Japan’s Evolving Business Environment Expands Opportunities for FDI, Global Capital and Talent

In a competitive global landscape that has been turned upside down by the coronavirus pandemic (Covid-19), Japan is accelerating the transformation of its business environment to meet the challenges of today—and tomorrow. This transformation is happening at a time when the country, and indeed much of the world, is beset by many problems, quite apart from Covid-19, including climate change and aging societies.

To meet these challenges, the country is setting out long term strategies for innovation and capital flows, including those aimed at increasing foreign direct investment (FDI) and the inflow of firms, technology and skilled individuals with collaborative mindsets from abroad.

As we noted in the prologue article, this article falls under one of the pillars under our consideration—that is, articles summarizing how Japan is speeding up the transformation of its business environment, making it more conducive than ever for foreign-affiliated companies, institutions and talent to thrive in this market. To this end, Japan is mainly doing the following:

  • adapting immigration rules to make it more convenient than ever for highly skilled talent from abroad to enter and establish a business in the country
  • increasing the competitiveness of the finance industry by updating its regulatory environment; accelerating Tokyo, Osaka and Fukuoka as international hubs of finance and capital
  • promoting environmental, social and governance (ESG) concepts and their adoption across society to achieve sustainable growth
  • increasing the domestic and global talent pool in the investment sector, including in mergers and acquisitions (M&As) and venture capital fields

While introducing the latest developments in policies and regulations, we will give examples of international entities expanding into Japan that are a result of such changes. We will also foreshadow upcoming trends across the economy and society—in particular those aimed at smoothening the flow of hito (people) and kane (money) from overseas into Japan, thereby making the work environment in Japan globally attractive.

How is immigration policy being adapted to make the business environment in Japan more convenient for international firms and skilled individuals?

The public sector, for example, is launching special visa programs that entrepreneurs from overseas can take advantage of to establish a business here. The Startup Visa program is such an initiative, permitting founders from abroad to enter designated cities and regions in Japan for a year to prepare for establishing their company, and receive support via municipal governments. The program, which is managed by the Ministry of Economy, Trade and Industry (METI), the Immigration Services Agency of Japan and others, allows startup founders up to one year to launch their business before they have to apply for a business manager’s visa.

As Japan transforms to become more welcoming to skilled foreign talent than ever before, the country is also enhancing the competitiveness of its finance sector and capital markets in order to attract FDI and foreign-affiliated financial institutions. Here, multiple stakeholders—including the central, metropolitan, and regional government as well as the private sector—are working collaboratively to lay the foundations aimed at making Japan a center of global finance.

Importantly, all the key players—the Financial Services Agency (JFSA), Japan’s financial regulator; the Japan Exchange Group Inc. (JPX), which manages the Tokyo Stock Exchange(TSE), the Osaka Exchange and the Tokyo Commodity Exchange; financial hubs such as Tokyo, Osaka and Fukuoka; and the industry itself, including foreign-affiliated firms—are aligned.

Previously, foreign-affiliated individuals in the asset management industry, for instance, faced red tape that took time to unwind in order to open a business in Japan. With an aim to remove obstacles to entry to the Japanese markets by overseas financial institutions, including regulatory burdens, that is now changing. That is why in January 2021, JFSA and Local Finance Bureaus jointly opened the Financial Market Entry Office as a one-stop English contact place for overseas financial companies considering establishment in Japan. It provides regulatory services from consultation to license registration and, ultimately, post-registration supervision, all in English.

As Japan enters a new period of reform and transition, international firms and skilled individuals will become increasingly key players helping the country become a center of global finance. With Japan opening up the finance industry, the international community can gain access to capital markets holding around 2,000 trillion yen (approximately US$14.5 trillion*) in largely untapped household financial assets, among other opportunities. Further, foreign-affiliated players can increase the sophistication of investors—and investment professionals—here, creating an environment where domestic and foreign industry professionals can thrive.

In future articles, we will see examples of firms from overseas—including financial technology (FinTech) startups, asset managers, and other skilled individuals—that are taking advantage of Japan’s fast-evolving financial sector. We will see how the entire industry—not to mention organizations in the public sector, such as JFSA, JPX, and TSE—are taking the steps necessary to improve its overall attractiveness and competitiveness. In particular, we will consider initiatives by these players that are aimed at foreigners.

  1. *

    Converted at 138 yen to the US dollar

In addition to upgrading immigration policies and making the finance sector even more globally competitive and attractive, Japan is promoting environmental, social and governance (ESG) concepts and their adoption across society—and in doing so, seeking to become a leader in ESG-based innovation. ESGs are a set of concepts that seek to evaluate whether corporations adopt a multi-stakeholder business strategy that includes the challenges faced by society—such as climate change—not just the causes of particular groups, such as shareholders, or narrow imperatives, such as maximizing profit.

ESGs came to global prominence around 2004, when the idea was adopted by the United Nations in collaboration with players in the financial industry, and has since spread across industries and institutions—and countries, including Japan. Indeed, the financial sector here has been an early adopter of such concepts in an effort to align itself with international norms.

Suffice to say that adoption of ESG norms in Japan’s financial sector is already bearing fruit. Such concepts were in part why the industry adopted a Stewardship Code in 2013, followed by a Corporate Governance Code in 2015. Since then, institutions such as TSE have promoted ESGs, and implemented systems for their measurement and promotion, quite apart from expanding the adoption of corporate governance best practices across industries.

Japanese companies are increasingly aligned with ESG and corporate governance standards, and are eager to become global leaders in fields such as green finance and the issuance of green bonds, developments that owe their growth to ESG ideas and similar trends. It is worth noting that foreign-affiliated institutions, firms, and talent have all played—and continue to play—a key role in Japan’s adoption of such standards.

The rapid transformation that is taking place across Japan’s business environment can also be seen in the area of inbound mergers and acquisitions (M&A) and venture capital (VC) investment. In upcoming articles, we will take a deeper dive into these fields, showcasing M&A as well as VC success stories, including those of foreign investors acquiring or investing in attractive Japan-based firms, and foreign-affiliated companies in the sector that have found a foothold in Japan’s investment market.

We will speak directly with key players in M&A and venture capital fields in Japan, gaining useful insights into the market, and actionable tips for investors and entrepreneurs from overseas that are interested in this ecosystem. In addition, we will chart major trends in M&A and VC activity here, both of which have been trending upwards—and are projected to continue doing so.

The takeaway here is that, in the M&A and investment space in Japan, as in other industries here, key players are helping to transform the business environment, making it easier for domestic and foreign-affiliated players to thrive.

In articles to come, we will further explore how players in the sector here, from JFSA to JPX to TSE and others—including corporations, cities and municipalities—are not merely promoting ESG concepts, but are rapidly adopting them across board, thereby opening up new avenues for transparency and innovation that benefit society as a whole.

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