Foreign Direct Investment

FDI flows to Japan remain low compared to most other developed nations across the world and are relatively unstable. According to UNCTAD's 2021 World Investment Report, FDI declined by 30% to USD 10 billion in 2020, reflecting a 25% decline in FDI from MNEs in the United States. Japan's FDI stock was estimated at about USD 243 billion in the same year. The country is also one of the main investors worldwide, with an estimated stock of outward investments of USD 1,982 billion. In 2020, investment by Japanese multinationals fell 49% to USD 116 billion from a record USD 227 billion in 2019, partly due to the economic crisis triggered by the Covid-19 pandemic. The United States, Singapore, France, the Netherlands, and the United Kingdom were the main investing countries and represented nearly two-thirds of the FDI inflows. Investments are mainly oriented towards finance and insurance, transportation equipment production, electric machinery, communication, and chemicals and pharmaceuticals. According to the latest figures from OECD, in the first semester of 2021 FDI inflows to Japan totaled USD 16.8 billion, up by 215% year-on-year. In the same period, Japan recorded increases in FDI equity outflows of more than USD 15 billion, partly influenced by some large M&A transactions, such as the acquisition of the entire share capital of Nipsea Pte Ltd, a Singapore-based manufacturer of coatings, by Nippon Paint Holdings Co Ltd.

Japan ranked 29th out of 190 countries in the World Bank's latest Doing Business report, an increase from the previous edition when it ranked 39th. The country has a solid net foreign creditor position and external indicators are generally robust.  Japan is actively opening its doors to foreign business, as it's aiming to create the best possible environment for overseas investors. The country's key strengths are its position as a leader in advanced technology and R&D, the fact that it is the third-largest economy in the world, a big internal market with high purchasing power and a highly skilled workforce. The potential barriers to investment are essentially demographic, linguistic and cultural; with international competition restricted by a very insular local business culture. Moreover, the Foreign Exchange and Foreign Trade Act (the Forex Act) was amended, lowering the ownership threshold for pre-approval notification to the government for foreign investors from 10% to 1% in sectors that could pose a national security risk, and introducing a new prior notification exemption scheme for share acquisitions. Nevertheless, Japan remains a key market for investors.