The Journal The Authority on Global Business in Japan

Businesses of the world: Japan wants you. With Japanese Prime Minister Shinzo Abe pledging to make Japan “the world’s easiest country for companies to do business in,” US and other foreign businesses of all sizes can now tap into a raft of incentives to set up shop in the world’s third-largest economy.

The latest data shows the success of the government’s campaign—albeit coming from a low base. Helped by major investments from Asia and Europe, Japan’s net inflow of foreign direct investment (FDI) hit a record high of ¥3.8 trillion ($34.3 billion) in 2016, according to the Invest Japan Report 2017, published by the Japan External Trade Organization (JETRO).

Significantly, the total inward FDI stock also reached a new high of ¥27.8 trillion, up for the third straight year. From just ¥6.1 trillion in 2000, the Japanese government hopes to grow the total to ¥35 trillion by 2020 as part of Abenomics policies aimed at reviving the economy.

“The policy target that was thought too ambitious at first has now become feasible,” said JETRO Chairman and Chief Executive Officer Hiroyuki Ishige.

Among the major investments identified by the govern­ment agency are Japan’s largest merger and acquisition (M&A) deal of 2016, in which a consortium led by France’s Vinci Airports acquired the management rights to Kansai International Airport, helping push European inflows to more than ¥2 trillion.

Asian net inflows also surged by 34 percent to more than ¥900 billion, including the move by Taiwan’s Hon Hai Precision Industry Co., Ltd. to take a controlling stake in Japanese electronics maker Sharp Corporation.

While inflows from North America were flat at around ¥630 billion in 2016, the United States remains the largest single overseas investor with some ¥7 trillion invested in Japan—accounting for one quarter of the total—followed by the Netherlands with ¥3.8 trillion and France with ¥3.4 trillion.

Key industries for foreign investors in Japan include finance and insurance (35 percent), electrical machinery (14 percent), and transportation equipment (13.6 percent), the report said.

JETRO cited a “qualitative change” in FDI, with the establish­­­ment of research and development (R&D) centers, expanding investments from Asia and an increasing focus on tourism amid Japan’s foreign tourism boom. Artificial intel­ligence (AI) and other technologies of the so-called Fourth Industrial Revolution are also attracting investor attention.

Despite recent progress and Japan’s supportive financial, legal, and regulatory environment, the US Department of State argues that “numerous challenges” remain in a country lagging behind its counterparts at the 35-nation-strong Organisation for Economic Co-operation and Development (OECD).

“Despite Japan’s wealth, high level of development, and general acceptance of foreign investment, inbound FDI stocks as a share of GDP are the lowest in the OECD,” it noted in its Investment Climate Statements for 2017.

Japan’s low level of inward FDI, which accounted for four percent of its gross domestic product (GDP) at the end of 2011, paled in comparison to the UK’s 48.8 percent and nearly 20 percent in the United States.

The US Department of State points to inflexible labor laws, a traditional aversion within corpor­ate Japan to M&As, and “deep relationships” between companies and suppliers that inhibit the entry of foreign competitors.

Other blocking factors identified by the OECD in its 2015 Japan economic survey included a high corporate tax rate, an “unclear regulatory environment,” and rules restricting the entry of foreign workers.

However, Tokyo has moved to address such issues, including through its 2016 policy package aimed at making Japan a “global hub.”

Among the measures launched by the Council for Promo­tion of Foreign Investment in Japan are the establishment of a process for skilled foreign professionals, similar to the US Green Card system, that slashes the waiting period for permanent residency.

Under the system, foreign entrepreneurs can apply for permanent residency after just one year, depending on their skills and job status. The previous wait was five years. The government is also eyeing an online system for residency status, aimed at reducing the time spent at congested Immigration Bureau offices.

Other measures, such as Japanese-language support in elementary and junior high schools and assistance with health and other services, aim to improve the living environment for foreign nationals.

JETRO also points to the establishment of 12 National Strategic Special Zones to achieve further deregulation, and simplified administrative procedures such as the Tokyo One-Stop Business Establishment Center to help entrepreneurs and businesses looking to start up in the capital.

From the national to local level, JETRO’s website currently promotes a range of stimuli related to investment in Japan—and not just for multinationals.

At the national level, there are various incentives for companies conducting R&D, as well as incentives related to new employment, capital investment, and easier immi­gration procedures.

Special zones also offer particular benefits, including subsidies for new business establishment and job creation in areas recovering from the Great East Japan Earthquake and Tsunami of March 11, 2011. This is in addition to the National Strategic Special Zones, Comprehensive Special Zones, and Special Zones for Reconstruction, which include tax benefits and financial support.

For example, the Tokyo Area special zone encompasses the Tokyo Metropolis and Kanagawa Prefecture, as well as Chiba City and Narita City in Chiba Prefecture. The zone includes special provisions for doctors and housekeepers from abroad, while an employment consultation center and “one-stop” business establishment center aim to smooth the process for new arrivals.

These entrepreneurs can also apply for residency status under the special provisions without needing to fulfill the usual conditions of employing at least two people full-time or investing at least ¥5 million. In addition, companies in Tokyo can benefit from subsidies for expert consultations, for example with lawyers and recruiters.

One such business that tapped into Tokyo’s incentives is AI solution provider Imageous Inc. According to Chief Operating Officer Dennis Hsueh, the start-up has benefited from subsidies for local accountants and other business consultants.

“They’ve acted as a middleman in helping us with all the documentation and other bureaucracy, as well as market research—all in fluent English,” said the Taiwan native.

“The Tokyo government has been a huge plus for our business.”

Foreign businesses are also encouraged to venture outside the Big Mikan with a range of city and prefectural subsidies on offer.

In Fukuoka Prefecture, for example, companies in the automobile, biotechnology, information technology, and other high-tech industries are offered travel allotments, subsidized registration fees, and other benefits. Other cities and prefectures also offer various incentives, typically subsidized office rent and corporate registration.

Arthur Matsumoto, chair of the ACCJ–Kansai External Affairs Committee (EAC), suggests foreign businesses venture further afield than the capital. He points to data from the Ministry of Economy, Trade and Industry (METI) showing that the vast majority of FDI is to the Kanto region, with only around 10 percent to Kansai and eight percent to other areas.

“Tokyo is like any other global city, but the regions outside Tokyo are large economies in their own right. In Kansai, the focus is on education and tourism, such as through the new proposed integrated resorts,” he said.

Bryan Norton, chair of the ACCJ Globalization Committee, suggests that the central government no longer offers a gateway to all of Japan, with foreign businesses now needing to seek opportunities at the local level.

“There has been a major shift since the Koizumi adminis­tration away from the national government and its agencies being able to generate business opportunities for foreign companies,” he said. “Foreign companies have to realize that they now must go to the prefectures and the cities, too.”

Norton highlights Fukuoka as one city that has taken advantage of the changes, successfully streamlining immigration procedures to allow increased tourism from visiting cruise ships, allowing tourists from China and elsewhere to stock up on “Made in Japan” goods before venturing home.

He also suggested that easier visa procedures have encour­aged multinational companies to set up global teams in Japan, benefiting the country in the lead-up to the much-anticipated Tokyo 2020 Olympic and Paralympic Games.

In its 2017 Growth Strategy, Japan announced a “regulatory sandbox” system aimed at encouraging the development of new business models not covered by existing regulations, such as those related to AI, drones, and autonomous vehicles.

Unlike the national strategic zones, the new system aims to promote “demonstration experiments” on a project level, with the government offering hands-on support.

The growth strategy also aims to curb administrative costs by 20 percent through the digitization of administrative procedures and unified documentation, including such areas as business licenses and tax.

Under recent reforms, Japan’s effective corporate tax rate has been cut from 34.6 percent in fiscal 2014 to 29.7 percent in fiscal 2018, putting it below France and Germany—although still higher than Asian rivals such as Hong Kong and Singapore.

JETRO also cites improved corporate governance, such as the introduction of a Japanese Stewardship Code and Corporate Governance Code, along with deregulatory measures in agriculture, energy, and medical care.

It also notes the need for Japan to move up the World Bank’s ease of doing business survey, in which the nation currently ranks 34th among 190 economies.

Importantly, the nation’s second-longest postwar eco­nomic expansion has Tokyo on the verge of declaring victory in its war against deflation.

Corporate profits are expected to hit a new record high of ¥25.6 trillion in fiscal 2017, up 17 percent from the prior year, helped by structural reforms along with an improving global economy.

The trade promotion agency points to a survey showing 72 percent of foreign-affiliated companies plan to expand their businesses within the next five years, with 70 percent intending to add staff.

Yet, with the move by the administration of US President Donald Trump to slash corporate taxes and amid intense competition for FDI from other Asian economies, Japan cannot rest on its laurels if it wishes to gain a bigger slice of the pie.

Jim Weisser, co-chair of the ACCJ Venture Company Task Force (VCTF), urges further reforms to create a more vibrant ecosystem for venture companies.

These include greater flexibility in hiring and firing employ­ees, eliminating restrictions on corporate officer remu­neration, allowing for greater use of tax carryforwards for net operating losses, and the revision of gift and inheritance tax laws that have sparked an outcry among the expatriate community.

“The current scope of the gift and inheritance tax laws incentivizes foreign nationals to leave Japan before they have resided here for 10 years out of the past 15 years,” the VCTF argues.

Weisser, who has lived in Japan since 1993, suggests the challenge for Japan is “making inheritance tax fair and reasonable, and addressable in a way where people don’t leave.”

Kumi Sato, vice-chair of the ACCJ Growth Strategy Task Force, also urges the authorities to better facilitate the intro­duction of housekeepers from outside Japan, to benefit women workers.

“All women need options, not just some. Not only special visa status holders who are non-Japanese, but also Japanese households should be allowed to sponsor foreign domestic workers. This will really encourage women workers, not just the top tier but also women who are starting their careers, to make sure they don’t fall out of the workforce,” she said.

Moving Japan higher up the global FDI rankings might require an even bigger change, according to Nicholas Benes, chair of the ACCJ Growth Strategy Task Force and director of the Board Director Training Institute of Japan.

“JETRO does a nice job at what it does, but it doesn’t move the needle very much. The biggest barrier is the lack of a more developed and active M&A market in Japan, and this is a direct function of corporate governance,” he said.

“If we can double the size of the M&A market, we’ll help not only foreign, but also Japanese companies in creating a bigger marketplace for all, raising productivity and growth.”

In the meantime, Japan’s new growth push has given foreign businesses plenty of reason to establish operations here, not least its “Cool Japan” status.

“Japan now has a very positive vibe, particularly if you look at the surge in tourism since 2010,” Weisser said.

Anthony Fensom is a communication consultant/writer with experience in Australian/Asian financial and media industries, including six years in Tokyo.
Japan now has a very positive vibe, particularly if you look at the surge in tourism since 2010.