For years Japan had a tourism imbalance. Japanese went and travelled the world, but the numbers of tourists visiting Japan was limited. Under Prime Minister Abe a number of policies were implemented to promote tourism. Since 2011, the number of tourist has surged six fold and has recently eclipsed pre-Covid levels.
In Japanese current account data, Japan now receives more from tourism that it spends. As late as 2014, this balance was negative, but is now extremely positive.
There is another imbalance in the Japanese economy that I think may soon be rectified. Japan, almost uniquely among major economies, has never really had any major foreign direct investment flows. What does that mean in plain English? Foreign companies never built any factories in Japan. While the US has had large FDI flows since 1980, Japan has only recently started to see FDI inflows increase, but still lagging the US.
When we look at net outflows, we can see that Japan has very large outflows. Not as large as the US, but much larger than relative inflows. (I don’t know why the US shows a negative print here for 2019 for the US - data is from World Bank)
How does this compare to China? China is almost the exact reverse of Japan. It attracted huge inflows first, which are now reversing. China now has substantial outflows, as Chinese corporates invest overseas.
Using China data, which is more up to date, it has China moving to a negative FDI position. Direct investment into China has moved negative (implying that existing investments in China are being sold). That is production is being moved out of China.
Data from the United Nations Conference on Trade and Data (UNCTAD), we can get a “stock” value of FDI (basically a sum of all inflows). This seems to imply there is USD4 trillion invested in China, with another USD 2 trillion invested in HK, while Japan has only USD250bn of investment.
There is a stock of near USD 3.5 trillion of FDI in China that is no longer growing, and at risk of rising tariffs, at least in the Western World. I do not know how much of the stock of FDI in China is from Japanese corporates - but a reasonable chunk in my view. The current view is that a large part of the investment in China will be diverted to other markets - India, Vietnam, Bangladesh are the most likely names. The problem with these three is that they are not US military alliance members, and never likely to be. South Korea and Taiwan are members of US military alliance, but both are threatened by near neighbours. It seems to me that investing back into Japan makes the most sense from a geo-political point of view. This seems especially true when gross wages in Japan are inline with other developed Asia.
Japan used to have much more expensive land costs than the rest of Asia. Not only has this premium declined, Japanese property prices seem to be moving inline with the rest of Asia now. Japanese property prices are at level first seen in the 1980s.
Japan is still a centre for an innovation, with 3rd most patent applications globally.
The big question here is whether the Japanese government can enact policies to promote domestic production - just as it enacted policies to promote domestic tourism? Historically Japanese government did just that, but under pressure from Washington, and globalisation, moved more and more production off shore. Japanese industrial production is at 1984 levels.
Currently Japanese politics is in a state of flux, with leadership race for the LDP surprisingly open. The room for a “Japan first” style politician seems to be opening up. Will they grasp the nettle?
Curious if you have seen Brad Setser's work on FDI flows
The TLDR is that almost all FDI is for tax evasion purposes and is not what most have in their heads as "investment". He goes over the World Bank data and he really goes after exactly what you intuit of like greenfield/factories. He claims that is such a small percent of FDI and that people use it interchangeably with actual investment in their heads is wrong.
"The most valuable foreign direct investment in the world today is almost certainly Apple (CA)'s ownership of Apple Ireland. Apple Ireland generates (technically) more of Apple's global profit than Apple (CA) and maybe pays a bit more tax ..."
Brad Setser tweet
This is a link to a tweet on percentage of greenfield FDI...
https://x.com/Brad_Setser/status/1787535329622118419
Yes - I have talked about this - and how I think it distorts a lot of economic data. This type of FDI is now really what I am talking about though - although in terms of market impact, this has been huge.
I always read your pieces on Japan with great interest. What's your take on Japanese infrastructure investments in Asia? Do you see them as a possible engine of growth for the country?
Here’s a bit from my article on the return of neomercantilism in Tokyo for "American Affairs". I’m really curious to hear your opinion on this:
"Xi Jinping announced the BRI in 2013, launching a competition for infrastructure investment in Asia. The rivalry escalated in 2015, when Japan lost a bid for a high-speed rail project in Indonesia. Abe unveiled the Partnership for Quality Investment in that year, in response to China’s launch of the Asian Infrastructure Investment Bank. Although Japan is reluctant to admit that the PQI is an attempt to counter the BRI, the competition is taken seriously by Japan. In 2020, Tokyo secured 240 infrastructure projects in the region, investing $367 billion, compared to Beijing’s $255 billion across 210 projects...
Hironori Sasada observes that expectations among Japanese corporations for overseas infrastructure projects are immense. As Keidanren (Japan Business Federation) announced: “We need to promote infrastructure system exports to emerging countries, including those in Asia, as this strengthens host countries’ basis for growth and creates greater market demand, and that in turn contributes to the growth of our economy.” (https://americanaffairsjournal.org/2024/05/japans-quiet-revolution/)
So I agree that Japan is competing with China for influence in the region- and this is great for the region. However, Japan has been investing in Asia for decades, with no meaningful effect on GDP growth at home. In Trumpian thinking, they have just been building up economic competitors that have put downward pressure on wages at home. I think a policy that focuses on growing investment in Japan would make a huge difference...
policies to promote domestic production , would have to start with an effective framework for migrant workers. I don't know if the Japanese are ready for that. But Japan would definitely be a great place to establish businesses if it chooses to be hospitable to foreign companies and workers. Making all regulation and governments services available in English would also make a huge difference.
Already huge increase in number of South Asians working in Japan
I think that Japan and China (for different political reasons) have swapped places. Japan has chosen aggressive reflationary policies whereas China has decided to "lie flat" and opted for deflation.
The strongest equity market in Asia (recent rout notwithstanding) is in Japan, while the strongest bond market is in China.
Japan can devalue without upsetting the world now - while China cannot
VERY important point.
Ultimately, the events of the last 10 years have taught me that it is the consumer that holds upper hand. The USA is still the consumer of last resort (for all its pros and cons).