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Revenue earned overseas by Japanese companies is being kept abroad and not sufficiently channeled back into domestic investments. The government must think hard about measures to change this trend and encourage domestic investment.
In the past, Japan has generated huge trade surpluses by exporting industrial products such as automobiles and home appliances. However, export volumes have recently been sluggish, due in part to a shift to production bases overseas.
Additionally, rising global energy prices and the weak yen have caused the cost of imports such as crude oil to balloon, resulting in a trade deficit of about ¥9.3 trillion in 2023.
Meanwhile, Japanese companies are receiving more income from overseas, such as from dividends and interest. Japan maintains a surplus in its current account balance, which is the sum of the balance of such income and the balance of trade.
This is due to an increase in foreign direct investment by Japanese companies, such as to build overseas factories or acquire overseas companies. The structure of the Japanese economy can be said to have shifted from trade-based to foreign investment-based earnings.
However, about half of the earnings from foreign direct investment are said to be kept overseas for further investment.
As the nation’s population declines, it is important for Japanese companies to seek opportunities in overseas markets. However, firms seem to be so fixated on such an approach that they have neglected to invest in market development, technology development and personnel training in Japan.
Though the balance of foreign direct investment by Japanese companies rose 540% from 2000 to 2020, domestic capital investment only boosted fixed assets by 15%.
This is said to be one reason why an economic recovery has not really been felt in Japan, despite the strong performance of many companies, especially in the manufacturing sector. For Japan to continue to grow as the population shrinks, it is essential that there be renewed domestic investment.
The Finance Ministry has established a panel of experts to discuss measures to redirect overseas earnings to such investment. The panel is scheduled to compile a report for its discussions this summer.
There are many fields of business that require large sums of money, such as for technological innovation to decarbonize, the manufacture of cutting-edge semiconductors and the practical application of quantum technology. The needs of economic security are also making it increasingly important to strengthen the production base through domestic investment.
Last December, the government compiled a policy package of over 200 items to encourage domestic investment, including tax incentives for domestic production of electric vehicles, semiconductors and other products.
It is important for the government to create an environment conducive to investment by clearly outlining strategies and future visions for priority sectors. One option would be to select areas where significant economic benefit can be expected and intensively expand tax incentives, subsidies and other forms of support for these areas.
