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No. 42 — November 7, 1997

 

Feature Article

JAPANESE DIRECT INVESTMENT IN THE UNITED STATES: REVISING AND UPDATING PERCEPTIONS by Arthur J. Alexander

Japanese direct investment in the United States surged in the late 1980s, reaching a record $20 billion in 1990. In the peak years of 1988 through 1990, megadeals — acquisitions valued at $750 million or more — accounted for a quarter to a half of the annual investment inflow from Japan. The visibility given these giant deals in the media and on Capitol Hill led to an American image of corporate Japan as a marauder. A closer look at the totality of the experience reveals a different picture.

Most Japanese investment abroad is in relatively low-risk portfolio assets like government and corporate bonds. Less than 10 percent of the stock of Japan's overseas assets takes the form of direct investment. The United States is the location of just under half of that total.

With the wave of Japanese money flooding into this country during the 1980s, Japan moved up from a seventh-place standing on the list of big foreign direct investors in the United States to the number-two position in 1988. It retains that ranking today, even though investment activity has bounced back only partially from a steep slide in the early 1990s.

The main driving force behind the late 1980s' surge in Japanese direct investment in the United States was the availability of inexpensive capital at home, as stock markets there roughly tripled in value between 1985 and 1990. That factor, combined with an appreciating yen over much of the 1980s and the relatively weak prices of assets in the United States, gave corporate Japan sufficient purchasing power to establish or acquire thousands of American businesses.

Other developments, such as the reality or the possibility of restrictions on a number of important Japan-made products and the prospect of the yen's long-term appreciation, pulled or pushed many Japanese manufacturers to American shores. The desire to avoid transportation costs from Japan and to get closer to the American market motivated investments as well. Low rates of return at home, coupled with firm-specific assets that enabled Japanese companies to cash in on these competitive advantages in the United States, also drove many investment decisions.

Significantly, though, foreign direct investment in the United States has not been a high-return activity. That is especially true for Japanese investors. On average, it takes 10 years for foreign-owned ventures just to earn a positive return and even longer — if ever — to break even. Two case studies highlight this fact of business life.

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Weekly Review

Japanese Bank Problems Intensify by Douglas Ostrom

Banking crises in Thailand, Indonesia and South Korea beginning last summer have grabbed the headlines, but the problems of Japanese banks hardly have gone away. In fact, they probably have worsened as a consequence of the problems of banks in neighboring countries. American analysts are increasingly blunt in their assessments of the health of the Japanese banking system, even suggesting that it could be on the verge of a full-blown crisis. That view may be too pessimistic, but disquieting signs are not hard to find.

Japan, United States Back Up IMF Indonesian Bailout Plan by Eric Altbach

With the effects of turmoil in Southeast Asian financial markets infecting markets elsewhere, the United States joined Japan and other Asian countries in offering fallback financial support for an International Monetary Fund-assembled rescue package for economically stumbling Indonesia. The IMF plan is intended to support the Indonesian rupiah and promote economic reforms while also helping to build investor confidence in the region. The resources available to Jakarta, estimated at $33 billion, are significantly larger than the $17.2 billion international package put together for Thailand in August (see JEI Report No. 31B, August 15, 1997). The shock waves felt in the New York, London and Tokyo stock markets in late October when Hong Kong suddenly succumbed to Southeast Asia's economic instability may have contributed to the larger-than-expected size of the package for Indonesia.

Japanese Executives Target Sokaiya Scandals by Jon Choy

Japan's corporate elite has watched with growing concern the ever-widening scandal that has revealed links between executives of top companies and sokaiya or corporate extortionists. So far this year, prosecutors have arrested high-level officials at the Big Four securities brokerages, some major domestic banks, three Mitsubishi Group companies, two big department store chains and several other well-known firms. Japanese news reports say that police are tracking down leads to more than a dozen other companies, including such giants as Hitachi, Ltd., Toshiba Corp. and Asahi Bank, Ltd. The problem has escalated to the point where the leading big business association — Keidanren (Japan Federation of Economic Organizations) — called an extraordinary meeting of its members to discuss the situation and press companies to sever all ties with corporate blackmailers. As firms announce their business results for the first half of FY 1997 (ended September 30), it is clear that those caught in the police dragnet are paying a price.

Japan, Russia Pledge To Normalize Ties By Year 2000 by Barbara Wanner

Following a warming trend in Japanese-Russian relations that began about a year ago, Prime Minister Ryutaro Hashimoto and Russian President Boris Yeltsin pledged November 2 that Tokyo and Moscow would sign a peace treaty before the end of the century. During the course of talks November 1 and 2 in the eastern Siberian city of Krasnoyarsk, the two leaders also agreed to a six-point economic cooperation plan. It includes measures aimed at promoting Japanese investment in Russia, integrating Russia into the global economic system, supporting Moscow's market-oriented reforms, training Russian business executives and government officials in Western-style business management and civil service, and cooperating in oil exploration and the development of a new nuclear reactor.

Notes

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