Faced with a stagnating economy and a shrinking population, Japan remains reluctant to embrace foreign investment and talent

In keeping with the conventional perception of the developmental state, the primary characteristic of Japanese capitalism has long been a high degree of solidarity based on cooperation between the state and private actors.

Although this characteristic seemed to have some merit during the era of high growth, now times have changed. Japan is faced with a stagnating economy and a shrinking population, and hence it should become more innovative. In order for that to happen, it is necessary to bring in foreign investment and talent.

The Japanese government is well aware of this challenge, and it has already initiated efforts to attract foreign investment. In the early 2000s, Junichiro Koizumi’s government advanced the so-called structural reforms such as the privatisation of postal services and public road corporations. This was done partly with the purpose of sending a signal to foreign investors that Japan had become an investor-friendly country. The current policy of Abenomics is clearly of great importance to foreign investors. However, so far, these efforts have only achieved a bubble-like rise in the stock market and it is fair to say that Japan has remained a relatively closed country when it comes to foreign direct investment (FDI).

Table 1: FDI Stock (2014, US$ Million)

	Inward FDI Stock		Outward FDI Stock
	Amount	% of GDP	Amount	% of GDP
United States	5,409,884	31.1	6,318,640	36.3
United Kingdom	1,662,858	56.5	1,584,147	53.8
China (excluding HK)	1,085,293	10.5	729,585	7.0
Germany	743,512	19.3	1,583,279	41.0
France	729,147	25.6	1,279,089	44.9
Australia	564,608	39.1	443,519	30.7
South Korea	182,037	12.8	258,553	18.2
Japan	170,615	3.7	1,193,137	25.8

Source: 2015 World Investment Report, UNCTAD

Table 1 shows that Japan has received very little foreign direct investment considering its economic size. In contrast to the outward FDI, Japan’s inward FDI stock is below that of Australia and South Korea whose economies are much smaller than that of Japan. There may be various reasons for this situation, and perhaps one of them is the negative and cautious attitude towards inward FDI that is widespread in Japan. Japanese political and business elites are eager for portfolio investment from abroad as that would result in higher stock prices. However, they do not necessarily want Japanese companies to be owned and managed by foreign firms or individuals.

Sumo is the national sport of Japan. However, decades ago sumo became unsustainable without foreign-born wrestlers

A clue to understanding such a contradictory attitude held by Japanese people may lie in one of the traditional Japanese sports, sumo. Sumo is the national sport of Japan. However, decades ago sumo became unsustainable without foreign-born wrestlers, and, at the moment, all wrestlers who reach the highest rank, yokozuna, are Mongolian.

Meanwhile, it is also true that Mongolian wrestlers often fail to follow the prevailing informal rules and norms. For example, Asashoryu, the former Mongolian yokozuna was once reported to have played a charity football match in Ulan Bator while not taking part in a regional exhibition tour because of injuries. He may have thought that an exhibition tour was not important. But, the informal rule in sumo, and in Japanese society in general, requires him to behave as a role model for other junior wrestlers, meaning that he should never be absent from an exhibition tour. So, he was criticised harshly, and then fined heavily and suspended for two tournaments.

Code of behaviour

The current top yokozuna, Hakuho, is relatively well behaved compared to Asashoryu, but even he is occasionally criticised for not playing in the beautiful, orthodox style that a yokozuna is expected to follow. In addition, despite the fact that he is indisputably one of the greatest wrestlers of the postwar era of sumo, he may be unable to become an oyakata (sumo coach) unless he becomes naturalised as a Japanese citizen. Just as there are non-Japanese wrestlers in sumo, there are currently a lot of foreign firms and individuals in the Japanese economy. However, they are expected to behave as if they were Japanese, otherwise they would be turned away or refused entry in the first place.

It may be instructive to review a couple of cases from the late 2000s. In 2006, the Dutch steel company, Mittal, began to show an interest in merging with Japan’s largest steel company, Nippon Steel Corporation. That move received close attention from the Japanese government, and the then Vice-Minister of Economy, Trade and Industry, Takao Kitabata, was quoted as saying: ‘The steel industry is crucial to Japan’s manufacturing sector as a whole, and protecting it from foreign capital is our key mandate.’ Nippon Steel itself took measures to defend against a takeover, and, in the end, it chose to merge with another Japanese steel company, Sumitomo Steel. Kitabata’s words showed that a foreign manufacturer like Mittal would not be welcome to join the Japanese manufacturing sector.

In May 2007, the US-based investment fund, Steel Partners, announced its intention to make a takeover bid for Bulldog Sauce, the Japanese condiment maker. Bulldog Sauce immediately decided to take defensive measures, issuing a so-called ‘poison pill’ in order to reduce the proportion of shares in the company held by Steel Partners. A poison pill can be described as device intended to make shares less attractive. Nonetheless, plenty of shareholders seemed happy to support Bulldog’s decision. The Japanese state also took Bulldog’s side. In this case, Vice-Minister Kitabata publicly accused Steel Partners of greenmail. In addition, during the legal process, the fund was described as an abusive acquirer, and, in August 2007, the Supreme Court finally rejected Steel Partners’ appeal. These cases reveal that Japan’s state and business sectors feared that foreign capital would not follow the informal rules and norms that are necessary to maintain economic prosperity and social stability.

In the same manner, talented foreign individuals are facing difficulties in adjusting to Japanese companies. Traditionally, most executives in large Japanese companies are chosen from Japanese employees who started their careers in those companies.

In 2008, in a departure from this practice, Nippon Sheet Glass appointed as chief executive British national, Stuart Chambers, of Pilkington Glass, the British glassmaker it had bought two years earlier. This could have been a model case for other Japanese companies who wish to become global. Unfortunately, Chambers left the company only one year later. He was quoted in a British paper as saying: ‘I have decided to put family first and company second’ and ‘I have learnt I am not Japanese.’ Then Nippon Sheet Glass chose an American as his successor, but he too resigned after one year.

Strong opposition

More recently, in 2014, Takeda Pharmaceutical named French national, Christopher Weber, as chief executive. This nomination certainly showed the enthusiasm of the company to attract global talent and expertise. Not surprisingly, there was strong opposition to the nomination, particularly from groups of shareholders such as the founding family members and former employees. Their statement sounded anachronistic and even, to some extent, racist: ‘Core business such as finance and R&D should not be left to foreigners’, ‘Foreigners would transfer important information abroad’ and so forth. These cases indicate the difficulties associated with the integration of foreign talent into Japanese companies. As in sumo, talented foreigners who do not seem to conform to informal rules and norms could be rejected.

However, there is good news from the electronics industry. At the time of writing, the Japanese electronics giant, Sharp, which has been embroiled in financial crisis for several years, is inclined to accept the takeover offer from Taiwanese firm, Foxconn, while also being offered a rescue plan from a government-backed fund, the Innovation Network Corp of Japan. Despite the symbolic importance of the electronics industry in postwar economic development, the Minister of Economy, Trade and Industry, Mikio Hayashi, made clear in advance that they would not oppose the rescue by Foxconn. So, hopefully, we may be able to interpret this recent development as a sign showing that Japan has truly begun to take a path towards a more open economic model.

Featured image
Sumo is the national sport of Japan. However, decades ago sumo became unsustainable without foreign-born wrestlers. Photo: Eckhard Pecher