In the face of a ‘super-ageing society’, the promotion of inward FDI is becoming a pressing concern in Japan. Japan is experiencing the highest ageing rate (28.1 per cent) in the world. With an ageing population comes a multitude of economic problems. Saving rates will decline as Japan’s elderly population draw on their savings. As a result, domestic sources of investment will dry up. The undersupply of labour is another problem. The problem of demographic greying will reduce the size of the working-age population, which consistently increased during the post-war years until it reached a peak in 1995. Such problems hinder sustainable economic growth.
Inward FDI sparks hope as it compensates for diminishing sources of investment and opens up new business opportunities — something Japanese companies have failed to explore adequately. Inward FDI can also bring technological development, which is likely to change the nature of work.
The Japanese government has made several efforts through the Council for Promotion of Foreign Direct Investment in Japan since 2014. To attract global human resources, the government tried to improve living conditions for foreigners by removing language barriers, enhancing education opportunities for foreign children and improving internet connectivity. Japan has also deregulated and simplified administrative procedures to start businesses, including visa applications and import procedures. But these efforts are not going well. Inward FDI has not increased as expected.
But there is a possible solution. Recent research suggests that foreign workers enhance FDI inflows in Japan due to ethnic network externalities, also known as diaspora effects or migrant network effects, that make cross-border business easier. FDI requires knowledge of local laws, business practices and marketing tactics — knowledge natives may have, but foreigners may not. Multilingual and multicultural migrants help reduce such information-related transaction costs. Policies that pursue inward FDI promotion and immigration are interrelated. Both strive to achieve sustainable economic development goals.
FDI inflows into Japan are also promoted by tourism. Research reveals interactions between inward FDI and international tourism. International tourism has a positive impact on not only FDI flows in industries such as hotels, restaurants and transportation but also on the overall volume of inward FDI. This is because revitalisation in tourism-related sectors has spill-over effects on the economic activities of other industries — possibly including finance and insurance.
Liberalising immigration policy is key to promoting inward FDI into Japan. Since the revised Immigration Control and Refugee Recognition Law came into effect in April 2019, Japan has expanded the acceptance of foreign workers. The new legislation will allow up to 345,000 foreign workers to work in 14 industry areas over the next five years. The targeted areas include care workers, restaurants, construction, building cleaning, agriculture, accommodation and food and beverage manufacturing industries. Currently, these industries are all experiencing severe labour shortages.
These solutions are not sufficient to solve Japan’s FDI challenges. The immigrant population in Japan amounts to only 1.6 per cent of the total population. This is low compared to 10.7 per cent for the EU and 14.5 per cent for the United States. Japan has always been wary of admitting foreigners. But to remain competitive and to pursue economic growth, Japan must allay fears and hostility towards immigration reform. Japan has much to gain by revitalising its economy through such interactions. Japan must act now while there is still hope.
Akinori Tomohara is Professor at the School of International Politics, Economics and Communication, Aoyama Gakuin University, Tokyo.
I have some observations to share about this interesting analysis. First, Japan has seen a tremendous increase in tourism in recent years. With the Olympics coming next summer even more tourists will come to the country. How many more such guests can be accommodated there?
Second, a report just published noted that there are 2.82 million foreign workers in Japan. For it to reach the 10+% level found in the EU its current goals of 345,000 more immigrant workers would have to be expanded tremendously. I have doubts the country has the willingness, let alone the resources, to help 5 million foreign workers assimilate successfully in a very short time period. At what point will the Japanese people object to this taking place? Or how will the country deal with the social strains that a growing number of immigrants will cause?
Third, the analysis says nothing about Japan’s low birth rate. If this could be significantly increased, would this boost demand for more economic development? Admittedly, this will require significant changes in Japanese society and take a number of years to have an impact. But a higher birth rate should be part of the solutions to the country’s future.
I do share common views with the author that in the face of a ‘super ageing society’ promotion of inward FDI is a pressing concern in order to revitalise Japanese economy.
Firstly, based on the analysis made in the article, my main observation is that the economy of Japan is at a cross-roads. Therefore, complete liberalisation of inward FDI in all economic sectors and substantial immigration policy reforms is a panacea for achieving a sustainable economic growth. My argument is based on the premise that apart from increase in investment in the various economic sectors, promotion of inward FDI will also lead to positive spillover effects on Japanese local companies in terms of technological transfer, human capital endowment and managerial expertise.
On the other hand, if the current trajectory will continue into the medium to long term perspective, the negative effect is that productivity, economic growth and the standards of living will eventually decline.
Lastly, my suggestion is that despite the prevalence of the 5.2 percent low ratio of inward FDI to GDP. Policy makers should review the current drafted measures of promoting inward FDI and identify the gaps and areas which requires improvement. This development should also be coupled with simplification of business administrative procedures which will eventually trickle down the perceived associated high business costs for inward FDI.
Two and a half years after this post Japan and the world has been struck with Covid-19, which almost completely stopped tourism and immigration. Japan was moving at the right direction in 2019 with policy changes regarding immigration, but unfortunately something unpredictable like a global pandemic happened. Surprisingly the pandemic has had minor to no impact to the ratio of inward FDI to GDP in Japan according to data.
For me this would suggest that the policy changes and efforts to promote inward FDI have been successful, but the ageing population still remains the main hindurance for solid growth in the ratio to GDP. I still share concerns that Japan will reach the level EU on this metric just based on the huge amount of workers it needs to assimilate, but for sure after two years it has made correct strides towards closing the gap.
Low-birth rate has become a global problem especially in the developed countries. Japan is one of them and with already ageing population, this is a serious problem. The fact that the ratio of inward FDI to GDP hasn’t changed in the time that for example tourism was extremely low and still having the problem of ageing population the main focus in the near future for Japan, should in my opinion be on solving the low birth-rate problem.