Foreigners attempting to do business in Japan typically confront governmental, structural and psychological barriers to doing business. But as Japan renews its engagement with Asia, there are many reasons to expect that the barriers that have kept Japan and its Western trading partners apart will be further reduced.
Governmental barriers include tariffs and various laws and government regulations that impede market access. Many of these have been significantly reduced or eliminated over the past 40 years, thanks in part to bilateral and multilateral trade negotiations. Japan now boasts the world’s lowest average level of tariffs on industrial products. Yet it still maintains some of the highest agricultural tariffs in the world, and in services — particularly in financial services — regulations often pose a challenge to doing business for foreign and Japanese companies alike.
Structural or institutional barriers are caused by close relationships between suppliers and buyers, suppliers and subcontractors, suppliers and distributors, regulators and companies, or corporate cross-shareholding that have the effect of vastly advantaging incumbents. Newcomers and outsiders are disadvantaged in most markets, but in Japan this is magnified by the tendency to value stability, continuity, predictability, precedence and long-term relationships. This tendency defies the short-term economic rationality and shareholder value that most Western companies like to believe they adhere to.
The third kind of barrier to foreigners doing business in Japan is psychological. Most Japanese people over the age of 40 still view their country as a small island nation devoid of natural resources that must produce and export to survive. This partly explains why Japan still has some of the lowest levels of manufactured imports and inward foreign direct investment among OECD countries. Many Japanese see trade and investment as a zero-sum game in which increased imports will harm Japanese producers and increased inward investment will displace Japanese companies. Japanese notions of corporate governance are different from the Anglo-American model, which gives primacy to shareholder value, board independence and board diversity. In Japan, the emphasis is on corporate stability, continuity and predictability, and on stakeholder value (that is, the interests of employees, customers, partners and society). Companies that pursue short-term profitability, high share prices and economic rationality as defined by Western economic theory are the exception rather than the norm.
Yet in the past four decades Japan has removed or significantly reduced barriers to trade and investment. The end of the Cold War, the forces of globalisation, the maturing of the Japanese economy, the diversification of Japanese industry and generational change have all contributed to this process. Many Japanese who compare the Japan of today to the Japan of the 1950s, ’60s and ’70s consider these changes to be dramatic. By contrast, outside observers tend to evaluate changes less chronologically than cross-nationally. That is, they are puzzled and often frustrated that changes in Japan, although real, are so slow compared to those seen in other countries, especially in neighbouring East Asian countries.
This gap in perception about the Japanese market has caused many Western companies to bypass Japan and seek business in other rapidly growing Asian markets. Because doing business in Japan is seen as too costly, too difficult and too time-consuming, many firms prefer to invest scarce resources in other markets that will reap returns in shorter periods of time. This gap in perception works both ways: Japanese observers point to significant reforms that have opened the market to trade and investment, and do not understand why Western companies are not more eager to enter the Japanese market or expand their operations in Japan.
To speak of ‘the Japanese market’ is to overgeneralise, because there are in fact many markets in Japan. The traditional, heavily regulated energy, transportation, finance, pharmaceuticals and telecommunications markets have only recently experienced true competition. By contrast, newer industries have spawned companies that aspire to be truly global players, and value products, services, management and human resources (regardless of gender or nationality) that are globally competitive.
Another notable change in recent years is Japan’s ‘Asia shift’. This trend, which began in the 1990s, was temporarily arrested by the revival of the US economy and the Asian financial crisis. The Asia shift resumed in full force after the dotcom bubble burst in 2000, and again after the US-led financial crisis of 2008 and the recent European sovereign debt crisis. Japanese political, government and business leaders have concluded that their nation’s economic future lies with Asia, the world’s fastest-growing region, both as a market to sell to and as a platform in which to invest for research, development and manufacturing.
This shift of attention and energy to Asia has led Japan to actively pursue a range of free trade, economic partnership and economic integration agreements. Even the Trans-Pacific Partnership, which includes the US, is seen by Japan as part of long-term efforts to promote bilateral and multilateral trade and investment in Asia, ultimately leading to the Free Trade Area of the Asia Pacific. The conclusion of these agreements would necessarily lead to reducing tariffs, regulations and other governmental barriers to the Japanese market.
As Asia’s economy assumes a more important role for Japan, its economy will likely become more integrated with other Asian economies. To this extent, the barriers to trade, investment and doing business in Japan that have caused intense controversy between Japan and its Western trading partners since the 1960s are apt to decline in significance.
The Asia shift will make the sharp divide between Japanese and Anglo-American notions of corporate governance less relevant. Valuing continuity or stakeholder value over shareholder value are also features of Asian corporate governance, which means that the often legalistic, ideological disputes between Japan and its Western partners over issues of corporate governance (which directly affect mergers and acquisitions, joint ventures and strategic alliances) are less likely to be repeated.
The gradual opening of Japan’s market from the 1980s, coupled with the growing attractiveness of the emerging markets of Asia, led many Western companies to scale back their complaints about Japan and to redirect their attention elsewhere. Japan’s shift towards Asia will further reduce the trade and investment barriers that were so contentious between Japan and its Western trading partners. A question for the future is whether Japan’s increasing economic integration with Asia — especially with China — will lead to a reduction of Japan’s dependence on the US as a political and military ally, and what implications this will have for the US policy towards Asia.
Glen S Fukushima is Senior Fellow at the Center for American Progress in Washington, DC, and President of GSF Associates, Inc. He is former President of the American Chamber of Commerce in Japan and former Deputy Assistant US Trade Representative for Japan and China.
This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Japan: leading from behind’.