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 World Investment Report 2023, FDI inflow rose by 31.9% in 2022 - the highest level ever recorded - totalling USD 32.5 billion, making the country the thirteenth-largest recipient worldwide. In the same year, the total stock of FDI stood at USD 225.3 billion, around 5.3% of the country’s GDP. Japan is also one of the major foreign investors, with the total stock of outward FDI at USD 1.94 trillion (the second in the world after the U.S.). The major investing countries in terms of FDI stock are the U.S. (22.3%), the UK (16.7%), Singapore (10.4%), the Netherlands (7.3%), France (7%), and Hong Kong (5.7% - data Japan External Trade Organization). Investments are mainly oriented towards finance and insurance, transportation equipment production, electric machinery, communication, and chemicals and pharmaceuticals. According to the latest government figures, FDI inflows totalled USD 18.7 billion in the first three quarters of 2023.

Japan maintains a supportive legal and regulatory environment for investors, continually aligning regulations with international standards. Intellectual property rights are well-protected, with robust enforcement mechanisms in place. The capital markets are deep and accessible to foreign investors, with nearly all foreign exchange transactions freely permitted, including profit transfers and capital repatriation. However, foreign investors encounter challenges such as a historical reluctance towards mergers and acquisitions in Japanese corporate culture, weak corporate governance leading to low returns on equity, and cash hoarding. Additionally, inflexible labour laws and a regimented system of labour recruitment and management contribute to increased costs and complexities in human resource management for investors and business owners. Typically, the sole requirement for foreign investors entering Japan is to submit an ex post facto report to the relevant ministries. However, legislation introduced in 2020 has reduced the ownership threshold for pre-approval notification to the government for foreign investors, from 10% to 1%, particularly in industries deemed to pose potential risks to Japanese national security. Japan’s overall good business climate is confirmed by the country’s ranking in the Global Innovation Index 2023 (13th among the 132 economies) and in the 2023 Index of Economic Freedom (38th out of 184 countries). Moreover, Japan stands at the 3rd position in Kearney’s Foreign Direct Investment Confidence Index 2023.