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Japan Looks Beyond Its Borders for Investors

Mayor Shohei Muroi knows it is a tough sell to get new companies to invest in this struggling industrial city just 60 miles from Japan’s most notorious nuclear plant.

The Monju nuclear power plant located in Tsuruga, Fukui prefecture.
Buddhika Weerasinghe | Getty Images
The Monju nuclear power plant located in Tsuruga, Fukui prefecture.

So in September, Mr. Muroi did the unthinkable. He flew to China to ask a fast-growing maker of heavy machinery to set up shop in his town. His move was a stark role reversal in a nation more accustomed to sending factory jobs to China, rather than recruiting them to move the other way.

“We’ve come to a point in Japan where we can no longer grow without outside help,” Mr. Muroi said in an interview here. “Whether you are based in China or America, we want you to please come do business in Aizu-Wakamatsu.”

Call it the post-tsunami economic order. Japan, once a manufacturing powerhouse known for its exports and overseas investment, is confronting a new reality.

A year after natural and nuclear catastrophes forced wrenching change on Japan’s economy, which was already listless from years of downsizing and moving factories offshore, the country is finding it must do what it has long resisted: welcome foreign manufacturers.

The new dynamic in Japan also signifies part of a larger regional power shift. A small but rapidly increasing amount of foreign capital comes from its rising neighbor, China, which last year surpassed Japan as the world’s second-largest economy and is looking to diversify its export-oriented approach to business.

Other recent Chinese manufacturing deals with Japan include plans for a plastics plant in Tottori and a heavy machinery factory in Kochi, both in western Japan.

“The Chinese are starting to look like saviors,” said Kotaro Masuda, an economist at the government-affiliated Institute for International Trade and Investment in Tokyo. “Any investment Japan gets is basically a plus, wherever it’s from, because it means more jobs, more tax income, more opportunities.”

Last month, the government invited a delegation of 80 Chinese trade officials and executives for an investment tour. Japan now says it aims to double the flow of foreign direct investment into the country in the next decade. A special focus is on the three prefectures most affected by the March 2011 disasters: Iwate, Miyagi and Fukushima, where Aizu-Wakamatsu is.

“We greatly welcome investment from abroad in the disaster zone, which will help with reconstruction,” Prime Minister Yoshihiko Noda said in a recent interview with journalists.

Direct investment from China to Japan jumped twentyfold in four years, to $314 million in 2010, according to data from Japan’s Finance Ministry — though as an overall percentage of investment into Japan, money from China remains small. Some experts say the true figure is much higher, however, because a large amount of Chinese investment is carried out through Hong Kong and other regions.

The new openness, if it lasts, will require Japan to break decades of habits that have discouraged foreign investment here, even as most other developed countries have done everything possible to lure foreign capital. The Japanese impediments have included relatively strong regulations, high operating costs and tax rates, and weak government inducements — not to mention what outside observers have often described as overt xenophobia.

According to data compiled by the United Nations, Japan has one of the lowest levels of foreign investment relative to its overall economy. Japan’s inflow of direct foreign investments came to just 0.24 percent of its gross domestic product in 2009 — and even turned negative over all in the two years after that. In 2011, overseas companies moved 183 billion yen ($2.3 billion) more out of Japan than they put in, according to the Finance Ministry.

Even now, many of Japan’s own companies are preferring to put their money into growth opportunities abroad rather than at home. The same Finance Ministry data shows that the net outbound investment from Japan reached 9.1 trillion yen ($113 billion) in 2011, accelerating the so-called hollowing out of Japanese industry long bemoaned by the nation’s policy makers.

It is a dangerous imbalance, economists say, particularly since Japan is struggling to reinvigorate economic growth, protect employment and uphold living standards. Moreover, recent studies have suggested that foreign-affiliated businesses in Japan tend to create more jobs than domestic ones, and that they tend to have higher productivity.

“Everybody is fretting that Japanese companies are moving overseas. If that’s the case, Japan should balance that out by opening up more to more foreign investment,” said Kyoji Fukao, an economics professor at Hitotsubashi University.

“Foreign companies that are successful enough to think about coming to Japan are highly competitive and productive,” he said, “which means they will invest, create jobs, pay high salaries, spark new demand.”

Aizu-Wakamatsu, the fourth-largest city in Fukushima Prefecture with a population of 125,000, has already found that domestic industry can no longer sustain local employment. At the height of the global economic crisis in 2009, a semiconductor plant run by Fujitsu, a cornerstone of the local economy for almost 40 years, announced it would eliminate a third of its 2,000 jobs.

The outlook for Japanese manufacturers has only worsened since then. Disruptions from last March’s disasters and the resulting energy shortages, along with a yen that continues to be punishingly strong, have lowered profits and pushed exporters to move even more production offshore.

Japan posted a record deficit in its current account — the broadest measure of imports versus exports — of 437 billion yen ($5.4 billion) in January, the Finance Ministry said Thursday, as energy imports surged in the wake of the Fukushima nuclear crisis, which has kept nuclear power plants shuttered across the country.

It is little wonder that when Mayor Muroi returned from China with a manufacturing agreement by the heavy equipment maker Zoomlion, he received a hero’s welcome in this city and Fukushima Prefecture.

“The deal could create jobs and revitalize Aizu,” the newspaper Fukushima Minpo said in an editorial. “It’s a ray of hope for Fukushima.”

The Chinese are also buying struggling Japanese companies. Last year, the washing machine and refrigerator business of Sanyo Electric was bought by Haier, a Chinese company, for 10 billion yen ($124 million). In 2011, for the first time on record, the number of mergers and acquisitions by Chinese companies in Japan exceeded those by American businesses in the country.

For Chinese companies, learning to appeal to the demands of finicky Japanese customers could help also refine goods and services for their growing domestic economy — not to mention make them more globally competitive.

“Our aim is to build products that satisfy Japanese standards,” Zoomlion’s chief executive, Zhan Chunxin, said at a September news conference. The company is expected to set up an office in Aizu-Wakamatsu next month and work with a local partner to build a small manufacturing plant in the city to make concrete pump trucks for the Japanese market.

Some people in the disaster zone have expressed concern that foreign companies, helped by generous subsidies, will hurt local businesses trying to rebuild. But the overriding impulse seems to be to seeking help from whoever is willing to offer it.

Last month, the central government designated districts in Iwate and Miyagi prefectures as “special disaster reconstruction zones” that offer incentives and tax breaks to new investors. In Miyagi, for example, companies that invest in the new zones are exempt from corporate tax for five years.

But some of the most generous subsidies could come in Fukushima, which has allocated 225 billion yen ($2.8 billion) to industry in the prefecture, including 30 billion yen to hand out to new companies that open in the prefecture.

“We are No. 1 in Japan for location subsidies,” Yuhei Sato, the Fukushima governor, said at a recent investment seminar. One company lured by the subsidies, Canadian Solar, which is based in Ontario and has strong links to China, is in talks to set up a solar panel factory in either Miyagi or Fukushima.

Regional cities like Aizu-Wakamatsu could be crucial to Japan’s effort to attract foreign investment, said Shojiro Nakamura, a consultant at Accenture, the global consulting company, which opened an office in the city last June. Rent and other costs are cheaper in Aizu-Wakamatsu than Tokyo, and it has a skilled work force, making it an attractive investment proposition, Mr. Nakamura said.

But the longer-term challenge for Aizu-Wakamatsu, Mr. Nakamura said, is to create lasting employment that is not contingent on subsidies or cheap costs. “Even if companies set up here to take advantage of the subsidies, they would all leave again once those are gone,” he said.

Instead, a joint initiative with the city, a local university and Accenture aims to make Aizu-Wakamatsu a center for research and development, a “smart city” that runs on renewable energy and supports high-tech jobs.

Investment from China is fine, Mr. Nakamura said, “but ultimately, we want to be more like Silicon Valley.”

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