Investing in Japan
PART 6: Despite Japan's slumping domestic consumer demand, the world's second strongest economy will remain a formidable global force built on government-industry co-operation, a strong work ethic, its mastery of high technology and other factors.
Modest domestic consumer demand coupled with the slowdown in the U.S. economy is expected to negatively impact Japanese economic growth for the remainder of this year. But 2009 should see a stronger performance as the U.S. starts to recover, and demand for Japanese exports increases, says Export Development Canada (EDC) economist, David Madani.
Mr. Madani says Japan's growth will be impacted in 2008 and possibly 2009 due to a softening of the domestic economy coupled with a slowdown in demand for exports. "This will be a challenge in 2008," he says.
Although 2009 should be a better year than 2008, Japan's economy is expected to continue struggling with longer-term economic challenges that will hamper its ability to emerge from a modest growth cycle.
"For example, Japan's demographic profile is of an aging population, which contributes to a shrinking workforce as workers retire. On top of that, low population growth means the number of new entrants to the workforce is also contracting," says Mr. Madani.
Economic stagnation is also a concern to some analysts. An EDC country report on Japan, for example, says some positive growth in prices is expected early this year as higher energy and food prices and tight labour conditions increase inflationary pressures.
However, it also notes deflation is a lingering risk as the Japanese economy works near full capacity in 2008 with companies unable to pass through higher input costs. Nevertheless, as the world's second strongest economy after the U.S., Japan will remain a formidable force globally built on government industry co-operation, a strong work ethic, mastery of high technology and a comparatively small defense allocation.
To put the Japanese economy in perspective, Kyushu, the country's southern island, alone has a GDP roughly the same size as British Columbia and Alberta combined. Kanto, the area around Tokyo, has a GDP the size of Italy and larger than all of Canada. Japan is also a gateway to Asia and is steadily increasing trade relations with emerging Asian economies including China.
Yasunari Miyauchi, deputy executive director of the Japan External Trade Organization ( JETRO) in Toronto says one of the Japanese government's key strategies to stimulate the economy has been the active encouragement of inward foreign direct investment (FDI).
"Japan's FDI to GDP ratio was a relatively low 2.5 per cent in 2006 compared to 30.4 per cent in Canada and 13.5 per cent in the US," says Mr. Miyauchi. "However, the government has a target to increase that figure to five per cent by 2010."
JETRO is the lead government agency for achieving this goal through promotion of FDI and support for foreign companies wanting to set up offices or facilities in Japan.
Mr. Miyauchi says many of the issues that were seen as impediments to investing in Japan have been addressed since the mid-1990s. "In particular, the cost of investment has decreased, complicated distribution systems have started to open up, and administrative procedures have become easier to deal with," he says. As an example, Mr. Miyauchi says Japan has worked to internationalize its accounting standards and reform its legal framework. "It is now easier to establish a new company in Japan with the abolition of minimum capital requirements, flexible corporate management rules,
and more flexible merger compensation such as cash out merger, triangular merger in cashless transactions."
According to JETRO's survey of foreign firms in Japan, their biggest challenge is finding staff, particularly engineers and senior management.
Mr. Miyauchi says while some Canadian companies in Japan have been hurt by the high dollar, others have taken advantage of new opportunities created by a reduction in the relative cost of investing in the Japanese market.
"To succeed in the Japanese market, Canadian companies can no longer rely on a cheap dollar to create an artificial discount on their products. Now, they must be more pro-active in their marketing and business development by increasing their presence in Japan," he says.
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