Lost Chance
Over the past 18 months, the vast majority of foreign and domestic companies that have received assistance from the Japanese government—to get through a period widely regarded as the most challenging for businesses in living memory—have been deeply appreciative of that support. Companies across the spectrum have struggled to keep their heads above water as the coronavirus pandemic has raged around the world, ravaging their operations and forcing too many to pull down the shutters. Yet there is one key area to which the policies of the Japanese authorities arguably have proved damaging.
How entry restrictions have impacted business and education
Over the past 18 months, the vast majority of foreign and domestic companies that have received assistance from the Japanese government—to get through a period widely regarded as the most challenging for businesses in living memory—have been deeply appreciative of that support. Companies across the spectrum have struggled to keep their heads above water as the coronavirus pandemic has raged around the world, ravaging their operations and forcing too many to pull down the shutters.
Yet there is one key area to which the policies of the Japanese authorities arguably have proved damaging.
Anyone in business knows that, by far, their most valuable assets are their people. But the government’s decision to impose stringent restrictions on anyone seeking to enter Japan—whether to return to a job, take up a new position, or begin a course of study—has added an extra layer of difficulty for many.
It was particularly galling for companies struggling with personnel issues to see those same restrictions relaxed for thousands of athletes, support staff, media, and VIPs arriving for the Tokyo 2020 Olympic and Paralympic Games.
According to the Japanese government, a mere 17,700 foreign nationals entered the country in September, a figure that includes anyone arriving for any reason. That total is down 99.2 percent from the same month in 2019, the year before the pandemic gripped the global community.
Road to Recovery?
With infection rates falling and the number of people fully vaccinated rising steeply, the authorities in Japan have begun to ease restrictions on people being out and about, while the Go To Travel scheme is expected to be relaunched to encourage domestic trips. The hope is that the gradual loosening of restrictions will soon be carried over to the international sector and borders will once again be open.
For many in business here, that cannot come soon enough. The failure to open to business travelers—with all the necessary precautions and caveats in place—has damaged companies’ operations, and it will take time for most to fully recover.
“The government restrictions on entry into the country have impacted my business in two ways,” said Kenneth Lebrun, a partner with the law firm Davis Polk & Wardwell LLP in Tokyo. “First, we have been unable to bring new employees to Japan, whether internal rotations from our US offices or external hires, because the government is not issuing new long-term work visas. This has impacted the ability of professional service firms to provide services to Japanese clients concerning their overseas operations.”
Mergers and acquisitions (M&As) as well as foreign direct investment (FDI) have also been affected.
“In addition, the blanket ban on foreign business travelers coming to Japan—and the quarantine requirements for Japanese residents traveling abroad, and then returning to Japan—has negatively affected the level of cross-border investment and M&A activity, which is a significant portion of our business,” said Lebrun, who also serves as co-chair of the American Chamber of Commerce in Japan (ACCJ) FDI and Global Economic Cooperation Committee.
Brain Drain
The entry restrictions have also caused headaches for staff and students at the Tokyo campus of Temple University, the Philadelphia-based institution which will be marking 40 years in Japan next year.
“At present, we have individuals in four key positions who are unable to make it into the country based on current restrictions,” said Matt Wilson, president and dean of the Japan campus.
“Not being able to have our chief academic officer, head of libraries and online learning, director of academic advising, and financial aid coordinator on site in Tokyo has been less than ideal,” Wilson told The ACCJ Journal. “Although they are working remotely from the United States and doing their best to actively engage and work with students, it is especially challenging as we have continued to offer in-person courses throughout the pandemic.”
The impact on the student body has been even more damaging, with the university forced to cancel four short-term study abroad programs in Japan, meaning that 500 students have missed out on opportunities to study here. There are concerns that the next intake of more than 150 students for short-term courses, which are due to start in January, may also be affected if Japan does not announce in November its willingness to reopen its borders to students.
Wilson explained that not only has the financial impact on the university been substantial, but they may lose students if the restrictions are not eased soon.
“If we have to cancel another short-term cohort, Temple and non-Temple students interested in the program may end up at another destination, such as at our Rome campus or one of our partner destinations in Europe or Asia,” Wilson said. “Or—more likely than not—they will simply abandon their plans to study abroad. I have spoken with many students who have been waiting and waiting, and now they are running out of time academically to study abroad as they prepare to graduate.”
In addition, more than 200 undergraduates are taking courses remotely, often at odd hours of the night, while waiting for the borders to reopen so that they can either resume their courses here or start their studies. “Our overseas students want to be in Japan, not attending classes remotely from their home countries,” Wilson emphasized. “Our concern is that the patience of our current students who are unable to enter Japan will run thin, and they will burn out on online education at strange hours in their home countries. They could decide to take a leave of absence, drop out, or pursue other opportunities.
“Because of the borders being closed, we have actually had some long-term, degree-seeking students who decided they were going to attend other institutions, take an indefinite leave of absence, or simply abandon their plans to study here in Japan.”
And it did not have to be this way, he pointed out. Many students who had applied to study in Japan switched to Temple facilities elsewhere, such as the school’s Rome campus.
Italy reported some of the worst coronavirus outbreaks in Europe, with close to 4.75 million cases to date and nearly 132,000 deaths. Japan, in comparison, has seen 1.72 million cases and just over 18,000 deaths, despite having more than double the population of Italy. Yet the Italian authorities chose to continue to host short-term study abroad courses throughout the pandemic. Similarly, while the United States kept borders open to foreign students—including those from Japan—the Japanese government refused to reciprocate.
“The 14-day quarantine imposed by Japan was much stricter than [the quarantine of] other nations and, personally, I believe this quarantine period would have eliminated any potential problems of new students bringing Covid-19 into Japan,” Wilson said. He added that another tactic would have been to require all inbound students to demonstrate that they had received both doses of an approved vaccine as a precondition for receiving a student visa.
Forced Change
Businesses and other organizations with operations in Japan have had little choice but to adapt to the vastly changed circumstances, said Katheryn Gronauer, founder of cross-cultural training and coaching company Thrive Tokyo.
“For business-to-business clients, what impacted my work wasn’t necessarily the government’s entry restrictions themselves, but the attitudes of the companies I have been working with in response to the entry restrictions,” she said. “On the one hand, I have been able to do more work with companies that value online training and have trained not only those currently stuck overseas who will be moving to Japan, but also employees who will continue to be based overseas and communicate with Japanese colleagues.
“On the other hand, some companies have chosen to wait until their employees move to Japan before starting the training process in person, so work with those companies has been significantly delayed.”
Gronauer, who is a vice-chair of the ACCJ Sales Development Committee, has worked through the challenges by moving much of her operations online and increasing her wellness-related coaching to meet demand from companies that have staff working from home. She is optimistic that the changes that have been forced on businesses—such as the growing acceptance of online training sessions—will hasten digital awareness.
Lesson Learned?
Both Lebrun and Wilson said that their staff adapted quickly and efficiently to new ways of working in the early weeks and months of the pandemic. Lebrun called the efforts of his company’s current Japan-based workforce heroic, but said they hope that, in government, lessons have been learned which might enable the business community to avoid such problems should a similar crisis occur again.
“The Japanese government has clearly prioritized certain categories of travelers, such as visitors connected to the Olympics,” said Lebrun. “We think that issuing new work visas for long-term stays should have a higher priority, as such employees are critical to Japan’s competitiveness and economy.
“The longer the restrictions continue, the greater the long-term impact will be,” he added. “I am encouraged to hear that the Japanese government is looking for a gradual relaxation of restrictions beginning in November, and I hope they focus on restarting the issuance of long-term work visas for professionals.”
Temple University’s Wilson echoed this, adding that while Japan “has no higher priority than the protection, safety, and health of its citizens,” there was a need to better balance the different priorities and needs of society, which include education.
“Through the promotion and advancement of education, a country has the opportunity to elevate its citizens, improve society, enhance communication, and better prepare to tackle present and future challenges on a domestic and global scale,” he said.
“In today’s interconnected world, the pandemic has made it clear that many of our biggest challenges are global in nature. International education is vital. It builds lasting relationships, facilitates greater cross-cultural understanding, prepares future leaders, fosters innovation, improves competitiveness, strengthens economies, and ensures sustainable development,” he continued.
“Academic exchanges and study abroad are two important keys to international education. And I worry that the loss of study abroad students due to closed borders will have an impact for decades to come. International education opportunities have been lost.”
And the same goes for business.
Steps to Recovery
In 2020, Japan experienced a significant inbound FDI decline, in the wake of what had been a steady increase over several years prior to the pandemic in sectors such as retail and e-commerce. Outbound FDI by Japanese companies looking to collaborate with, or acquire, overseas enterprises had also been on the rise. Which leads one to ask: What’s the outlook for inbound FDI here—and the rest of the world, for that matter—post-Covid-19?
Japan FDI set to pick up pace after Covid-19, despite major challenges
Since the start of the Covid-19 pandemic in early 2020, inbound and outbound foreign direct investment (FDI) has been on the decline around the world.
A reflection of foreign ownership of companies via investment, acquisition, or joint venture, in 2020 FDI decreased globally. It was down 37 percent on the year to $998.9 billion.
Calculated on a balance of payments basis—net and flow—this was the lowest level since 2005, according to the United Nations Conference on Trade and Development (UNCTAD), a 194-member intergovernmental organization that promotes the interests of developing nations in trade.
According to UNCTAD’s World Investment Report 2021, “this is a major concern, because international investment flows are vital for sustainable development in the poorer regions of the world.”
Local Impact
While UNCTAD’s report sheds light on the effect of Covid-19 on FDI in developing nations, major economies—including Japan—also have been affected adversely.
In 2020, Japan experienced a significant inbound FDI decline, in the wake of what had been a steady increase over several years prior to the pandemic in sectors such as retail and e-commerce. Outbound FDI by Japanese companies looking to collaborate with, or acquire, overseas enterprises had also been on the rise.
Which leads one to ask: What’s the outlook for inbound FDI here—and the rest of the world, for that matter—post-Covid-19?
As “economic and geopolitical uncertainty looks set to dominate the investment landscape in the midterm,” the UNCTAD report notes, the outlook beyond 2021 remains unclear.
At their most optimistic, projections of experts suggest that a rebound to pre-Covid-19 FDI trend lines may occur before 2022. But there are looming geopolitical and economic challenges that lead to caution, if optimistically so.
Kenneth Lebrun—a partner at international law firm Davis Polk and Wardwell LLP, and co-chair of the American Chamber of Commerce in Japan (ACCJ) FDI and Global Economic Cooperation Committee—spoke to The ACCJ Journal about outbound mergers and acquisitions (M&As). He noted: “As we exit Covid-19, there will be a rebound in outbound M&A activity, which basically stopped due to travel restrictions.
“But now, Japanese companies have more cash on hand than they did at the beginning [of the pandemic]. They’ve done a lot of equity offerings and debt issuances, so they have lots of cash. As travel becomes easier, I suspect they will go shopping soon.”
In and Out
In Japan, inbound and outbound FDI in 2020 declined overall, although there is data for specific industries in which that was not the case. Here, inbound FDI in 2020 increased 65.2 percent on the year to $66 billion—mostly in the form of debt issuance—according to data from the Japan External Trade Organization (JETRO) and other national groups. But that’s only if you discount equity capital and reinvestment of earnings, which were down year over year. M&As and new investments in Japanese markets were also slow, according to JETRO and others.
Japan’s inbound FDI was led by Asia, even as it declined sharply from China (-29.9 percent) and Hong Kong (-44.7). Next was North America—in particular the United States, where the Japan FDI growth rate remained positive (+23 percent)—and Latin America. Oceania, Europe, and the rest of the world followed.
Japan’s outbound FDI during the same period, meanwhile, was $171.1 billion, marking a decrease of 33.8 percent on the previous year, led by a drop in large-scale M&A activities, outflows in equity capital and debt issuances, and reinvestment of earnings, JETRO reported.
Outbound FDI targets mirrored the inbound, led by Asia (China, Hong Kong, Singapore, and Thailand), North America (the United States), and Latin America. This was followed by Oceania, Europe, and the rest of the world.
However, the growth rate of outward FDI was negative in all countries and regions, with the exception of Thailand (+2.2 percent), Latin America (+3.6 percent), and Oceania (+54.3 percent).
What’s more, JETRO notes that, in 2020, there was a 1.7-percent decrease to $134.5 million in Japan’s FDI return (receipts) and rate of return—a measure of dividends from overseas subsidiaries of Japanese companies and reinvestment income equivalent to retained earnings on local companies.
According to reports, there had been a seven percent decline for two consecutive years in the return on investment, calculated via revenue (receipts) divided by the average FDI balance at the beginning and end of the period.
Revised Strategies
As noted by UNCTAD, the Covid-19 pandemic has exacerbated national and geopolitical fault lines, with US–China relations among other national, regional, and global events posing continuing risks to global FDI. As a result, companies in Japan and abroad are revising their business strategies for the post-pandemic period, according to the 2020 JETRO Survey on Business Conditions of Japanese Companies Operating Overseas.
According to the survey, more than half the Japanese companies with operations overseas are planning to renew their overseas business strategies and models across the board, from sales to procurement to production. For instance, 38.1 percent of respondents said they planned a review of sales destinations, while 20.6 percent said they planned cancellations or postponement of new investments and capital investment.
With regard to sales, companies mentioned plans to review their promotion of virtual exhibitions (30.4 percent) and digitalization, including utilization of artificial intelligence (27.8 percent), as well as to review sales products (24.8 percent).
A small but significant number (12.5 percent) referred to plans to sell their products on e-commerce sites.
As for procurement and production, a fifth of the respondents said they planned to change their procurement sources (20.5 percent), while others shared that they intended to scale up the promotion of automation and labor saving (15.7 percent), as well as to implement multiple procurements (15.5 percent).
Interestingly, a significant minority stated that they planned to use e-commerce sites—a sign that more companies in Japan are embracing digital platforms.
What’s more, companies in the hotel and travel industry (86 percent), employment agency and temporary staffing sector (85 percent), and food services industries (82 percent) are among those that said they had revised, or were planning to revise, their business strategies and models in response to shifting trends in global trade.
Educational and research institutions, organizations in the healthcare and welfare sectors, as well as companies in advertising, marketing, and research expressed similar sentiments.
New Rules
In addition to hastening public health countermeasures, such as social distancing and restrictions on cross-border travel, the pandemic has laid bare global challenges, including those involving trade agreements, national security, and climate change.
In response, many of the world’s leading economies are seeking to update trade agreements, relocate certain industries within national borders, or add restrictions to FDI—especially where there are national security concerns, such as in the semiconductor industry.
As a key pillar of the post-Covid-19 economic recovery plan, the United States, for instance, has taken steps to ensure supply chains are “flexible, diverse, and secure,” JETRO noted.
To that end, the administration of US President Joe Biden has tightened export control systems and revised the list of controlled items, technologies, and entities that are subject to import restriction.
Since May 2020, the United States has imposed export restrictions in industries that include telecommunications and textiles, infrastructure and semiconductor manufacturing, as well as supercomputing.
But this trend goes beyond the United States. Indeed, among major economies, rules are being tightened for screening of FDI investment mechanisms. This is especially true in high-tech fields that require cross-border data transfers.
Sustainability
Despite posing challenges, the Covid-19 pandemic also has created or accelerated business opportunities, not least of which is a renewed drive to develop sustainable business models that “will all have far-reaching consequences for the configuration of international production in the decade to 2030,” UNCTAD’s report notes.
And those trend lines have reached Japan. Indeed, even before the pandemic, companies from abroad with sustainability at their core had identified this market as ripe for investment.
That was the case when New Zealand–American footwear and apparel brand Allbirds entered Japan in 2020. They took advantage of Tokyo’s position as a global trendsetter in fashion, while seeing Japan as being ready to support sustainable businesses.
“Japan is a very important market for Allbirds. As you know, Tokyo is the destination for any fashion brand if they want to be global,” explained Mits Minowa, marketing director at Allbirds Japan. “And, as history shows, fashion and street culture trends often come from Japan, and have spread to the world. Thus, having Allbirds stores here was a priority for the company when we decided to go global.”
Allbirds was established in 2016 by co-founders Tim Brown, a former soccer player, and Joey Zwillinger, an engineer. The company is certified by non-profit organization B Lab as a B Corporation—an entity that has environmental and social concerns at the core of its business strategy.
A relatively new concept in Japan, B Corporations prioritize sustainable sourcing of materials in a bid to help tackle environmental challenges: “We believe that we can ‘reverse climate change through better business,’” said Minowa.
“That’s why we measure the carbon footprint of all our products, label the score on the product, and open source the calculation of the carbon footprint. Without measuring the carbon footprint, we cannot reduce it. “Allbirds provides a life cycle assessment of materials, production, transportation, use, and end-of-life of each product,” he added.
While Covid-19 countermeasures led to the temporary suspension of business, Allbirds in Japan has returned to regular hours, and the company feels confident that the country’s post-Covid-19 mindset will be in line with Allbirds’ core values.
“On the positive side, the mindset and lifestyle of people living in Japan has changed since the coronavirus hit. Many people here, especially Japanese aged between 30 and 40, realize that we need to change and to treat the planet well to maintain it for themselves and the next generations.”
Digitization In addition to sustainability, UNCTAD’s report notes that digitization—including leveraging e-commerce, financial technology, and cross-border data transfers—has become a priority for businesses and governments in the post-Covid-19 world.
Japan, long considered a laggard in digital transformation, is now among those countries that have fully embraced it as an imperative. Thus, in September, the Japanese government launched the country’s first digital agency.
Yet even before digital transformation became front and center in Japan, foreign companies with digital solutions, including Canada-based e-commerce provider Shopify Inc., had already made this market a priority. “Despite being a top-five global e-commerce market in terms of size, having grown 9.1 percent in 2017, there was tremendous room for growth in Japan’s e-commerce sector when compared with the United States and China, at 16 and 32 percent growth, respectively,” explained Shopify Japan Country Manager and Director Makoto Tahara.
Has the pandemic accelerated digital adoption in Japan? It has, particularly among young consumers.
“The pandemic has brought forward the future of retail by a decade, prompting lasting changes to consumer habits and accelerating the shift to online shopping. However, consumers have not only been shopping online, but also in stores, as well as on their smartphones, social media, and PCs,” explained Tahara. “Businesses have suddenly been forced to quickly pivot and start selling online, or to upgrade their e-commerce offerings to reach those customers who shop anytime and wherever they prefer.”
Despite the dash to digital—about 40 percent of consumers here are shopping online, the second-lowest adoption rate among the advanced economies—many still choose to shop locally in physical stores, making Japan an outlier among surveyed nations.
However, they are prioritizing sustainability in their purchasing choices. “Japanese consumers are very supportive of local brands, choosing to buy from local independent businesses even as they still make purchases on digital marketplaces for convenience,” Tahara added. “They also are expected to vote with their wallets by choosing to support sustainable and green brands that demonstrate authenticity, transparency, and accountability.”
Recovery
As the world emerges from the pandemic, is there a silver lining? According to industry experts, there is: global vaccine rollouts. And that ties directly into kickstarting FDI.
By the first quarter of this calendar year, 33 of the world’s major economies and regions had exported vaccines worth $13 billion around the world.
In Japan, the percentage of the population that had been fully vaccinated—at the time of writing—stood at more than 68 percent, compared with 57 percent in the United States.
Globally and by country, Portugal led the way for the number of individuals fully vaccinated per 100 population. Japan was ninth, just behind France, the United Kingdom, and Italy, while the United States was 13th, the Nikkei reported in October.
In the wake of global vaccination programs, at the time of writing international trade (on a customs clearance basis) was heading toward recovery, including in Japan.
While exports had declined 9.3 percent in 2020 from the previous year’s total of $640 billion, and imports had decreased 12 percent to $634.1 billion, exports had recovered by mid-2021.
Japan’s exports grew 26.2 percent year on year to ¥6.6 trillion in August 2021, the sixth straight month of double-digit sales growth, according to reports. This has led some experts to be optimistic in areas such as outbound M&As.
“If you look through the mid-term plans of Japanese companies, almost all will say, ‘We are going to allocate additional capital to outbound M&A activity to change the percentage of our overseas sales from 10 to 30 percent of our group sales over x number of years,’” Tokyo-based lawyer Lebrun notes. Other experts who spoke to The ACCJ Journal share similar sentiments.