TOKYO – Japan risks missing, yet again, an opportunity to use foreign investment to help fuel sustained economic growth that has eluded it for the last two decades.
Prime Minister Shinzo Abe pledged to make Japan "the world's easiest country for companies to do business in" as part of his economic revival plan, which so far has been largely met with approval. The stock market has rallied 45 percent this year and Abe's approval ratings are around 70 percent.
Abe gave further hints on Friday about government plans to be unveiled in a longer-term economic growth strategy, referring to tripling infrastructure exports and doubling farm exports.
But a month before that strategy is due to be unveiled, his efforts to ramp up inbound foreign direct investment (FDI) are showing little indication a trickle of foreign investment will turn into a tide.
"Over the last five years, 90 percent of my work has been outbound deals," said Ken Lebrun, chair of the FDI committee at the American Chamber of Commerce in Japan and a partner at the law firm Shearman & Sterling specializing in mergers and acquisitions.
"The reason is the same as why Japanese companies haven't been acquiring companies in Japan: growth prospects are poor. Hopefully, Abe's reforms will improve these perceptions."
At first glance, Japan is tough to sell to a foreign investor. Its population is ageing and quickly shrinking. Its own corporations are pessimistic about home markets and have been hoarding cash or investing overseas.
Yet its appeal lies in the sheer size of the $5 trillion-plus economy, the world's third-largest, a survey by international consultancy Accenture showed in March last year.
In insurance and pharmaceuticals, areas of foreign investor interest, Japan is second only to the United States in market size, reports from ratings agency Standard & Poor's and research firm IMS Medical show.
Standing in the way of foreign investment are barriers that have kept Japan at the bottom of the FDI league table.
Compared with the size of the economy, foreign direct investment inflows into Japan are the lowest among the 34 developed nations grouped in the Organization for Economic Co-operation and Development (OECD).
The total amount of inward FDI was less than 4 percent of its economic output at the end of 2011. In comparison, Britain's was 48.8 percent of GDP in 2011, while in the United States it was nearly a fifth of GDP.
The OECD's index of regulatory restrictions to FDI, which includes limits on foreign equity holdings, screening and approval procedures, rules on hiring foreigners and rules on repatriating capital, showed Japan was the club's most closed economy in 2012.
To break the mould, Japan needs to simplify and reduce corporate taxes, cut red tape and scale back regulations that are so excessive that they even deter Japanese firms, economists say.
"The single biggest area that Britain and other countries would welcome is a bigger move on deregulation and liberalization," said Sue Kinoshita, director of trade and investment at the British Embassy.
The benefits of foreign investment would be heightened competition for skilled workers, which could help reverse a long decline in Japanese wages and boost productivity, helping to address concerns about the "hollowing out" of manufacturing.
"We have a lot of outgoing FDI, so we need to balance this with more incoming FDI," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
Rather than break the mould though, the advisory panels charged with drafting the growth strategy are discussing only modest steps, such as tax breaks for special economic zones.
One idea is to provide incentives for English-speaking doctors to work in Japan and another is to run Tokyo's subway and bus networks 24 hours a day. Proponents suggest that would make Japan more attractive to foreign executives.
Areas that are likely to remain a no-go zone for foreigners are agriculture and construction, two industries that tend to rely on cozy government ties for protection.
At 1.2 percent of GDP, the size of Japan's agriculture sector is about the same as many developed economies.
The appeal is that whoever can fix the sector's notorious lack of efficiency stands a better chance at marketing Japan's high-end vegetables, beef and other produce to gourmet consumers overseas.
Construction, on the other hand, may not hold much appeal to foreign firms as there are few prospects for growth after decades of excessive public works projects.
Elderly care is one area that will be growing as Japan ages. A third of Japanese will be 65 or older by 2035, up from a quarter now.
It is ripe for new entrants, foreign or local, but it is also a prime example of the red tape keeping newcomers at bay.
Each of Japan's 47 prefectures issue the licenses for nursing homes in their areas. But local governments often deny licenses to avoid the subsidies they have to pay to nursing home workers, who themselves have to hold several licenses and qualifications to work.
Pharmaceutical firms complain that strict rules on clinical trials and on prescribing new drugs make access to the Japanese market lengthier and costlier than other leading economies.
Some economists say Japan should make it easier for foreign companies to enter the renewable energy market in Japan as the country ponders life without nuclear power after the 2011 Fukushima disaster.
Letting foreign players in is sometimes the best way to shake things up, such as when French automaker Renault took over Nissan Motor Co Ltd <7201.T> in 1999.
Nissan's chief Carlos Ghosn implemented what become known as the "Ghosn shock" by aggressively pushing its steel suppliers to cut prices. At the time Japanese automakers did not dare to squeeze their long-time suppliers.
The result was lower steel prices for all automakers and a restructuring of the steel industry.
(Editor Neil Fullick)