Tokyo (SCCIJ) – The speech at the July Luncheon with more than 40 guests was about “Inbound Investments to Japan and Recent Trends of Japanese Investment Withdrawals from China”. The speakers were Mr. Paul Leonhardt, Foreign Legal Advisor at Kuroda Law Offices, and Ms. Yuki Onoue, Attorney at Law at Kuroda Law Offices. We present the luncheon talk in Q&A form.
SCCIJ July Luncheon Speaker Mr. Paul Leonhardt, Foreign Legal Advisor at Kuroda Law Offices.
Why should we be interested in investment flows into Japan and China?
Mr. Paul Leonhardt: Given the depreciation of the yen and China’s ongoing economic slowdown, the investment landscape between Japan and China is undergoing significant shifts. These trends reflect underlying economic and geopolitical factors and may impact your business strategies and operations.
What types of investments should we take into consideration?
P.L.: If you look at the Foreign Exchange and Foreign Trade Law, inbound direct investment can be acquiring or transferring shares or voting rights of a domestic company, establishing a business office or changing the purpose of business in Japan, lending money to a domestic corporation exceeding one year, or the assignment or succession of a business from a non-resident to a foreign investor. These are the main areas of foreign direct investment (FDI) by legal definition.
What were the recent amounts and growth rates of FDI in Japan?
P.L.: In 2022, the finance and insurance sector received the highest FDI amount of 1.2 billion yen, almost unchanged compared to 2021. FDI in the transportation sector more than tripled to 730.5 billion yen. FDI in the electrical machinery sector grew by 80 percent to 505 billion yen. However, we have to consider that 2022 was the third year of the pandemic. Hence, FDI inflows were heavily influenced by these circumstances.
(from left) Swiss Ambassador Dr. Andreas Baum, July Luncheon Speaker Ms. Yuki Ounoue, July Luncheon Speaker Mr. Paul Leonhardt, SCCIJ Kanto Vice President Nobuhiro Tajima, SCCIJ EC advisor Mr. André Zimmermann, and Mr. Gregor Muischneek, Embassy of Switzerland.
Where are the main investors in Japan from?
P.L.: Rather surprisingly, almost 43 percent of outstanding FDI in Japan at the end of the year 2022 came from Europe, 24 percent from Asia, and 24 percent from the US. We will see how this develops. During the pandemic, the Japanese government recognized that some supply chains of necessary items like medicines and masks depended on China. European governments had a similar experience and announced their goal to become less dependent on China. This could mean strengthening national production or a redirection of FDI flows into other countries.
There is a lot of political talk about de-risking and decoupling from China. What is Japan doing in this regard?
P.L.: Japan was the first country that invested in China after the Deng reforms. Panasonic set up the first joint venture in 1987. However, Japan was also the first to withdraw net capital from China. The third quarter of 2021 marked the first recorded outflow of Japanese capital from China since 1998. Other countries followed. Last year, FDI in China fell to a 30-year-low of 33 billion dollars on a net basis, about 80 percent down from 2022. Investors reacted to the pandemic, the alignment of China and Russia, the trade war between the US and China, and the economic slowdown in China.
The SCCIJ July Luncheon at the Grand Hyatt Tokyo was fully booked.
How do you assess the current developments?
P.L.: China has set ambitious targets to become the world’s powerhouse until 2029, building R&D centers, high-end projects in semiconductors, sustainable production, and smart manufacturing. In general, it wants to become less dependent on the outside which probably means less FDI. At the same time, China has made life more difficult for foreign companies. In 2021, it enacted the personal information protection law. In 2023, the anti-spying law was amended. This month, the Amendment to the Companies Act was enforced. 17 Japanese nationals have been detained since 2015. Chinese citizens are obliged to report suspicious transactions of foreigners and receive awards of up to 100,000 yuan, about 2.2 million yen.
What does this mean for Japanese and foreign direct investment in China?
P.L.: Very difficult to predict. The Taiwan question is one issue. Many Japanese used to invest in Taiwan, but also in Hong Kong. But the “One country, two systems” principle is virtually dead, it is now more a “One country, one system”. China is a huge market that you cannot ignore as a Western or Japanese company but it is also a very specific market. But the political risks are increasing which also makes FDI more risky.
And how are the perspectives for FDI flowing into Japan?
P.L.: The government of Prime Minister Fumio Kishida is encouraging free trade zones for foreign asset management with relaxed rules for asset managers. This should encourage investment in Japan. Also, foreign private-equity funds have announced huge investment plans for Japan, especially in data centers, health care, robotics, and real estate. Blackstone plans to invest 5 trillion yen in Japan by 2027, the same amount as in the past 17 years combined. Bain Capital, another US private equity giant, will double its investments from the previous five years to a total of over 5 trillion yen by 2029. The Carlyle Group closed a new buyout fund focusing on Japan in May, with capital of 430 billion yen. KKR intends to invest more than 1 trillion yen over the next ten years.
Ms.Yuki Onoue: Also, Taiwanese companies such as TSMC, the largest contract manufacturer for processors, are increasing investments in Japan and some of their suppliers are following as well.
About the speakers
Mr. Paul Leonhardt graduated from Hamburg Law School in 1980 and passed the bar exam (2. State exam) in 1982. During his career, he worked for Deutsche Bank and DZ Bank, among others, in Japan, Indonesia and Hong Kong. He joined Kuroda Law Offices on a freelance basis in August 2020 as a Foreign Legal Advisor.
Ms. Yuki Onoue is an Attorney at Law at Kuroda Law Offices. She graduated from Waseda University, Faculty of Law, in 1995. She specializes in corporate law, with expertise in inbound and outbound corporate acquisitions, capital and operational tie-ups, international transactions, and labor and employment matters.
Text and pictures: Martin Fritz for SCCIJ
