Investment in a country by foreign companies is referred to as foreign direct investment (FDI). Examples in Japan include the U.S. company Apple’s investment to establish a technology center in Yokohama, investment by Taiwan Semiconductor Manufacturing Company (TSMC) to establish a factory in Kumamoto, and capital investment by the Swiss company Roche in Chugai Pharmaceutical.
The cumulative amount (outstanding balance) of FDI in Japan at the end of 2023 was 51 trillion yen, more than eight times as large as the 6 trillion yen that had been undertaken as of the end of 2000. Under the Basic Policy on Economic and Fiscal Management and Reform 2023, the government upheld the goal of increasing the outstanding balance of FDI in Japan to 100 trillion yen by 2030, but the target figure was later revised upward to 120 trillion yen.
While investments are steadily expanding, if GDP size is taken into account, the scale of FDIs in Japan is among the smallest in the world. The ratio of FDIs in Japan to GDP at the end of 2023 was 8.5%, placing the country 192nd among the 198 countries/regions for which data is available, according to the UN trade & development (UNCTAD) (see the figure below).
Naturally, the ratio of FDIs to GDP tends to be smaller for countries with large economies. Nonetheless, the ratio is 46.1% for the United States and 19.9% for China. The ratio for South Korea, at 16.8%, is nearly twice that of Japan. A higher rate does not necessarily mean better welfare, but Japan ranks that lowest among advanced economies. The low ratio means that for foreign companies, Japan is a very closed country or unattractive country and indicates that it is failing to harness overseas dynamism.
◆◆◆
Why, then, is inward FDI in Japan so low? Answering that question is more difficult than you might expect. To understand why Japan is not selected as an investment destination, it is necessary to closely examine the behavior of companies that have refrained from advancing into Japan. In other words, analyzing companies that have entered Japan does not answer the question, so it is necessary to conduct a comprehensive analysis of FDI in other countries around the world. Because of these difficulties, academic research to date has been unable to identify any single decisive factor inhibiting FDI into Japan.
Even so, accumulated research allows for the derivation of possible hypotheses. This article will present four hypotheses based on recent research. The first is that the Japanese market is a highly competitive market, making it difficult for foreign companies to both enter and thrive.
Dobbelaere, Kiyota, and Mairesse (2015) conducted a comparative study of markup rates (profit-to-cost ratio) between Japanese, French, and Dutch manufacturing companies. The study confirmed that the markup rate tends to be lower among Japanese companies than among French and Dutch companies. Although this comparison covers only a limited number of countries, this finding indicates that companies face difficulties in earning significant profit because the Japanese market is price competitive, which may be a factor inhibiting inward FDI into Japan.
The second hypothesis is that Japan’s demographic situation, and specifically that the aging of society and low birth rate are together an inhibiting factor. Hirakata and Katagiri (2025) pointed out that the long-term pattern of FDI can be explained by the demographic aging of society coupled with a low birth rate.
As for outward FDI, the declining working-age population encourages Japanese companies to shift their international supply strategy from exports to outward FDI. The labor shortages in Japan also contributed to an unfavorable environment for foreign companies in terms of investing in the country.
According to the Ministry of Internal Affairs and Communications, the share of people aged 65 or older rose from 17.4% in 2000 to a record high of 29.3% in 2024. Over the same period, the outstanding balance of Japanese FDI on a net basis, that is, the balance of outward FDI (FDI made by Japanese companies into foreign countries) minus the balance of inward FDI, expanded from 26 trillion yen to 299 trillion yen. Given this reality, the pattern of Japanese FDI may indeed be a reflection of its demographic aging.
Furthermore, a study by Hirakata and Katagiri showed that the fixed costs associated with FDI into Japan are very high compared with the costs associated with outward FDI. This indicates that the high cost of entering the Japanese market may itself be an impediment to FDI in Japan.
The third hypothesis is that the language barrier is an inhibiting factor. According to Hejazi and Ma (2011), countries where English is an official language tend to attract more FDI than others. Meanwhile, according to a survey by the Japan External Trade Organization, communication in English is viewed as one of Japan’s weaknesses as an investment destination.
In the English proficiency rankings published by “EF Education First” (Switzerland), which manages language schools around the world, Japan ranks second from the bottom among the member countries of the Organization for Economic Cooperation and Development (OECD). South Korea scored 17% higher than Japan, despite the Korean language, like Japanese, having low similarity to English (based on the database provided by Melitz and Toubal (2014)). This suggests that English communication ability may be a barrier to investment in Japan.
The fourth hypothesis is related to Japan’s enormous public debt. Dell'Ebra and Reinhardt (2015) has shown that large public-debt-to-GDP ratios are negatively correlated with FDI. As high public debt raises concerns over risks related to tax hikes or even default, companies may avoid investment. According to the IMF, Japan’s ratio of public debt to GDP in 2023 was 240%, the second highest among the 192 countries for which data is available. Therefore, this enormous public debt may also be a factor deterring FDI in Japan.
Whether or not those hypotheses prove valid after taking other factors into consideration requires further research; however, given the research to date and the current circumstances of Japan, the hypotheses are entirely plausible and deserve further examination.
◆◆◆
The government has a large role to play in expanding FDI into Japan. Given that FDI has steadily increased in Japan in the past several years, governmental initiatives in recent years, such as speeding up various procedures and revising the residency qualifications, have been successful to a certain extent. In the short run, it is important to maintain these initiatives and continue to improve the investment environment.
Improving the investment environment may not only increase FDI in Japan but also contribute to domestic investment by Japanese companies. However, even if Japan’s investment environment has improved, we must recognize that investment environments in other countries have also improved and in most cases to a greater extent than in Japan.
If the abovementioned hypotheses are plausible, we may say that the demographic crisis, communication in English, and the enormous public debt are challenges that must be resolved in the medium to long term. Policymakers will need to address these from a medium- to long-term perspective.
Moreover, in recent years, economic security has become an additional critical policy challenge. The new Takaichi administration has announced plans to strengthen screening procedures for inward FDI, but in order to achieve the government’s goal of increasing the outstanding balance of inward FDI to 120 trillion yen, it will be essential to conduct reviews that are both rapid and transparent.
With respect to economic security, it should also be kept in mind that inward FDI can also be indirectly routed through low-tax jurisdictions and other intermediaries. One effective way of addressing such indirect investment is to improve statistics to capture not only the immediate investing country but also the ultimate beneficiary owners who control investing entities. There still seems to be much that can be done.
>> Original text in Japanese
* Translated by RIETI.
December 4, 2025 Nihon Keizai Shimbun
