https://www.wsj.com/articles/SB109710101769038483　

By Nicholas Benes　　Oct. 7, 2004 12:01 am ET

Even as Japan starts to play a more proactive role in global political affairs, in some key economic areas the nation remains a relative laggard in terms of its integration with other countries.

On Monday, an advisory panel to Prime Minister Junichiro Koizumi recommended that Japan rethink its security policy so as to more clearly define its capability to defend itself and its allies abroad. Japan’s understandable and justified desire to join the United Nations Security Council has also been much in the news. These events suggest that the nation with the world’s third largest gross domestic product — and which contributes 19% of the United Nation’s budget — is becoming more internationalized.

But on the economic front, it is an entirely different picture — at least in terms of direct inward flows. For example, Japan hardly shows up on the charts when it comes to inward foreign direct investment, foreign labor and immigration. The cumulative stock of FDI is a negligible 2% of GDP, as compared with an average level of more than 20% for most advanced industrial nations. Foreign workers comprise only 0.2% of the work force, in contrast to a range of 2-6% for most other developed countries. Even in Korea the figure is 0.6%.

Japan has trouble reconciling open-door facilitation and regulation of direct flows with the insecurities and emotionalism that are an easy angle for cheap exploitation by the domestic media and politicians. Absurd as it may sound for a country with such a paltry base of foreign investment, and where foreign labor is so small it affects almost no one, no politician wants to be cast as the friend of foreign capital or foreign labor. The former is referred to in some magazines as hagetaka gaishi (vulture foreign capital) and is often followed by alarmist words like “the coming wave” that is poised to “attack” and “swallow up” Japan’s companies. The negligible foreign population is a popular scapegoat for the rising crime rate, though that connection is not well supported by the numbers.

Until very recently, Japan’s leaders have done little to alter the essentially closed and distrustful mindset of its people with regard to these direct inward flows. To his very considerable credit, in 2003 Prime Minister Junichiro Koizumi set the laudable public goal of doubling the FDI base in five years. Although it would then still stand at only 3-4% of GDP, it was a step in the right direction. But despite the efforts of the Cabinet Office, follow-up by government ministries has been marked by foot dragging and resistance. Japan’s bureaucracy has also been slow to reorient its priorities away from protecting domestic industry and managers, toward protecting shareholders and consumers.

Such attitudes will only make it more difficult to address the challenges of Japan’s rapidly aging society. Research by Professor Kyoji Fukao of Hitotsubashi University’s has shown that Japan’s economy faces daunting challenges in stopping its fall in productivity, so as to increase GDP and address its fiscal deficit. Like a number of economists, Dr. Fukao’s conclusion is that inward FDI and immigration are two of the biggest weapons the country could wield in this battle.

These direct inward flows would bring a long-term commitment of know-how and resources that Japan desperately needs now that its economy has matured and is more driven by innovation, speed, global competition, and harsh demographic realities. GDP growth is driven by two things: population and productivity. The former is flat and poised to shrink over the next 40 years; something immigration could offset. And whereas total factor productivity has been in decline, on average, for more than 10 years, economists agree that in many cases FDI spreads new technologies, know-how, business models, competition and management methods within a country faster and more effectively than any other mechanism.

Yet despite these obvious benefits, the country is not attracting these resources by fashioning a rational immigration policy, or by making investment as easy as it might. The reason is that with foreign capital and labor still so rare in Japan, there is much fear of the unknown. The fear is aggravated by misconceptions about the impact and benefits of these flows.

Recent developments show how hard it is to alter this tendency. Five years after domestic stock-swap transactions were first permitted, Japan may finally amend the Commercial Code next year to allow foreign companies to propose cross-border swaps that would result in the acquisition of Japanese companies. But this step forward is likely to be hampered by tax-deferral conditions that are more restrictive than those passed into law for domestic stock-swap deals five years ago. As any investment banker worth his salt knows, these FDI-enhancing transactions simply will not take place if there are not convenient and broadly applicable rules allowing selling shareholders to qualify for tax deferral.

At the same time, the Ministry of Economy Trade and Industry has recently announced that it would study potential amendments to the Commercial Code allowing managers to adopt “poison pills” to avoid hostile takeovers that might occur if hostile M&A and such cross-border swaps by foreign companies become frequent. This is despite the fact that there have never been any successful hostile merger and acquisitions transactions in Japan, a situation which the advent of the amendments concerning cross-border swaps will not change. That’s because existing natural defenses — such as cross-shareholdings, governance sympathetic to management, and other provisions in the Commercial Code — are already so incredibly effective. Indeed, this is one reason why FDI remains so low. The contemplated Commercial Code changes will do nothing to allow an acquirer to offer tax-deferred stock exchanges directly to shareholders. But, if for all practical purposes, hostile cross-border stock swaps with tax deferral will still not be possible, then what is the fear mongering about?

The past 15 years have shown a significant and encouraging improvement in the transparency and depth of political debate within Japan, extending beyond domestic matters. But on the economic front, when it comes to direct inward flows and the most important infrastructure for facilitating them, little has changed as yet. The next few years will be a crucial period in this respect.

Mr. Benes is president of JTP Corporation, an independent investment bank in Tokyo specializing in mergers and acquisitions.