The U.S. Department of State’s Investment Climate Statements provide information on the business climates of more than 170 economies and are prepared by economic officers stationed in embassies and posts around the world. They analyze a variety of economies that are or could be markets for U.S. businesses. The Investment Climate Statements are also references for working with partner governments to create enabling business environments that are not only economically sound, but address issues of labor, human rights, responsible business conduct, and steps taken to combat corruption. The reports cover topics including Openness to Investment, Legal and Regulatory Systems, Protection of Real and Intellectual Property Rights, Financial Sector, State-Owned Enterprises, Responsible Business Conduct, and Corruption.
Japan is the world’s third largest economy, the United States’ fourth largest trading partner, and, as of 2019, the top provider of foreign direct investment (FDI) in the United States. The Japanese government actively welcomes and solicits inward foreign investment and has set ambitious goals for increasing inbound FDI. Despite Japan’s wealth, high level of development, and general acceptance of foreign investment, however, inbound FDI stocks, as a share of GDP, are the lowest in the OECD.
Japan’s legal and regulatory climate is highly supportive of investors in many respects. Courts are independent, but attorney-client privilege does not exist in civil, criminal or administrative matters, with the exception of limited application in cartel anti-trust investigations. There is no right to have counsel present during criminal or administrative interviews. The country’s regulatory system is improving transparency and developing new regulations in line with international norms. Capital markets are deep and broadly available to foreign investors. Japan maintains strong protections for intellectual property rights with generally robust enforcement. The country remains a large, wealthy, and sophisticated market with world-class corporations, research facilities, and technologies. Nearly all foreign exchange transactions, including transfers of profits, dividends, royalties, repatriation of capital, and repayment of principal, are freely permitted. The sectors that have historically attracted the largest foreign direct investment in Japan are electrical machinery, finance, and insurance.
On the other hand, foreign investors in the Japanese market continue to face numerous challenges. A traditional aversion towards mergers and acquisitions within corporate Japan has inhibited foreign investment, and weak corporate governance, among other factors, has led to low returns on equity and cash hoarding among Japanese firms, although business practices are improving in both areas. Investors and business owners must also grapple with inflexible labor laws and a highly regimented labor recruitment system that can significantly increase the cost and difficulty of managing human resources. The Japanese government has recognized many of these challenges and is pursuing initiatives to improve investment conditions.
Levels of corruption in Japan are low, but deep relationships between firms and suppliers may limit competition in certain sectors and inhibit the entry of foreign firms into local markets.
Future improvement in Japan’s investment climate is largely contingent on the success of structural reforms to raise economic growth, and, in the near term, the implementation of COVID-19 recovery measures.