Cumulative foreign investment in Japan (since 1950) totaled $37,918 million as of 1995, of which US firms held 41%; Netherlands, 9%; Switzerland, 6%; Germany, 5%; Canada, 4%; UK, 4%; and others, 31%. In 1995/96, most foreign direct investment in Japan was directed towards the manufacturing sector (40%, half of it in machinery), followed by services (31%), retail and wholesale trade (22%), and finance and insurance (4%). Annual new investment into Japan rose from $2.78 billion in 1989/90 to $7.08 billion in 1995/96; average annual new investment between 1989/90 and 1995/96 was $4.19 billion. Due to continued recession, new foreign direct investment slumped to $5.53 billion in 1997, the last year for which statistics are available.
Japanese investments abroad have expanded steadily since the 1970s, the result both of liberalization on the outflow of capital and of the prosperity of the Japanese economy. It has also been due in part to increased investment in the US and EU as a conciliatory move to lessen the trade gap between Japan and the two industrial regions. Net annual direct investment outflows remained near $5 billion in the late 1970s but climbed steadily between 1985 and 1991 when they reached $48 billion, declining somewhat to $30.7 billion in 1992. Overseas direct investments made by Japan totaled $41 billion in 1993/94 and $51.4 billion in 1994/95. In 1996, Japan reportedly invested $50 billion overseas and attracted only about $7 billion in inward direct investment. Of the total Japanese overseas investment of ¥5,409.4 billion outstanding in 1995/96, ¥2,478.9 billion was invested in the US (up from ¥1,852.5 billion in 1993/94), ¥387.3 billion in the UK, ¥282.8 billion in China, ¥272 billion in Indonesia, ¥167.5 billion in Hong Kong, ¥158.1 billion in Thailand, ¥125.6 billion in Singapore, ¥123.8 billion in the Netherlands, ¥117.3 billion in the Cayman Islands, and ¥113.7 billion in Panama. In 1995/96, some 48% of Japanese investment was in North America (up from 32% in 1985), 24% in Asia, 9% in Latin America and the Caribbean, 15% in Europe, 2% in Oceania, and the remainder in Africa and the Middle East. About 42% of the investment total in 1995/96 was in manufacturing: electronics accounted for 14%; transportation equipment, 8%; metals, 5%; chemicals, 4%; machinery, 3%; and other manufacturing, 8%. Nonmanufacturing sectors (58% of total investment) included: finance and insurance, 16%; real estate, 13%; commerce and trade, 10%; services, 8%; transportation, 4%; mining, 3%; and other sectors, 4%.
Foreign investment in Japan is far less than in other G-7 countries. One reason for this is that in the past, the Japanese government discouraged foreign investment. A second but perhaps more significant reason is the high cost of doing business in Japan, which, in turn, reduces profits. Some of the barriers are now less significant with the signing of the US-Japan Investment Accord signed in July 1995.
There is still a marked imbalance in Japan's investment in other countries compared to other countries investing in Japan, i.e., the former is far greater than the latter. As an example, in terms of million of dollars invested by Japan in 1994 and 1995 Japan invested $17,331 million in the US in 1994 and $22,649 million in 1995. During those same two years, the US invested $1,915 million and $1,837 million, respectively, in Japan. During those same two years, Germany invested $502 million and $174 million in Japan, respectively, while Japan invested $727 million and $550 million, respectively, in Germany. In 1996 Japan's ratio of inward to outward foreign direct investment flows was 1:9.77.
South Korea invested $71 million and $68 million in Japan during 1996 and 1997, respectively, while Japan invested $415 million and $443 million in South Korea during those same years. The imbalance between China and Japan is even greater. During 1994 and 1995, China invested $19 million in Japan, while Japan invested slightly over $7,000 million in China. One should not conclude that barriers account for this imbalance.