OVERSEAS INVESTMENT RISES:
Clear Signs of a Recovery

OCTOBER 7, 1996

Direct investment in fiscal 1991 had hit 5.69 trillion yen but began to slide in the economic slowdown following the collapse of the bubble economy and the drop in corporate earnings. It fell 22.1% in fiscal 1992 to 4.43 trillion yen, and a further 6.3% to 4.15 trillion yen in fiscal 1993, before rebounding with 3.1% growth in fiscal 1994. Then came the great leap forward of fiscal 1995.

Destination Asia
The biggest beneficiary of the outflow was North America. This region took 2.24 trillion yen, or 45.2% of total Japanese direct investment in fiscal 1995, up 20.9% from the previous year. A popular sector was electronics/electrical machinery, which saw a 2.6-fold leap in investment to 239.9 billion yen. The reason for this was a string of major investments in information technology, including 60 billion yen spent by major companies on construction of semiconductor manufacturing facilities. While the biggest target of Japanese direct investment was the services sector, which received 865.9 billion yen, much of this money went into software development and other areas of information technology.

After North America, Asia was the second-most popular target region. Direct investment in the region outpaced such spending in Europe for the second straight year, rising 18.2% in fiscal 1995 to 1.91 trillion yen, or 24% of the total. A particularly prominent recipient was China, which absorbed investment totaling 4.32 trillion yen, a 61.0% increase. Electronics/electrical machinery was the most popular sector, attracting 238.8 billion yen, or 20% of all investments made in Asia. Direct investment in third-placed Europe totaled 828.1 billion yen in fiscal 1995, a rise of 25.4%. Nonmanufacturing sectors such as commerce, real estate, and finance and insurance, accounted for 76% of this sum.

Seeking the best production site
The main reason for the recovery in direct investment after fiscal 1994 was the rise in the yen. Japanese manufacturers flocked to set up offshore production facilities as the rising yen forced up their costs, eroding their competitiveness.

Direct investment has continued to rise despite a corrective weakening in the yen from the summer of 1995 that began to develop a momentum of its own in early 1996. In the second half of fiscal 1995 (October 1995 to March 1996), such investment totaled 2.78 trillion yen, about 610 billion yen more than the total for the first half.

These figures reflect the fact that Japanese companies are no longer simply concerned with beating the exchange rate. They are also making greater efforts to find the ideal production site. In this process, they scour the entire globe, taking into consideration such factors as labor and other costs, ease of procurement of materials and parts, and market trends.

For this reason, there is a rough consensus among economists inside and outside the country that the moves overseas by Japanese corporations will continue for the moment, as long as the yen does not fall to extreme lows.