No entry: Japan retreats

TRADE:When Japan offered to pay thousands of Latin American immigrants to go back home and never seek work there again, questions were once again raised about the country's attitude to foreigners, writes DAVID MCNEILL

FOR SOME, it was a sign that Japan was again turning its back on the world. Last year, as the recession bit down hard on the industrial town of Hamamatsu, the local government made a cold-hearted offer to thousands of Latin American immigrants: it would pay them to go back home – as long as they agreed not to look for work in Japan again. Some had invested 20 years in the country and had children who knew nothing about Brazil or Peru.

“It showed that Japan is still uncomfortable with foreigners and with the realities of the modern world,” lamented Hidenori Sakanaka, director of the independent think-tank Japan Immigration Policy Institute.

Not that long ago, two competing versions of Japan vied for analytical supremacy. One, “Japan Inc”, referred to the insular, protectionist regime that came under heavy fire during Ronald Reagan’s America.

The other was the transformation model: the notion that Japan was becoming “more like us” as its economic, political and social institutions converged with the west and it embraced the world.

Two decades after the old Japan tottered along with the nation’s overheated stock and land markets, the balance seems to have shifted decisively toward transformation. The world’s second largest economy is increasingly vibrant and internationalised. Japanese corporations are heavily investing abroad – $78 billion in foreign acquisitions in 2008 alone.

Foreigners in turn have splurged on Japanese stocks for much of the decade since local firms began dumping cross-shareholdings, at one stage in 2006 owning about a quarter of all Japan’s stock – before a turnaround. And according to the Japan External Trade Organisation, net foreign direct investment into the country hit a record high of $24,550 million in 2008.

Even critics accept the days when trading with Japan was mostly a one-sided affair have now ended. Japan’s trade balance fell to a deficit of 725.3 billion yen in the year ending March 2009. Although plummeting global demand was the main factor, the country’s first full-year loss in 28 years shows times have changed, say analysts.

“Japan is now one of the most open countries in the world because, with the exception of rice and agriculture, they are one of the biggest traders in the world,” says Martin Schultz, senior economist at the private think-tank Fujitsu Research Institute. “A lot of the old models need to be revised.”

Yet on closer inspection, the world’s second-largest economy still has its dark corners. The number of foreign-owned companies listed on the Tokyo bourse has dived to a quarter of the 127 recorded in 1991, and several foreign investment companies have been, in Schultz’s words, “bullied out” of Japan.

Among the best-known cases is Steel Partners Japan Strategic Fund, which was blocked in 2007 from a hostile takeover attempt of Bull-Dog Sauce Co. Bull-Dog’s defence strategy, later supported by the Tokyo high court, has since been copied by hundreds of listed firms in Japan, according to Nomura Securities Co.

The reason, says Schultz, is simple: doing business in Japan can still be a trial. And Japan is wary of foreign takeovers, especially by companies it feels are looking for a quick buck.

“Japanese corporations are concerned about firms that just want to make a profit – that sounds almost wrong to Japanese ears. In Japan business is about stakeholders, including employees and pensioners, not just stockholders.”

Signs of retreat from the world don’t stop at the economic. Take the fall in the number of Japanese students going abroad, which has been declining since 2004. Roughly 80,000 Japanese students now study outside the country, far fewer than, say, Korea with less than half Japan’s population. The fall has been particularly sharp in the US: 34,000 Japanese students went to American universities in 2007, down from 47,000 in 1997.

“Japanese are less eager to study or work abroad than 20 or 30 years ago,” says Glen S Fukushima, chief executive of Airbus Japan. He says many Japanese prefer staying at home, where life is clean, safe and secure, and that the country is becoming more insular. “Japan is lagging behind most other Asian countries in its acceptance of tourism, inward foreign direct investment and use of English.”

Then there is immigration. Despite a string of signals from the business and political worlds that a looming population crisis will force immigration policy past its tipping point, the government shows no sign of taking the padlocks off fortress Japan. Roughly 2 per cent of the population is foreign, far below most OECD countries. And the Hamamatsu case, while isolated, seemed to show the state might take away the welcome mat when the economy darkens.

On trade, there is also plenty of room for improvement, says Anne Lanigan, head of the Irish Enterprise Center in Tokyo. She points out that Japan is still a tiny percentage of European exports.

“Ireland is actually the biggest exporter to Japan in per-capital terms. Between 2000 and 2008, only two [Finland and Netherlands] of six countries increased their exports to Japan, and growth was small – 4.1 and 3 per cent. British goods to Japan were just 1.1 per cent of their total exports in 2008.”

Lanigan blames both sides for the imbalance. “Europe is just not that interested in Japan – there are 27 countries there, so it’s a huge market by itself.” She says that with new Japanese regulations in industries such as biotech and pharmaceutical and medical devices mirroring European, not American, rules, “there is a huge opportunity for growth of trade with Europe”.

Fukushima agrees. “Both sides share some responsibility. Japan tended to focus on the US market in the second half of the 20th century. But we are seeing some potential for changes. The new Japanese government of prime minister [Yukio] Hatoyama has stated his desire to have a more ‘balanced’ relationship with the world.”

However, in a speech last October at the British embassy in Tokyo, the UK’s secretary of state for business, innovation and skills, Peter Mandelson, took a potshot at that old enemy – non-tariff barriers – for the relatively poor showing of British companies in Japan. “For too long, the growth of our trade has been hampered by regulatory restrictions,” he said. “We really need to . . . commit to a new EU-Japan vision of commercial ties, of trade and investment. But the catalyst has to be regulatory reform and the rolling back of restrictions in Japan.”

One outcome of the current downturn will be a renewed commitment to Mandelson’s vision, predicts Lanigan. “In terms of trade, there is going to be a stronger Japan-Europe relationship, but I think Japan will drive that,” says Lanigan. “Internationalisation is going to come slowly and incrementally, and at Japan’s own pace.”

Whatever happens, don’t expect Japan to embrace mass immigration any time soon. “Japan is not going to go down that road,” says Schultz. “It doesn’t like what it sees elsewhere.”