Japan experienced a significant 76% jump in foreign direct investment (FDI) outflow in the first nine months of 2023, against the same period in 2022. It became the top Asian creditor nation in 2023.
This Japanese outcome runs counter to the broader, global picture where FDI outflows continued to struggle, dropping 15% below 2022 levels, according to the latest figures from the Organisation for Economic Co-operation and Development (OECD).
With an outflow of USD60 billion in the third quarter of 2023 alone, Japan was the second largest source of FDI outflows worldwide after the US on USD110 billion, with China lagging at USD53 billion, OECD figures reveal.
According to the Ministry of Economy, Trade and Industry (METI), Japanese manufacturers earnt more than 25% of their revenue from their overseas subsidiaries. This is a significant increase from the 1990s, when only 5% of their revenue came from overseas, which doubled to 10% in the early 2000s.
The government’s fiscal policies made it easy for Japanese investors to venture overseas, and multiple factors have contributed to Japanese companies strengthening their operations abroad, with the key influence being a gradual appreciation of the yen between the early 1980s and its peak in 2012.
Due to Japan’s ageing population and reducing demand, many companies have started expanding their operations closer to local markets where demand is high and labour costs are comparatively lower. A shrinking labour force in Japan has also prompted firms to explore overseas opportunities.
Recently, Southeast Asia has become a more attractive market for Japanese investors, surpassing the traditionally popular European and US markets due to their maturity and depth.
Japanese companies previously invested heavily in China, but have shifted to the Asean region, especially Indonesia, Thailand and Vietnam.
In 2023, Japan was the fourth-largest investor in Indonesia with a total investment of USD4.63 billion. Japan is attracted to Indonesia due to its large population, expanding economy and an abundance of natural resources such as minerals, coal and natural gas. These factors offer a stable supply chain.
India is an equally lucrative market for Japanese investors, especially in real estate. There is a high demand for commercial real estate as India has emerged as an IT destination. The IT boom has also opened opportunities in related sectors, including building materials, electricals and sanitaryware – known areas of Japanese expertise.
Although several Japanese companies have adjusted their budgets for overseas M&A deals, investment figures for 2024 paint a different picture. According to CEIC Data, Japan’s direct investment abroad expanded by USD9.4 billion in January 2024, compared to USD21 billion in the preceding month.
Many Japanese companies have globalisation-oriented business strategies to generate revenue from their overseas subsidiaries. So far, these strategies have been successful especially at a time of minimal economic or geopolitical risk. However, the current geopolitical landscape presents significant risks that could impede the business model.
The silver lining for 2024 could come if Japan’s central bank removes negative interest rates. Experts anticipate higher interest rates will strengthen the yen and further boost investment outflow. In this special series of articles we gleaned the advice of legal experts around the region, and further afield, on what issues Japanese outbound investors need to heed when entering their particular jurisdictions.
