Japan's Global Companies Thrive but Economy Withers

With few investment opportunities for foreign capital at home, Japanese companies' overseas acquisitions may not soften a domestic slump

By Dan Slater

An incongruous juxtaposition of events has arisen this week, with Japanese companies going on an international shopping spree on the one hand, and news that Japan has formally entered a recession on the other. Some commentators have assumed that the prowess of Japanese companies in acquiring foreign companies will mitigate the overall downturn at home. However, there is no logical link between the two.

The blame for this can be attributed partly to Japan's ambiguous relationship with globalisation. Japanese companies have successfully linked up with the outside world, but the Japanese economy is closed in the other direction. Inward foreign direct investment, imports and immigration all show little, or even negative, change over the years.

Japan's inward direct investment was $22 billion in 2007 (the same as Australia's and half the size of Switzerland's), while Japan's outbound investment came to a much larger $70 billion in 2007. The figures represent 1.1% of the world's total inward direct investment and 3.4% of outward direct investment, according to the Japan External Trade Organisation (Jetro). Further, Japan's strong export performance means that the country's income gains from net exports as a fraction of GDP are higher than at any time since the 1970s, according to Jetro.

So, while Japanese companies have increased their revenues by setting up in, and selling to, countries all around the world, there has been no counterbalancing growth effect by foreign companies and imports within Japan. A dearth of imports is the downside of the superficially impressive trade surplus. Some economic theories suggest that imports, as well as foreign companies producing in Japan, provide a tonic to the local economy by breaking up cartels and forcing down costs. On a macro level, a trade surplus also indicates a lack of domestic consumption, which makes the economy vulnerable to a slowdown in exports. In short, the trade balance should not be taken as a sign of overall economic strength. In fact, it merely reflects corporate prowess.

The stockmarket, a mechanism for creating domestic wealth in many other countries, does not have a similar function in Japan. This is again due to the one-sided nature of Japan's globalisation. Some 30% of the stockmarket is owned by foreigners, which means that 30% of dividends are paid out to non-Japanese shareholders. The higher the dividend payout and the tighter the cost controls on staff wages (traditionally not seen as a cost in Japan), the worse the outlook for Japanese employees. In the past, it was the employees who were first in the queue for extra profits, which they received as bonuses, but this is no longer the case. Japanese retail investors own just 19% of the market.Nor are Japanese investments in foreign assets compensating for reduced exposure in Japan. Data from the TSE shows net sales of ¥59,000 billion in 2006 and ¥51,000 billion in 2007 across stocks and bonds.

When it comes to capital expenditure, Japanese companies focus on the US, the UK, Korea and the high-growth economies of Latin America and China. The domestic market has zero attraction for them. According to one estimate by Barclays Capital, if the country's population continues to decrease at its present rate, the Japanese people will be extinct in 300 years. Clearly, that has deflationary consequences which make it a deeply unattractive market for business. As a result, capital expenditure is done abroad, rather than in Japan.

It's difficult to tell if the government foresees the seriousness of the situation. In one panel discussion at the recent MipimAsia real estate conference, the possibility of transforming Tokyo into an international financial centre along the lines of New York, London, Hong Kong and Singapore was debated. The officials and academics on the panel spent a good deal of their speaking time discussing how facilities have been set up for expats to get visas for their maids, and in emphasising the excellent Tokyo rail system. One investment banker on the panel pointed out that what would really attract foreign investors to Japan would be investment opportunities.