Thursday, March 6, 2008

Japan and Inward Foreign Investment

Michiyo Nakamoto discusses Japan's apparent willingness to erect new barriers to foreign investment in the FT's March 2nd issue. Nakamoto remarks on what may reasonably be described as a landmark speech given on January 24th by MITI's top bureaucrat Takao Kitabata. Kitabata's speech, which was widely reported in both the domestic Japanese press as well as the international press, was significant in that it signalled a potential shift in Japan's attitude towards foreign investment. Kitabata suggested that companies should have the right to choose their shareholders (an apparent reference to the traditional system of publically traded firms cementing business relationships through cross-shareholdings) and described shareholders as being '"fickle, irresponsible and greedy."' Although Kitabata was criticized and made to apologize for the speech by his political boss, MITI Minister Akira Amari, it would not be unreasonable to interpret his criticism of his "underling" for having said too much rather than having said something factually incorrect. As an example of foreign reaction to the speech, Nakamoto quotes a "European hedge fund director" as questioning "`"Do I want to be here [in Japan]? [Kitabata's] comments just pushed people over the edge who were already near the edge."

My goodness! The fear of having speculative hot money yanked out of the Japanese market must be causing sleepless nights for Japanese bureaucrats and central bankers. Not. Even amobeas are probably aware that Japan runs a massive current account surplus that has persisted for most of the past quarter century. It has been frequently noted by international trade economists that a country running a current account surplus must necessarily have an excess of investment capital to investment (a good explanation that this is the case can be found here). Simply put, Japan does not "need" foreign investment. So why has Japan opened its doors to foreign investment over the past 15 years? Because Japan needs foreign investment.

This apparent contradiction is resolved when one understands that Japan has welcomed foreign investment in order to reform sectors of its economy (most importantly real estate) nessessary for it to achieve a new and higher level of economic prosperity. It also suggests that the willingness of Japan to accept foreign investment is predicated ultimately on that investment advancing Japan's economic development. That few foreign investors understand such concepts is well understood by Japanese policymakers with a long institutional memory of rapacious westerners happy to spout economic theories of mutual benefit through open trade while looting and pillaging lesser developed countries. In this sense, Kitabata's comments are a none-too-veiled threat to such foreign investors that they and their money may no longer be welcome.

Nakamoto goes on to quote an HSBC analyst as saying that Japan has the choice to either '"become a more U.S. style capitalist economy . . . . [or] put up the barricades, block foreign investment and immigration [and] allow companies to be more paternalistic"'. What balderdash. That western analysts can't conceive of successful economic models different from their own simply means they are utterly unprepared for the world of the 21st century where alternative models of economic development in countries as diverse as Japan, China, Korea, India, Russia and Brazil will be shown in lesser and greater ways to offer workable models of economic development that contrast with U.S. style capitalism.

Foreign investment that improves the Japanese society and economy is now and will continue in the future to be welcomed. Such investment adding to Japan's national well-being will in turn be allowed to earn for its investors a return sufficient to attract such inward investment. Such investment will necessarily be a two-way street and will be managed as such without regard to western sentiment and economic theories.

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