Both in the economic and political arena, Japan is coming back into fashion.
Want an example? Since he arrived in the Oval Office,
Joe Biden has made it clear that Japan remains the linchpin of US security policy in Asia.
Proof of this is that both Secretary of State, Antony Blinken, and Secretary of Defense,
Lloyd Austin, visited Japan on their first international trip. And not only that,
the Japanese Prime Minister of the time, Yoshihide Suga, was the first foreign
guest Biden received as President at the White House. Quite a statement of intent.
And, of course, it's not just about the relationship between Tokyo and Washington.
Increasing economic competition from China is causing the Japanese government to step
up its game. There is, for example, the Trans-Pacific Partnership Agreement,
the CPTPP, one of the largest free trade and economic integration agreements in the
world that is being led, by none other than Japan.
A country that, according to public opinion polls,
is the most trusted power in Southeast Asia, the world's fastest-growing economic region.
But we’re not only talking about the political field.
The truth is that Japan is also becoming fashionable economically.
Despite all its limitations, such as its eternal crisis, the demographic decline or the weakness
of the yen, the Land of the rising sun, or rather Japanese companies, are reinventing themselves.
Starting in the late 1990s when, first South Korean and Taiwanese companies,
and then Chinese ones, began to compete head-to-head with many Japanese manufacturers,
they were gradually forced to produce goods that
were more difficult to make and imitate. In other words, move up the value chain.
And that is exactly what they did. Many Japanese companies
have transformed themselves into suppliers of high-tech,
highly innovative materials and components that are indispensable in the global production chain.
To give you an idea, although for us end consumers it may be somewhat invisible, Japanese companies
control more than 50% of the market share in many of the advanced components and supplies
of the high-tech industry. From specialty glass, to semiconductor manufacturing equipment,
to complex chemicals. If you use high-tech products, Japan probably has a lot to do with it.
In many ways this explains how, since 2009, Japan's real per capita growth has grown
almost at the level of the United States and risen above countries like France or the United Kingdom.
Yes, yes, that’s right.
Japan's GDP is barely growing but we have to take into account that its population,
particularly that of working age, has been shrinking for years. In other words,
with a lower population they produce more. In per capita terms, Japan’s economic performance
over the last decade has been reasonably good. And if we also take into account that it is
still the third largest consumer market in the world after the United States and China, we can
get an idea of why Japan's economy is once again attracting the attention of many multinationals.
However, hold on just a minute, because something is not adding up.
Despite all its attractions, the truth is that international companies barely invest in Japan.
Check it out.
But, having said that, let's move on.
(WHY IS NOBODY INVESTING IN JAPAN?)
Well, to say that nobody invests in Japan is obviously an exaggeration.
But surely you won't think it's such an exaggeration if I tell
you that the United Nations ranks Japan second to last in the world
only to North Korea in terms of Foreign Direct Investment received as a percentage of GDP.
This is a huge anomaly.
The bottom line is that: FDI accounts for just over 4% of Japan's GDP. To give you an idea,
the average for developed countries is 44%.
Normally countries that want to boost their economic growth would encourage
foreign companies to locate there, to open new facilities, such as new factories or new offices,
to buy local companies or to invest in the country's public or private bonds.
However, this is not the case in Japan,
which remains completely disconnected from foreign direct investment flows.
But does that mean it is forbidden to make
a productive investment in the Land of the rising sun?
Not at all. In fact, Japan's politicians have been talking about encouraging foreign
investors for almost 20 years. And in a way they have done just that.
When Junichiro Koizumi took office as Prime Minister in 2001, FDI in the country was a
mere 1.2% of GDP, prompting this government to set a target of 5% by 2011. At first
things went smoothly and the percentage of foreign investment increased to 4%
in 2008. Since then, however, things have remained stagnant.
So the question is, what is the reason for this anomaly? Why does Japan not attract productive
investment? Why does nobody – or almost nobody – want to invest in this country? How is it
possible that in this race, the only country the Land of the rising sun beats is North Korea?
Well, VisualPolitik fans, the key seems to lie in corporate operations.
Let me explain. In a typical developed country, up to 80% of FDI inflows take the
form of corporate mergers and acquisitions. However, that is not the case in Japan.
This seems to be a legacy of the immediate post-World War II era.
At that time Tokyo restricted FDI to
prevent foreign companies from taking control of the market.
Years later, when entry into the OECD forced the Japanese government to overturn these
restrictions, Japanese policymakers devised countermeasures of sorts to
make it more difficult for multinationals to buy Japanese companies. A large part of
these countermeasures had to do with the promotion of cross-shareholdings between
companies and above all with the return of the large conglomerates, the Keiretsu.
To give you an idea, today these conglomerates continue to exercise
enormous control over the national economy. The Keiretsu control 26,000 parent companies,
56,000 subsidiaries and employ about 18 million people, almost a third of all Japanese employees.
And this is not even counting many companies that
act as subcontractors and suppliers closely linked to these groups.
The Toyota group, for example, has some 1,000 subsidiaries and 40,000 suppliers, most of which
are closely linked to this group. In other words, in practice, they are not entirely independent.
In this way, the Keiretsu exercise such great control over Japanese
companies that they leave little room for foreign
corporations to gain a foothold. It is something like a very closed ecosystem.
The problem is that the ecosystem is so closed that in many fields it has fueled
enormous inbreeding that comes at the expense of productivity and change. For example,
the digital transition in Japan lags far behind its counterpart countries.
To make matters worse, despite its intentions,
the government has introduced even more control mechanisms.
For example, in 2020 it pushed through parliament a change in the Foreign
Exchange and Foreign Trade Law to lower the threshold by which a corporate transaction
requires government approval: from 10% of the shares it dropped to around 1%.
The result is that buying a company in Japan can be almost an impossible mission. And
that explains the very little FDI that enters the country in relative terms,
However, this is something that could start to change very soon, for three main reasons.
Firstly, surveys are beginning to show greater social acceptance of foreigners taking control
of local companies. This is something that traditionally generated dread in the country.
Secondly, demographic decline is forcing many Small and Medium-sized Enterprises
to close as their owners retire and have no successors. Along these lines, in 2020,
a report published by the FDI Promotion Council, a government advisory body,
argued that foreign capital inflows could be the solution.
We are talking about more than 600,000 profitable SMEs that might have to
close within the next three years. There are six million jobs at risk.
And thirdly, plans to raise the economic growth and profitability of the Tokyo Stock Exchange
are driving changes in the corporate governance policies of companies. We'll tell you all about
this in an upcoming video, so don't forget to subscribe to VisualPolitik to stay in the loop.
However, as we have mentioned on other occasions, this is not the only area
where Japan's economy has become the odd one out in terms of economic globalization.
Check it out.
(A COUNTRY THAT IS ALSO CLOSED TO TALENT)
In contrast to most developed countries, Japan has a fairly small immigrant population:
barely 2% of the total. In the United States, for example, this figure exceeds 13%.
Not only has this meant excluding a lot of talent,
but it has also contributed to deepening the demographic crisis the country is experiencing.
Its population first began to decline in 2005 and has been steadily shrinking since 2011,
which is taking a major toll on the working-age population.
For example, in 2019, more than 28 percent of the population was over the age of 65, and only about
60 percent of Japanese residents were between the ages of 15 and 64. This explains why this
country suffers from one of the highest levels of labor shortages of all developed countries.
According to the Japanese government itself,
we are talking about a shortage of about 6.5 million workers by 2030.
So far, some changes have already been introduced to encourage the arrival of
foreign labor. But everything indicates that things will have to move faster in the future.
And so, VisualPolitik viewers, you can see that in some fields, the Japanese economy is
the most closed to international flows but that it is about to undergo a huge transformation.
The question is, will it be enough to balance all the problems the country is facing? Will
Japan become the new fashionable destination for multinationals?
These are questions that only time can answer. For now,
leave us your thoughts below in the comments and, very, very important:
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School interesting, don't forget to like it and leave us your impressions in the comments.
All the best and see you next time.