Greenwood Sees Today's Japan as More Open to FDI

JETRO Invest Japan Quarterly: Message to our Readers
Ambassador C. Lawrence Greenwood,
Deputy Assistant Secretary for International Finance and Development
U.S. Department of State

Looking back over the twenty years since I began working on the U.S.-Japan economic relationship, I am struck by the profound shift toward openness in Japan's investment climate. Thanks to reforms championed by progressive Japanese officials and efforts since 1993 to promote two-way foreign direct investment in the US-Japan Investment Initiative, FDI into Japan is increasing and will hopefully reach Prime Minister Koizumifs goal of doubling by 2006. While challenges remain, the results so far are significant, and the outlook is promising because Japanese leaders understand that foreign direct investment will play an essential role in making their economy dynamic, competitive, and productive.

Steady progress on regulatory reform has made Japan an easier place to do business. In the 1990's, liberalization of specific sectors such as retail, financial services and telecommunications resulted in a boom of foreign and domestic investment and significant productivity gains. Facing the need for across-the-board financial and corporate restructuring after nearly a decade of stagnation, in the late 1990's Japan began a major overhaul of its commercial code, bankruptcy procedures, and accounting and auditing practices. As a result, and for the first time in the nation's postwar history, mergers and acquisitions (M&A) have become a real tool for improving corporate performance and value. In fact, Japan emerged as the world's second most active M&A market in 2005.

The Government is now working to conclude the final phase of that reform by implementing a provision of the new Corporate Law that would facilitate friendly cross-border acquisitions and make M&A in Japan truly global. However, Livedoor's unsuccessful attempt to acquire a Japanese media firm in early 2005 led, ironically, to criticism of foreign investors and resulted in a delay in implementation of this provision for a year. Though this setback was disappointing, we expect that by 2007 the Government will implement this new provision and related tax measures in a manner that enables innovative foreign firms to join in Japan's booming market for friendly M&A transactions.

Japan is clearly heading in the right direction, but it must avoid complacency. Inward FDI is still tiny for an economy of Japan's size. Spasms of opposition to foreign investment will continue, much as in the US twenty years ago when Japanese firms acquired well-known American firms from New York to Hollywood. But just as the US Government trumpeted the virtues of open investment in the face of that criticism, we expect Japan will also show the same leadership and courage. Japan is open to foreign direct investment, and I believe Japanese leaders are committed to keep it that way because they believe it is the right thing for Japanfs people and economy. The US-Japan investment relationship is blossoming; it is my privilege to have played a very small contributing role.