FDI into Japan Reaches Record High for Second Straight Year in 2008

By Akira Yasuda
International Economic Research Division
Overseas Research Department
JETRO Tokyo

Net foreign direct investment (FDI) inflow into Japan (balance of payment basis) reached a record high for the second consecutive year in 2008, reaching US$24,550 million, up 10.7% from US$22,181 million recorded the previous year (see Note 1), while figures for 2009 appear to be declining.

M&A transactions account for majority of FDI inflows
Gross capital inflows for 2008 reached a record high of US$73.2 billion, while gross capital outflows rose significantly to US$48.6 billion, which is not far behind the US$52.5 billion recorded in 2006. The high outflow figure could be attributed to deteriorating economic conditions in industrialized nations.

Most of the inflows came from additional investments made by financial institutions and companies seeking to boost the capital of their Japanese subsidiaries. According to the Bank of Japan (see Note 2), 82.5% of Japan's inward FDI in 2008 was classified as "additional M&A investment." This percentage was well above figures recorded in recent years: 34.5% in 2005, 53.8% in 2006, and 57.1% in 2007. Initial M&A investment accounted for just 15.7% of FDI, the lowest level since 2005.

Despite record net inflows in 2008, substantial declines in M&A activity in 2009 are expected to push the net inflow figure down.

U.S. remains largest investor by far
Looking at the breakdown of FDI into Japan by major investing country and region (see Table 1), North America remained at the top of the list, with US$12 billion, which is comparable to the level seen in 2007. Of the US$11.8 billion investment made by U.S. companies, most (US$10.7 billion) was in finance & insurance. A major contributor was the additional purchase (US$4.7 billion) under the three-way merger transaction (stock swap M&A whereby shares of the parent company were used to pay the purchase price) implemented by Citigroup of the U.S. in Nikko Cordial Securities Inc. in the first quarter. Also, Citigroup was reported to have made an additional investment (370 billion yen) in Nikko Citi Holdings Inc., which the U.S. bank purchased under the aforementioned transaction, in the fourth quarter.

Direct investment into Japan from Asia doubled to US$3.4 billion, with the majority in real estate. The purchase of Westin Tokyo (a hotel) by Singapore's sovereign wealth fund, GIC, for US$700 million, is one notable example.

Direct investment from Western Europe increased by 1.6% to US$4.9 billion, with major investments coming from Switzerland, the Netherlands, Ireland, Germany, and others, in the first half of 2008. An inflow of US$2.1 billion came from Switzerland in the second quarter in the wholesale & retail sector, possibly led by the additional purchase of Seiyu shares by a sub-subsidiary of Wal-Mart in Switzerland. There was also a large inflow of capital from the Netherlands in the chemicals & pharmaceuticals and petroleum sectors, as well as from Ireland in chemicals & pharmaceuticals. And German automotive parts manufacturer Bosch increased its stake in its Japanese subsidiary with a US$900 million investment. On the other hand, there was a marked capital outflow to Western Europe in the second half, mostly in the fourth quarter. Japan recorded a net capital outflow (of US$1.1 billion) with the U.K., due to large withdrawals by firms in the chemicals & pharmaceuticals and wholesale & retail sectors.

From Central and Latin America, the Cayman Islands invested US$3.6 billion, which was 2.43 times the amount invested by the island nation in the previous year. Among others, the U.S. investment fund JC Flowers raised its stake in Shinsei Bank via the Cayman Islands with a US$1.8 billion investment

Table 1: FDI into Japan by Investing Country and Region (net inflows, balance of payment basis)
(Units: US$ million, %)

Click table to enlarge

Notes:

• Published yen-denominated quarterly figures were converted into US dollars at the average Bank of Japan interbank rate for each period.
• "-" indicates net outflow.
• "." indicates that no record is available.
• Rate of growth in comparison to the previous year.

Source: Compiled by JETRO using "Japan's Balance of Payments and International Investment Position" (Japan Ministry of Finance) and "Foreign Exchange Rates" (Bank of Japan).


Highest percentage of net investments in finance & insurance
Looking at the breakdown by sector (see Table 2), finance & insurance stood out with a net inflow of US$19.8 billion, which accounted for 80.7% of net FDI into Japan. The non-manufacturing sector accounted for 90.8% of total net FDI, while the manufacturing sector accounted for just US$2.3 billion.

Table 2: FDI into Japan by Sector (net inflows, balance of payment basis)
(Units: US$ million, %)

Click table to enlarge

Notes:

• Published yen-denominated quarterly figures were converted into US dollars at the average Bank of Japan interbank rate for each period.
• "-" indicates net outflow.
• "." indicates no investment recorded.
• "0" indicates the amount is less than US$ 1 million.
• Rate of growth in comparison to the previous year.

Source: Compiled by JETRO using "Japan's Balance of Payments and International Investment Position" (Japan Ministry of Finance) and "Foreign Exchange Rates" (Bank of Japan).


(Note 1) Original yen-denominated figures were converted into US dollars by JETRO, based on balance of payment statistics for the fourth quarter of 2008 published by the Ministry of Finance on April 8, 2009. More detailed data on the breakdown of foreign direct investment into Japan by investing country and region can be downloaded from the JETRO website. Although the figures published by the Ministry of Finance are denominated in yen, JETRO converted them into US dollars for comparison with past published figures, which were also denominated in US dollars, and other relevant figures from foreign sources.

(Note 2) The "2008 Trend of International Trade Balance (Flash Report)" (Bank of Japan, March 2009). This report analyzes flash figures which are different from confirmed figures. Nonetheless, it does provide useful guidance for reference purposes.

More Macroeconomy and Regulations Industry Information