, in turn, is to create an attractive Japan.

"Japan Investment Council"

Prime Minister Koizumi presently chairs the "Japan Investment Council" (JIC), which was established in July 1994 in response to demand by the US for Japan to open its doors to imports and achieve economic growth. In order to assess various import barriers, an expert committee was formed, where I have served as the chairperson since its inception. As every Prime Minister has a chairperson of the Council, I have effectively served seven Prime Ministers. The expert committee publishes a "Progress Report" every year, in which the areas and the extent of accomplishment for more open market is assessed, and issues still existing are identified and solutions discussed.

There were constant and numerous demands by the US for Japan to further open its doors in the days of President Clinton, but they practically diminished when President Bush took over. I was sent to Washington D.C. at the time, as a civilian envoy of Prime Minister Koizumi immediately after his taking the office, in preparation for the upcoming Japan-US summit meeting. As it was a concern for Japan that Koizumi’s name had not been recognized in the diplomatic arena, my visit was to avoid a "Koizumi who?" situation when he would visit Washington later for the summit meeting. Among the people I met during the visit was Larry Lindsey, Assistant to the President for Economic Policy at the time. The very first thing he said to me was "The other Larry (Sommers, the previous Treasury Secretary) may have made tough demands, but this Larry (Lindsey) will not preach and intends to support Japan". Indeed, the US government under the Bush administration stopped making categorized demands of Japan, so we discontinued publishing the annual "Progress Report".

In 2002, Prime Minister Koizumi expressed his policy objective to double the volume of foreign investment into Japan as a major medium to advance structural reform. Meanwhile, business leaders such as Minoru Makihara, Chairman of Mitsubishi Corporation, Carlos Ghosn, President of Nissan Motors, and Yoshihiko Miyauchi, Chairman of Orix Corporation, jointly established The Invest Japan Forum, having a similar objective of making Japan an attractive place to invest. Our Expert Committee of JIC, already having had eight years of experience analyzing the subject, decided to work with the new forum and formulated 74 policy measures, which was reported to the Japan Investment Council as "Program for the Promotion of Foreign Direct Investment in Japan".

This program consists of five categories:
- Reviewing administrative procedures
- Improvements in the business environment
- Create favorable employment and living environments
- Improve local and national structures and systems
- Dissemination of information within Japan and abroad

The last item on the list above had not been paid much attention in the past but, Koizumi considers it very important. He has appeared on TV commercials in person, and he always refers to investment and tourism when he meets the heads of states, such as Prime Minister Blair and President Chiraq. Koizumi's strong determination to realize the policy objective could be gauged by the fact of his declaring a numerical target of doubling the relative figure in five years, a risky political move.

Foreign investment not a vulture

Japan is rich in economic resources. Per capita savings is the largest in the world. Technology and labor are well organized. But as the expression "the lost decade" illustrates, while other countries recovered from currency and financial crises, Japan has stood still without growth. Declining prices made people reluctant to spend, forcing the real economy to contract, completing the vicious cycle of deflation spiral. Japan was stricken with the disease for four years, never before seen elsewhere.

The reason is clear. The days of economic growth realized by selling industrial goods to the US ended in the latter half of the 20th century. From the international perspective, Japan had grown significantly and the exchange rate of yen appreciated significantly. In addition, as a result of the end of the cold war, China grew to be a major exporter in global trade, keeping Japan a country based on exports. Domestically, there is the aging society. Japan's high growth was made possible by manufacturing goods for younger generations, and the industry has not been able to adjust to the elderly market. By not being able to cultivate the huge new market, the economy began to shrink.

Doing business by borrowing from banks in such an environment would only lose money, and accumulation of bad assets from the collapse of the bubble has brought the economy to a halt.

Banks have ample money but bad loans must be cared for before money can be lent to companies. There are many capable people in the changing industry structure but liquidity of people will not occur because of the seniority system and the skewed pension system. And employees will not follow managers who, after 40 years, suddenly call out for reform.

What we need now are fresh capital, fresh workforce, fresh management, and fresh technology. Fresh capital in the form of investment from abroad will be a stimulus to liquidate domestic capital paralyzed by bad assets.

Some refer to foreign capital as "vulture funds", but this is not a meaningful assessment. Foreign investments come in to fill those areas not covered by domestic capital. Through investments from abroad, new employment will be created which will induce the whole labor market to mobilize. There is a good example of foreign, fresh, management already, at Nissan. Despite the former CEO being a capable person, there were no followers when he apparently all of a sudden began to push for major reform. But people listened when similar words came from a new manager from abroad. By enabling middle and small size companies to operate productively in Japan, domestic companies were able to function more efficiently as it would become possible to communicate in Japanese.

Lessons from the UK experience

A decade ago Japan was one of the most closed countries for foreign investors. As a simple illustration, the UK and the US at the time had about the same amount of outgoing and incoming investments. For France and Germany, the ratio of outgoing and incoming investments was 4 or 5 to 1, while in the case of Japan it was 15 to 1. The picture has changed significantly in recent years, and the ratio is currently about 3 to 1. Also, the actual amount of incoming investments has doubled in the past five years.

Prime Minister Koizumi's plan is to further double investment in the next five years, which in my view is indeed possible. The reason for the inadequate legal and administrative framework to induce investment into Japan until recently was not because of the character of the Japanese people or their bias toward foreigners. Japan did not need foreign capital when it was growing vigorously on its own. As Japan’s economy has matured, it became necessary to seek foreign capital to sustain it.

The UK's case would be a good precedent. The UK in the 19th century was more closed in terms of investment than Japan was a while ago. The UK invested heavily into its colonies all over the world but accepted very little capital flowing in. But now the UK is one of the largest recipients of foreign investments. The reason for the change, put simply, is that as the UK matured and aged it needed and sought fresh stimulus. The UK lost its political powers significantly following the Boer War at the turn of the century, and inward investment gradually increased since then. During Prime Minister Thatcher’s time in office, the manufacturing industry in the UK temporarily disappeared. For example, long established car makers such as British Rayland and Rolls-Royce had vanished and US, German, and Japanese cars were to fill the gap. Consequently, it was foreign capital that revived the UK.

A similar change is occurring in Japan. When Japanese car manufacturers were producing and exporting cars by utilizing low wages and high productivity accessible domestically, there was no need to accept foreign capital. But as Japan changed to a high-wage, matured and aged economy and lost steam, foreign capital became necessary. Japan's auto industry, once the vanguard of its economy, has accepted foreign capital, as in the case of Matsuda and Nissan, which was a very natural and reasonable development. What happened in the UK is now happening in Japan, indicating that Japan has indeed become a developed country.

About a decade ago, Japan's automobile manufacturers made their way into the US. An example of the outcome was that General Motors was revitalized by utilizing Toyota's technology. In other words, it could be said that Japan's foray changed US manufacturers. After the collapse of the bubble, Japan’s financial industry is being supported by US entities such as Goldman Sachs and Ripplewood, in anticipation for eventual recovery of Japan. This is the world of mutual investment in action.

After WWII, Japan's talented youths all went out of the country to brush up their abilities. But as Japan began to experience high growth, fewer people became interested in foreign affairs. It was a natural career path ten years ago for talented individuals to work for Japan's large corporations or the government, but foreign companies were outside of their scope. Recently there have been reports of students who tend to prefer foreign companies over most prominent Japanese employers, including such entities as the Bank of Japan.

To reiterate, the inadequate legal and administrative framework in Japan was not caused by exclusivity or any bias toward foreigners. Rather, it was because foreign investment was not necessary in the high growing economy. As Japan matured, it began to require foreign capital.

Once I conducted research on how the UK promotes inward foreign investment, and spotted an organization called "Invest UK". But contrary to our expectations, it was found to be very inactive. The fact was that there was no need anymore for the UK to provide special facilities in order for foreign capital to flow in. Thus, if Japan were to look to the UK for reference, it must be the UK of 40 years ago.

An Englishman once said to me, "Any foreign company making its way into the UK has something better than what can already be provided in the UK. It must be so or otherwise the company would not be able to penetrate the UK market. It is a well established notion in the UK that something making its way into the UK should be good for the UK". This is genuinely the attitude of a well-developed country. The UK may have already experienced its peak in terms of political power, but has acquired a keen sensitivity and the wisdom to live in concert with other decent people of the world. Japan in a few decades could be a country with such an orientation.

(This article originally appeared in Japanese in the Japanese edition of June, 2004 "Gaiko Forum", translated and reproduced here with permission.)