Foreign direct investment (FDI) in Japan

FDI in Figures

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 2024, Japan was the 19th-largest recipient of FDI globally, with an inflow of USD 21.4 billion (down from USD 34.1 billion one year earlier). At the end of the same period, the total stock of inward FDI stood at USD 246.8 billion. Japan is also one of the major foreign investors, with an outward FDI stock of USD 2.1 trillion (the second in the world after the U.S.). According to figures from the Japan External Trade Organization, by the end of 2023, Europe’s FDI stock in Japan was the largest at JPY 20.8 trillion (41.3%), followed by North America at JPY 13.4 trillion (26.5%) and Asia at JPY 11.9 trillion (23.6%). The United States remained the top investor at JPY 12.5 trillion (24.7%), followed by the United Kingdom at JPY 8.7 trillion (17.2%) and Singapore at JPY 5.3 trillion (10.4%). France slightly increased to JPY 3.4 trillion (from JPY 3.2 trillion), while the Netherlands dropped to JPY 3.3 trillion (from JPY 3.4 trillion), swapping ranks. The top 10 countries and regions made up 85.8% of Japan’s total FDI stock. A sectorial breakdown of FDI stock shows that the manufacturing sector accounted for JPY 11.5 trillion (36.2% of the total), while the non-manufacturing sector made up JPY 20.2 trillion (63.8%). The finance and insurance industry remained the largest at JPY 11.5 trillion (down 2.3%, 36.3% of the total), followed by chemicals and pharmaceuticals at JPY 3.19 trillion (up 8.7%, 10.1%) and transportation at JPY 3.17 trillion (up 3.5%, 10.0%). Wholesale and retail saw significant growth, rising 145.0% to JPY 0.6 trillion, with the United States contributing the most. According to preliminary figures from the OECD, FDI inflows were down to USD 2.6 billion in the first semester of 2024, compared to USD 7.1 billion in the corresponding period one year earlier.

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. The Japanese government recently unveiled an "Action Plan for Attracting Human and Financial Resources from Overseas" aiming to double Japan's inward FDI to JPY 100 trillion, or around 15% of GDP, by 2030. Japan’s overall good business climate is confirmed by the country’s ranking in the Global Innovation Index 2024 (13th among the 133 economies) and in the latest Index of Economic Freedom (38th out of 184 countries). Moreover, Japan stands at the 7th position in Kearney’s Foreign Direct Investment Confidence Index 2024.

What to consider if you invest in Japan

Strong Points

Advantages for FDI in Japan:

• In addition to having the third largest economy in the world, Japan has very strong purchasing power and therefore strong domestic demand.
• As a leader in high technology, research and development (with the largest number of patents in the world), Japan has had a steadily growing economy and rock solid stability for several decades.
• Because of its geographical location, any foreign investor operating in the Japanese market has a facilitated entry to other Asian markets. 
• The business environment is clearly favourable and reinforced by a stable political system.
• The workforce is highly skilled and the Japanese are known as great workers dedicated to their company. 
• The ageing of its population opens up great opportunities for products and services geared towards older age groups (health care technology, medical devices, entertainment, pharmaceuticals, etc.).
• Japan has signed Trade agreement with the EU and Transpacific Partnership (December 2018).

Further arguments in favour of investing in Japan can be found on the website of the Japanese investment agency (JETRO).

Weak Points

 Here is a non-exhaustive list of the main obstacles to FDI in Japan:

• Excessive regulation that hinders economic growth as it increases the cost of starting activities
• The difficulties the country faces in restoring public finances and deflation 
• International competition restricted by a very insular local business culture: Japanese prefer to do business (especially M & A transactions) with known partner companies. In the same way, it is preferable to establish networks and alliances with companies and national professional organizations. 
• Cultural and linguistic challenges that can be complicated to overcome for an SME 
• Low productivity of Japanese SMEs.
• Still insufficient female labor participation, lack of child care
• Ageing population at risk of jeopardizing the social security system

Government Measures to Motivate or Restrict FDI

Japan offers a number of national and local tax incentives that are available to foreign investors in Japan. These incentive schemes have been created for the benefit of both foreign investors and all Japanese companies. These incentives include the following:

• Tax incentives for comprehensive special zones - The government offers tax benefits in the form of special depreciation rules and other deductions related to investment in equipment and plant related to special sectors.
• Tax incentives for strengthening local business.
• Tax incentives for wage and productivity improvement. These programmes offer tax incentives to increase employees' salaries and for investing in information technology.
• Local tax incentives

For more information, visit the Japan External Trade Organization JETRO site.

Bilateral investment conventions signed by Japan

Japan is a signatory to 34 bilateral investment treaties. For a list of conventions signed by Japan, consult the list prepared by UNCTAD.