What are the advantages of direct investment toward Japan for a foreign company?

Japan is economically a large country with about 8.7% of the worlds GDP and a population of 130 million people. The capital of Tokyo and the Kansai area, centered around Osaka, are the business and economic hearts of Japan.

According to an awareness survey conducted by Japan’s Ministry of Economy, Trade and Industry regarding direct foreign investment into Japan, foreign companies responded to the question asking what was most appealing about the business environment in Japan when considering expanding over there, the responses “the large volume of potential customers” and “the low country risk” received the highest rating.

Appeal of Japan as an investment environment as seen from foreign companies

On top of this global expansion of foreign companies, the biggest focus has been in Asia. Furthermore the biggest focus has been in Japan, followed closely by China, then Korea, India, and Singapore.

Regions in Asia Companies are Focusing on

The reasons for the increased focus on Japan are many: its stable political and social stability minimizes the country risk, its strong business partners, and its complete trade, distribution, and infrastructure systems are all highly valued by the business development community.

Here we will discuss some of the top merits for expanding business into Japan.

1. Japan is Huge Market

Along with America and China, Japan is economically one of the largest countries in the world. Within Japan, Tokyo has the largest economic scale, with total production within at about 90 trillion yen. This amount covers a sixth of Japan and surpasses countries like Australia and Netherlands. If Tokyo itself were a country its economy would rank 13th in the world. After Tokyo, Osaka is the second largest followed by Aichi Prefecture. The size of Osaka’s economy hovers around that of Thailand’s, Malaysia’s, or Singapore’s.

Looking at Japan this way, it’s easy to see that the scale of the economies even at a prefecture level are on par with many of the major countries. There is no argument in saying that Japan is a huge market.

2. Total Personal Wealth of 1,500 Trillion Yen Means an Enormous Hidden Potential for Consumption

Among the major nations of the world, Japan has one of the highest household income and spending. One of the reasons for this is the large amount of discretionary spending. Prominent expenses in households include dining out, entertainment, fashion, and electronics.

In addition to the Japanese people’s tremendous spending power, Japan maintains about 1,000 trillion yen of personal assets. Currently in Japan the large population of baby boomers working in companies are nearing retirement age, and business expectations are extremely high for spending of by those retirement funds. The creation of new products and services that look to the future of a society with a high proportion of seniors.

3. Japan is the Ideal Marketing Location for New Products & Services

In addition to its high buying power, Japan has very brand-oriented consumers interested in the latest and greatest, while extremely sensitive to the latest trends and the added cost of products and services. This is the reason why many global products make their debut in Japan. By developing and investing in Japan, you can verify the global competitiveness of products in a great test market.

4. Japan has a Complete R&D Environment

Japan has a phenomenal environment for developing technologies in manufacturing-related fields. Japan has world-class research and development quality and abilities, and this manufacturing is done by technologically advanced small and medium businesses that make up 99% of all companies in Japan. In recent years there has been a lot of active collaboration between government, industry, and academia.

Also, Japan has laws in place to protect intellectual property. Protection of intellectual property is essential for the development of high value-added products and services. These protective systems are in place and the government also has developed policies that promoted the protection of intellectual property. The awareness of the importance of these protections is even well-known by ordinary citizens.

5. The World’s Largest Market for Senior-oriented Businesses

Japanese society is currently aging at the fastest rate in the world. Its citizens’ average lifespan is also the highest in the world. For this reason, the demand for services related to life-style support and healthcare, such as care-giving, medical expenses, and care-giving, is very high. This has produced several new business markets. Also, while the population continues to age, awareness about health will continue to grow along with revolutionary technology fields related to biotechnology and healthcare markets.

6. Close Proximity to China– the world’s upcoming largest consumer market

Japan is in an optimal geographic location near East Asia and China, a country that has experienced phenomenal economic growth. A flight from Osaka to Shanghai is only about 2 hours. In addition to its geographic proximity, Japan also shares deep connections with China economically, culturally, and historically. Japan aims to have a wide economic influence in Asia while leveraging to maximum potential its networks with areas in Asia.

The Japanese lifestyle has a great impact on the markets in Asia. Many products and services that are widespread in Japan become popular throughout Asia. For foreign companies, establishing a base in Japan is extremely important for being successful in developing market share throughout Asia.

7. Japan is a Safe and Comfortable Living Environment

In 2010 Japan was ranked 3rd in the world by the Global Peace Index next to New Zealand and Iceland. Japan has the highest ranking among G8 member nations. Japan was chosen as a top country in peace and safety because of its relatively stable political situation, its low danger from terrorism and internal conflict, and its high education level.

Employees from foreign companies who are sent to work in Japan rate Japan as a very easy place to live because of its stability, socially and politically, its completely developed social infrastructure, its complete public transportation systems, its convenient shopping, the kind treatment foreigners receive, and the variety of its eating establishments.

Companies say that the primary barriers to expanding into Japan are the high cost of real-estate & staff wages and difficulties in securing a workforce. However in recent years real-estate prices in the main business areas have been falling and available office space continues to increase. For this reason it’s now possible to rent an office at a reasonable rate in even the heart of business districts. Also, because of the competitiveness among new college graduates with excellent technical skills, it’s possible to hire excellent employees with high skills for lower costs than before.

The Japan has been focusing its efforts with governmental policies that offer incentives such as locational subsidies and tax-deductions in order to attract foreign companies into Japan. As illustrated in the graph below, the amount of actual direct investment into Japan has been increasing at an accelerating rate. The government plans to continue assist in furthering this trend by creating and executing direct investment programs with collaboration at the local level.

(Trillion yen) Total Direct Investment into Japan

Examples of Large Companies who have Expanded to Japan

Hewlett-Packard Japan Co. Ltd.
Overturning conventional wisdom about cheap and overseas production, Hewlett-Packard has successfully produced their computers in Tokyo. Those higher added costs were able to be accepted in the Japanese market.

Proctor & Gamble Japan Co. Ltd.
P&G develops products in-house by combining Japanese technology and products ideas. They have come out with many unique hit products.

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