U.S. Direct Investments in Japan Offer the Highest Yields Among Major Industrialized Nations

For U.S. companies, Japan is an attractive investment destination offering high investment yields. U.S. direct investments in Japan offer the highest yields among the country's direct investments in major industrialized nations, exceeding the global average including developing countries. This report compares the direct investments in major industrialized nations by U.S. companies by country and industry to examine which industry in Japan is relatively more attractive as the target of direct investment.

Yields from direct investments in Japan are 1.5 to 2 times the yields from E.U. industrialized nations

U.S. direct investments in Japan offer the highest yields among the country's direct investments in major industrialized nations, exceeding the global average. The table below lists the U.S. direct investments in six major industrialized nations (G7 member nations other than the U.S.) as well as global average investment yields from the corresponding countries. To absorb yearly variations, five-year averages were used in the comparison. The shaded fields indicate the countries offering the highest yield in each applicable industry.

Note: The yield is calculated by dividing the direct investment income by the direct investment position at the end of the previous year. The global averages include data from countries other than those listed above. The shaded fields indicate the countries offering the highest yield in each applicable industry.
Source: U.S. Department of Commerce

Direct investment yields of U.S. companies from Japan averaged 13% per annum from 2001 through 2005. This figure not only exceeds the global average of 10%, but it is also the highest among all G7 nations.

During the period, Japan's economic growth rate was not particularly high. On the contrary, it lagged behind other industrialized nations in most of the period. In this sense, the high yield from the country is particularly impressive.

In addition, yields from direct investments in Japan were the highest among major industrialized nations in all years studied, including 2001 when both Japan and the U.S. grew at slower rates than their European counterparts. In addition to high yield, another feature of direct investment in Japan is stability. This makes Japan an attractive direct investment destination in a different sense than what makes emerging economies attractive.

Professional services for businesses are reaping high yields

When the data is analyzed by industry, yields from many industries in Japan are producing relatively high yields among industrialized nations. In the manufacturing sector, electrical equipment, appliances and components, and transportation equipment, are doing well. The manufacturing sector offers the highest foreign investment yields on average among all industries in Japan. In the service sector, investment yields from the finance (except depository institutions) and insurance industry, as well as professional scientific and technical services industry, are the highest in Japan compared to other industrialized nations.

Among others, investment yields from Japan's professional, scientific and technical services are outstanding, as they are more than twice the levels in other industrialized nations. Professional, scientific and technical services include computer system design services, consulting services for businesses, advertisement media services and market research services. These services represent a growth segment that also offers high yields in the U.S. and where employment is expanding. Also, Japan offers high foreign investment yields in the "finance (except depository institutions) and insurance" industry that encompasses securities companies and insurance companies.

Other industries that offer high direct investment yields include food, chemicals, computers and electronic products, and information. With all these industries, Japan offers the second highest yield among the industrialized nations listed in the table. The food industry includes beverage and tobacco manufacturers, the chemicals industry includes drug and pharmaceutical companies, and the information industry includes Internet and other media companies, movie studios and telecommunications companies.

On the other hand, direct investment yields are low in the areas of primary and fabricated metals and depository institutions in Japan. The average yields from these industries over the past five years are significantly lower than the yields from their counterparts in other industrialized nations and also compared to the global averages. In particular, the investment income from Japanese depository institutions is negative, as is the case in Italy. Analysis of yearly figures finds that the investment income from this particular industry was negative in four years from 2001 through 2004 (2005 data is not available).

Direct investment yields from Japan are increasing further due to recovery of the Japanese economy

High levels of direct investment yields from Japan present a desirable condition not only for U.S. companies, but also for Japan itself. The direct investment yields of U.S. companies from Japan in 2001 through 2005 show that the yields rose toward the end of the period when earnings of Japanese companies began picking up. While the investment yield over the first two years (2001 and 2002) was 11%, the yield over the last two years (2004 and 2005) was 17%. As the Japanese economy performed better, direct investment yields of U.S. companies from Japan rose further.

Also, it is likely that an influx of direct investment money from foreign companies boosted the efficiency of the Japanese economy. The relationship between the economic performance of the investment destination country and the income performance of invested companies is not one-sided. Instead, both are complementary and mutually dependent on each other. In this sense, inward direct investment is a means for bringing benefits to both the investor and the country receiving investment.

Not only Japan but all countries in the world also view promotion of inward direct investment as an important means for boosting their economy. Although this report discusses foreign direct investment by U.S. companies, we can draw an important conclusion from the argument. That is, Japan is a stable investment destination among industrialized nations, not competing against China and other emerging economies. We should emphasize that Japan has actually offered the highest investment yields among major industrialized nations in recent years. Looking at the data by industry, average yields over the past five years show that the entire manufacturing sector excluding primary and fabricated metals, as well as the service sector including professional, scientific and technical services for businesses, are particularly attractive investment sectors in Japan compared to other industrialized nations.

Source: American New Policy, a Japanese journal, published by JETRO.
By Kengo Moro, Director of Research, JETRO New York.

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