Investment Risks in Japan

Investment Risks in Japan

Abstract

Globalization has become a major trend in the modern world, which has made many cross-borders transactions and investments economically feasible. Thus, before investing in any foreign nation, potential firms should make a critical analysis of the foreign market to consider whether their investment will be beneficial or not. This discussion paper is an investment feasibility study on Japan. The paper gives an in-depth analysis of the investment risks in Japan in terms of economic risks, geographical risks, political risk factors, legal systems, technology and infrastructure factors, cultural and social risks. At the end of the discussion, the paper gives concluding remarks on whether it is economically viable to invest in Japan.

 

 

Investment Risks in Japan

Background Information about Japan

Japan is a country that is bordered by the Sea of Japan from the east side of the coastal region of Asia. The country has four main islands namely Honshu, Hokkaido, Kyushu, and Shikoku. Japan’s neighboring countries are Korea, China, and Russia. Japan’s current population is estimated to be 127,290,000 people, and the country covers a land are of about 377,959 square kilometers (Paraušić, Cvijanović, Mihailović, & Veljković, 2014). Japan uses Yen as its national currency to transact businesses. The language used in the country is the Japanese. The main religions in Japan are Shinto, Buddhism, and Christianity. The capital city of Japan is Tokyo City, with an estimated population of 13,222,760 people. The city covers an approximated land area of 2,188.65 square kilometers (International Monetary Fund, 2012). In 1989, Emperor Akihito came into power as the 125th emperor of Japan. The emperor is a sign of unity among the Japanese people that the state citizens share. The type of leadership in Japan is a constitutional monarchy with a parliamentary government. Japan has a fast growing economy that is driven by various industries. These are automobiles industries, electronics manufacturing sectors, machinery, computers, and other electronic productions (International Monetary Fund, 2012).

Japan prides for having the third biggest economy in the world as compared to other countries. Japan is placed as the second main export market to the United Kingdom after Europe and the United States of America. The country also prides for being one of the promising investors in the United Kingdom. The Gross Domestic Product of Japan exceeds that of UK by 150 percent and her GDP per capita exceeds that of China by about 600 percent (McCreary, 2013). Japan remains to be a prominent high-tech powerhouse economy on the continent of Asia. The country has second highest spending worldwide in research and development. The country also has a great motivation for intellectual property and emerging trends as well as an increasing globalized outlook. The households in Japan have financial assets that are worth 1645 trillion Yen, an amount that accounts for more than 300% of the country’s Gross Domestic Product (Lai Kuen, 2013). The major economic driver in Japan is exports despite the external demand that represents 16% of its total Gross Domestic product (Chu, 2015). Since 2012, the average yearly growth of the economy has been estimated to be at 1% (Chu, 2015). According to the OECD, Japan’s economy is projected to grow by 0.7% in the year 2015 and by 1.4% in the year 2016 (Paraušić et al., 2014)

Economic Risks

Japan’s economy has been affected by some economic factors. A crucial long-term challenge for the country is its rapidly aging and declining population. The population projections indicate that the Japanese population is likely to reduce from 127 million to 117 million in the next decade (Chu, 2015).

Japan’s economy is also affected by the following factors. The Triple Weaknesses - the country has a weak market for bonds, a weakening national currency the Japanese Yen, and a weak stock stemming that came as the result of the delay of the additional tax hike on consumption. In addition, China’s banking problem shadows Japan’s economy as well as changes in the state of economies of emerging countries as the result of the exit strategy of the United States and a global decline of the value of stock resulting from risks associated with geopolitics

Another major challenge to investment in Japan is the fall in the value of the Yen (Tanaka & Hosoe, 2011). The fall of the currency value has not brought an increase in the country’s exports. It came as the result of recent off-shoring activities of the manufacturing operation in Japan. Another reason for the fall was the declining competitive edge of some of the nation’s firms (Ng, Li, & Chan, 2011).

The large public sector debt in Japan currently stands at over 245% of the GDP (Prasad & Sharma, 2015). In April 2014, the country increased the rate of consumption tax from 5% to 8%. There is a proposition to have a second rise in VAT to 10% although it has been postponed until the year 2017 (Prasad & Sharma, 2015). Late last year, the Japanese government put in the economy a $29 billion stimulus package with an aim to boost the economy of the country (Hayakawa, Lee, & Park, 2014).

The natural resources in Japan are limited. The country has a high dependence on oil and gas resources. It also depends on food resources and raw materials for the industrial productions. The dependence issue has been on the increase as the result of the tsunami of 2011. The effects of the tsunami led to the closing of the country’s nuclear reactors, which translated to the increase in the amount of energy imports.

Recommendations

To curb the above risk factors and combat inflation, Japan has come up with an economic policy known as ‘Abenomics’ through the ‘three arrows’. These are the reforms aimed at monetary easing, bringing about a flexible fiscal policy, and restructuring reforms in the country. The economic policy has strengthened the rate of exchange rate of the Japanese Yen. It has brought significant improvements in the stock market and increased investors’ confidence in Japan. It has resulted in a greater coverage of corporate investment. Japan should also engage in viable negotiations with the U.S.A, Trans-Pacific Partnership members, and members of the European Union on the Economic Partnership Agreement (EPA). These negotiations will be helpful in addressing the structural reforms of the arrow policy and improve the agricultural energy sectors and reforms in issues of corporate governance corporate governance (Lai Kuen, 2013).

Environment/Geographic Risk Factors

Japan is the country often affected by many natural disasters. Japan is an earthquake zone, but it is also affected by typhoons. Typhoons occur between the months of June to December. During such times, the greater risks are in the southern parts of the country. Damaging high tides accompany the typhoons; thus, the people living in the coastal areas are at risk. Landslides occur anywhere. The dangers escalate when an earthquake strikes after a typhoon (Prasad & Sharma, 2015). The 2011 nuclear incident in Fukushima has also been an environmental risk factor in Japan.

Recommendations

When an earthquake or tsunami strikes, the visitors in Japan should be aware of safety procedures. The hotel rooms also have emergency instructions. The Japan Meteorological Agency and the US Federal Emergency Management Agency have guidelines on Tsunami warnings. Information on tropical cyclones is also available to provide advice on what to do in case of a storm.

Society /Cultural Risk Factors

Social evils such as crime, terrorism, and corruption are also major investment impediments in any economy. Tokyo has areas like Roppongi and Shinjuku that pose higher risk of crimes. Drug abuse and drink spiking with substances such as Rohypnol are common in urban centers. The country also has many cases of assaults on victims, with most of them losing consciousness. During such time, the credit cards of these victims are fraudulently billed with large amounts. Japan also has some organized crime syndicates called the Yakuza. These crime groups tend to operate mostly in the construction and entertainment industries (Lektzian & Biglaiser, 2012). The Japanese also have strong uncertainty avoidance. They have respect for authority; thus, cultural differences do not pose greater challenges to foreign investors.

Recommendation

The Japanese government should come up with stringent measures that help minimize cases of social evils to attract more investors. Firms that have business undertakings in Japan should develop effective contingency plans to curb the evil actions of the Yakuza. People also join these groups illegally; thus, the police should put crackdowns to target such groups. Those who are victims of social evils should attract attention and seek assistance by shouting for help.

Political Risks

The Japanese government is made up of a constitutional monarchy. Thus, the emperor’s power has restrictions as far as ceremonial duties are concerned. Current Japanese Prime Minister has promised to restore Japan both in economic, domestic, and international resilience. The restoration is meant to take care of the deflation in the Japanese economy over the past two decades. The political leaders have come up with a policy platform that is based on two core values. The economic stimulus and structural reforms called the ‘Abenomics’ is the major package for policy reforms. Security reforms and increased diplomatic activities forms the second values that have been adopted (Johnsey, 2011).

Legal Systems

Intellectual Property

Japan has a stringent Intellectual Property framework that has similar principles with the UK. The legislation in the country has clear terms and full enforcement. The country also makes recently available changes to the IP system to have a close focus to supporting and encouraging innovations in business. In 2014, the patent processing waiting times were reported to take duration of less than eleven months (Anyika, 2015). Japan is also a party to the Madrid Protocol for the International Registration of Marks and the World Intellectual property Organization (WIPO) (Anyika, 2015).

Transparency Issues, Human Rights and Corruption in Japan

Bribery is an illegalized act in all countries. The country has placed high rates as far as personal and press freedoms are concerned. Japan has an independent judiciary that is highly committed to ensure the rule of law. The laws of Japan meet most of the international standards on civil and political rights. The main challenge in this front is the United National Human Rights Committee’s (UNHRC) periodic reports that raise concerns on issues of racial discrimination, equality, and hate speech (Waring, 2011). Japan has a strict application on death penalty, stringent rates on conviction rates, and use of force on confessions. All these issues have risen a great deal with the rights committee.

Technology Factors

Japan harbors one of the biggest economic sectors in technology. The country is very prominent in electronics, robotics, automotive and the automobile industry. Japan has built a competitive industrial sector that is a very vital strategy for survival and success in the rapidly changing new economic environment. Any new firm that wants to venture in Japan should emphasize an outward-oriented industrialized strategy and raise the levels of domestic savings and investment.

Conclusion

From the above discussion, it is evident that Japan offers minimal risks for foreign investors who would like to invest in the country. The Japanese government also works tirelessly to minimize the barriers and risk factors to attract more foreign investors. Japan has become a popular country that many investors want to venture in. Even though Japan has some risk factors in some areas, the levels or risks are far much lower as compared to other countries. The success factors in the country outweigh the risk factors. The country has welcomed foreign investors to the country and investments in different sectors for economic development. Hence, according to the analysis, Japan is a country that is very suitable to invest in a foreign nation with companies that would like to invest in electronics, automobiles, and the automotive industries.