A good market that is hard to enter: how low Japan's inward FDI is

Series「Five numbers to read before entering Japan」 · Part 1 of 5

If you are considering Japan, look at one number first: foreign direct investment stock in Japan as a share of Japan's GDP. At the end of 2024, on the OECD's basis, it was 5.2%. The same year Canada was at 82%, the UK 72%, the US 40%, France 31%, Germany 27%, Italy 21%. Japan is the lowest in the G7, and by a long way.

Getting the number right

There are two ways to count it. JETRO uses the asset/liability principle, which includes money that Japanese companies' overseas subsidiaries invest back into their parents. That gives 53.3 trillion yen at end-2024, or 8.7% of GDP. The OECD uses the directional principle, which strips that out, and gets 5.2%. Both are correct. They just use different numerators. On either measure, Japan sits at the bottom of the major economies.

The Japanese government knows this. Its FDI promotion council raised the 2030 stock target from 100 to 120 trillion yen. Even if Japan hits it, the GDP share only reaches the low double digits, still far behind the rest of the G7.

Japan’s inward FDI is 5.2% of GDP, a quarter of the next-lowest G7 country

Inward FDI stock as a share of GDP, end of 2024, OECD basis (directional principle). Bars scaled to Canada = 100

• Canada
  81.9%
• UK
  72.3%
• US
  39.9%
• France
  31.3%
• Germany
  26.5%
• Italy
  20.6%
• Japan8.7% on JETRO’s basis
  5.2%

The rules are open. Customers have just watched foreign firms come and go. Budget for a three-to-five-year payback.

The usual reading is that Japan is closed

Most people see this number and conclude that Japan is closed. Heavy regulation, slow procedures, hostility to outsiders. That reading made sense in the 1980s. I don't think it holds today. Japan's restrictions on foreign entry are among the looser ones in the OECD's index, a company can be registered in weeks, and tax and visa procedures are clear and predictable.

And if regulation were the problem, procedures would be the top complaint. They aren't. In What foreign companies struggle with most in Japan, the JETRO and METI surveys put talent in the top three and procedures ninth. Companies that have entered don't complain about the door. They complain about what comes after it.

What's actually hard is time and trust

My explanation for the low stock is different. Entering Japan takes so long to pay back that many companies leave before they break even, and many never come at all.

Japanese customers switch suppliers slowly. Channels sit inside existing relationships. A new brand often takes years to get from first visit to first order. None of that is regulation. It's how trust gets built here. A Japanese customer is judging whether you'll still be around in five years at least as much as your product. And in a market where foreign capital is 5% of GDP, customers have watched foreign companies come and go many times. Their caution is based on experience.

So what this number should change is the unit you account in. Most HQs measure Japan's return by quarter or fiscal year. Payback in Japan takes three to five years. Use the wrong unit and the project gets judged a failure in year two.

Draw the map before you register

If costs run in years, the first year's money shouldn't go to an office and a legal entity. Spend it on working out where those three to five years will be fought.

In practice, draw the market map first. Who the real competitors are, who holds which channels, who customers buy from and why. That's the subject of Picking the wrong competitors is worse than having none. Once the map exists, decide whether to register, in what form, and who the first hire is. Plenty of companies do it the other way around. They register the entity, hire the people, and spend two years discovering the market's entrance isn't where they thought. Those two years are part of why the FDI stock is so low.

One question for your budget

On what payback period was your Japan budget approved? If the answer is one year, this number says you are likely to be one of the companies that leave.