Is Japan becoming more insular?
For some, it was a sign that Japan was again turning its back on the world. Last year, as recession bit down on the industrial town of Hamamatsu, the local government made a coldhearted offer to Latin American immigrants: it would pay them to go back home – as long as they agreed not to work in Japan again. Some had invested 20 years in the country and had children who knew nothing about Brazil or Peru.
“It showed that Japan is still uncomfortable with foreigners and with the realities of the modern world,” lamented Hidenori Sakanaka, director of the independent think tank Japan Immigration Policy Institute.
Not that long ago, two competing versions of Japan vied for analytical supremacy. One, “Japan Inc.”, referred to the insular, protectionist regime that came under heavy fire during Ronald Reagan’s America. The other was the transformation model: the notion that Japan was becoming “more like us” as it converged with the West and embraced the world. Where is that debate today?
Certainly, two decades after the old Japan tottered along with the nation’s overheated stock and land markets, the balance seems to have shifted decisively towards transformation. The world’s second-largest economy is vibrant and internationalised. Japanese corporations are heavily investing abroad – $78 billion in foreign acquisitions in 2008 alone.
Foreigners, in turn, have splurged on Japanese stocks for much of the decade since local firms began dumping cross-shareholdings. At one stage in 2006 they owned about a quarter of all Japan’s stock – though they have since sold some of their holdings. And according to the Japan External Trade Organization, net foreign direct investment hit a record high of $24,550 million in 2008, albeit from a very low base.
Even critics accept that the days when trading with Japan was mostly a one-sided affair are gone. Japan’s trade balance fell to a deficit of ¥725.3 billion in the year through March 2008. Although plummeting global demand was the main factor, the country’s first fiscal-year loss in 28 years shows that times have changed, say analysts.
“Japan is now one of the most open countries in the world because, with the exception of rice and agriculture, they are one of its biggest traders,” says Martin Schulz, senior economist at the private think tank Fujitsu Research Institute. “A lot of the old models need to be revised.”
Yet, on closer inspection, the world’s second-largest economy still has its dark corners. Despite the rise in foreign direct investment, Japan’s FDI in 2008 was just 2% of GDP, the lowest in the OECD. Likewise, trade with the EU is remarkably limited considering the size of the Japanese economy, especially compared to the United States, China, South Korea and India. As of 2009, the number of foreign-owned companies listed on the Tokyo bourse had dived to 15, down from a high of 127 recorded in 1991, and several foreign investment companies have been, in Schulz’s words, “bullied out” of Japan.
Among the best-known cases is Steel Partners Japan Strategic Fund, which was blocked in 2007 from a hostile takeover attempt of Bull-Dog Sauce. Bull-Dog’s defence strategy, later supported by the Tokyo High Court and Japan Supreme Court, has since been copied by hundreds of listed firms in Japan, according to Nomura Securities.
The reason, says Schulz, is simple: doing business here can still be a trial. And Japan is wary of foreign takeovers, especially by companies it feels are looking for a quick buck. “Japanese corporations are concerned about firms that just want to make a profit – that sounds almost wrong to Japanese ears. In Japan business is about stakeholders, including employees and pensioners, not just stockholders.”
Signs of retreat from the world don’t stop at the economic. Take the fall in the number of Japanese students going abroad, which has been declining since 2004. Roughly 80,000 Japanese students are studying outside the country, according to 2005 figures by the Ministry of Education, Culture, Sports, Science and Technology. The fall has been particularly sharp in the United States. According to the Institute of International Education, 34,000 Japanese students went to American universities in 2007, down from 47,000 in 1997 – far fewer than, say, those from South Korea with less than half Japan’s population.
“Japanese are less eager to study or work abroad than 20 or 30 years ago,” agrees Glen S. Fukushima, CEO of Airbus Japan. He says many Japanese prefer staying at home, where life is clean, safe and secure, and that the country is becoming more insular.
Then there is immigration. Despite a string of signals from the business and political worlds that a looming population crisis will force immigration policy past its tipping point, the government shows no sign of taking the padlocks off fortress Japan. Roughly 2% of the population is foreign, far below most OECD countries. And the Hamamatsu case, while isolated, seems to show that the state might take away the welcome mat when the economy darkens.
On trade, there is also plenty of room for improvement, argues Anne Lanigan, head of Enterprise Ireland in Tokyo. She points out that Japan only accounts for a tiny percentage of European exports. “Ireland is actually the biggest EU exporter to Japan in per-capita terms. Between 2000 and 2008, only two [Finland and the Netherlands] of six surveyed countries increased their exports to Japan, and growth was small – 4.1% and 3%. British goods to Japan were just 1.1% of their total exports in 2008.”
Unlike some, however, Lanigan blames both sides for the imbalance. “Europe is just not that interested in Japan – there are 27 countries there, so it’s a huge market by itself.” She says that with new Japanese regulations in industries such as biotech, pharmaceutical and medical devices mirroring European not American rules, “there is a huge opportunity for growth of trade with Europe.”
Fukushima agrees. “Both sides share some responsibility. Japan tended to focus on the United States market in the second half of the 20th century. But we are seeing some potential for changes. The new Japanese government of Prime Minister [Yukio] Hatoyama has stated his desire to have a more ‘balanced’ relationship with the world.”
In a speech last October at the British Embassy in Tokyo, however, the UK’s Secretary of State for Business, Innovation and Skills Peter Mandelson, took a pot shot at that old enemy – non-tariff barriers – for the poor showing of British companies in Japan. “For too long, the growth of our trade has been hampered by regulatory restrictions,” he said. “We really need to … commit to a new EU-Japan vision of commercial ties, of trade and investment. But the catalyst has to be regulatory reform and the rolling back of restrictions in Japan.”
One outcome of the current downturn will be a renewed commitment to Mandelson’s vision, predicts Lanigan. “In terms of trade, there is going to be a stronger Japan-Europe relationship, but I think Japan will drive that.” “Internationalisation is going to come slowly and incrementally, and at Japan’s own pace.” Whatever happens, however, don’t expect Japan to embrace mass immigration any time soon. “Japan is not going to go down that road,” says Schulz. “It doesn’t like what it sees elsewhere.”
Glen S. Fukushima Q&A
Airbus Japan, President & CEO
Is Japan bucking the trend towards more open, globalised economies?
It is true that Japan has become more insular in recent years. Some Japanese say that many younger Japanese simply want to stay in Japan and not go abroad, where they would have to speak foreign languages, contend with unfamiliar and uncertain situations, and deal with peoples and cultures they don’t understand. Japan is lagging behind most other Asian countries in its acceptance of tourism, inward foreign direct investment, and use of English.
Airbus has reportedly struggled in Japan – what particular difficulties has it encountered?
Airbus is a newcomer to Japan compared with our competitor, which has a long-standing relationship with Japan of nearly 60 years. This is not likely to change overnight. We are optimistic that, over time … our aircraft will be fully appreciated in Japan as in the rest of the world, where we have a 54% market share in sales. We consider Japan to be a key country for Airbus, both as a market for aircraft sales and as a partner for industrial co-development and co-production.
Does the blame for the relatively low level of Japan-EU trade lie with Tokyo, or Europe?
Japan tended to focus on the United States market. Since a decade or so ago, there has been a shift to place considerable emphasis on trading with, and investing in, Asia. Europe has also put its priorities on the United States and, more recently, mainland Asia. But the EU appears to be reassessing the importance of Japan, especially in the context of a potential FTA [Free Trade Agreement], EPA [Economic Partnership Agreement], or EIA [Economic Integration Agreement] between the EU and Japan that could significantly benefit both sides.
What could be done to make Japan a more open, vibrant economy?
(1) Provide scholarships for more foreign students to study in Japan; (2) place graduates of such programs in Japanese companies; (3) relax immigration restrictions on foreign professionals; (4) increase tourism to Japan; (5) dramatically improve English-language education so that Japanese can actually use English for oral communication and discussion rather than for just reading and writing; and (6) actively promote greater inward foreign direct investment.