Smoke signals from Japan
The Japanese government must develop a national policy and raise its PR game if the country is to secure the foreign direct investment it both wants and needs, suggests James Weeks
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 What Japan needs, beyond a clear, consensus-based national FDI policy, is a concerted communications campaign to convince the world that the country really is open for business
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On a visit to Tokyo last year Peter Mandelson, then the EU trade commissioner, described Japan as “the most closed investment market in the developed world.”
Japan’s relatively tiny stock of foreign direct investment (FDI) may have appeared to support what Mandelson said. But Japan’s fundamental policy really IS to boost FDI. It just isn’t very good at making the tough decisions that need to be made, and at promoting its attractions to the outside world.
Rather than unequivocal messages, Japan sends periodic smoke signals to overseas investors which they can’t quite decode.
Japan certainly needs the stimulus increased FDI can provide. Its export-dependent economy is heading into deep recession amid the global downturn, and this comes on top of huge existing problems, including a declining population and a massive fiscal deficit.
According to the latest statistics from UNCTAD, Japan’s FDI stock as of the end of 2007 was just 3.0% of GDP, ranking it 135th among 141 countries. The figure for China was 10.1%, for the US 15.1%, for the EU 40.9% and for the UK 48.6%.
In 2008 the government set a target of raising the FDI stock to 5% of GDP by 2010. However, even if this target is met Japan will still be way behind global competitors in gaining the huge economic revitalisation benefits that increased FDI can bring.
Maximising benefits
So what does Japan need to do to maximize these benefits? There are two distinct challenges. The first and most fundamental is for Japan’s politicians, bureaucrats and industrialists – once famed as an “Iron Triangle” - to hammer out a consensus on the pressing need to attract more foreign capital.
At present, the lack of consensus on reform leads to constructive proposals being watered down to the point of destructive ambiguity.
There are many examples. Take the tax treatment of M&A transactions, which account for the great majority of FDI inflows into Japan.
In 2007 Japan finally allowed cross-border triangular mergers, potentially opening the way for a wave of foreign companies with subsidiaries in Japan to use stock rather than cash to acquire Japanese companies.
However as it turned out, lack of clarity concerning tax deferral plus other issues made it exceptionally difficult for most new investors to execute such deals.
The initial smoke signal appeared to say "welcome", but once decoded the message was far less clear.
I This article appears in the March edition of PublicAffairsAsia I
As the American Chamber of Commerce in Japan has frequently commented, the lack of flexibility to execute a range of M&A transactions or corporate reorganisations on a tax-deferred basis continues to create major barriers to investment.
Potential foreign investors have also been frustrated by slow progress in addressing other obstacles, including weak corporate governance standards, high taxes, immigration rules and regulations that stifle entrepreneurship and innovation in some areas.
The to-do list is a long one, the issues are complex and they can’t all be resolved overnight.
Revitalising interest
But announcement of a clear “Triangle” consensus, combined with an action timetable, could revitalise foreign investor interest in Japan at a single stroke, even though growth opportunities in Japan may currently appear limited.
The second challenge, regardless of how quickly practical obstacles are removed, is for Japan to raise its PR game.
In the midst of intense global competition for investment dollars, foreign investors need to be courted and persuaded, and Japan is out-PR’d by almost every major nation on earth.
As things stand today, Japan not only sends mixed messages about the future but also fails adequately to promote investment opportunities that already exist.
One example is the apparent lack of a comprehensive strategy for managing overseas perceptions of the opportunities through the major foreign media.
All of this reflects the lack of consensus, as well as Japan’s cultural aversion to tooting its own horn, and the relatively small pool of fluent English speaking officials and businessmen ready and able to fly the flag for Japan on the world stage.
To really get results what Japan needs, beyond a clear, consensus-based national FDI policy, is a concerted communications campaign to convince the world that the country really is open for business.
Any positive shift in its approach to PR would be major news in itself, and would be welcomed with open arms by foreign media.
Scepticism remains
Many observers are sceptical Japan will be able to resolve its internal contradictions any time soon.
With the opposition Democratic Party of Japan (DPJ) dominating the upper chamber of Japan’s Diet, policy making is constrained pending the outcome of a national election that must be held by September.
The DPJ is currently forecast to achieve power, putting an end to more than 50 years of virtually uninterrupted rule by the Liberal Democratic Party (LDP), and ushering in a new period of uncertainty.
Meanwhile, resistance to the bold reforms needed to attract more foreign capital will remain strong among those who fear the impact of change on Japan’s business and social cultures.
But never say never. Political change can create opportunities for new approaches. Tax reforms are on the agenda. The economy is heading south very quickly.
And necessity is the mother. If these forces prevail, perhaps Mandelson will be proved wrong once and for all.
James R. Weeks is managing partner Asia Pacific at the newly merged Kreab Gavin Anderson
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