According to the Ministry of Finance, Japan’s net foreign direct investment (FDI), which includes corporate acquisitions and investments in production facilities, increased by 17.1% year-on-year to USD211 billion in 2024 – the highest since records began in 1996. Japanese companies are expanding FDI for access to broader markets, advanced technologies and cost-efficient production sites.
Hideyuki Sakamoto
President of Japan In-House Lawyers Association and Chief Legal Officer
Gibraltar Life Insurance
Geographic diversification also enhances global competitiveness, helping Japanese companies leverage global supply chains, optimise operations and strengthen their international presence for sustainable growth.
The increase in FDI is most notable in the US, which accounted for nearly 40% of the total, at USD78.2 billion. This figure is the highest since 2014, and has more than doubled in the past decade. The US market remains attractive for Japanese companies due to its vast consumer base, advanced technological landscape, and business-friendly environment.
In contrast, investment in China remained relatively flat at USD3.29 billion, a decrease of nearly 60% compared to 10 years ago. Heightened geopolitical risks and the real estate market downturn in China may be causing Japanese companies to hold back on investment there. This trend has been exacerbated since the US-China trade tensions during the first Trump administration. Additionally, concerns over regulatory transparency and safety for employees in China have made Japanese companies more cautious.
Meanwhile, investment in Asean countries saw significant growth, rising by about 36% year-on-year to USD29.6 billion. The Asean region presents attractive opportunities due to its growing middle class and favourable demographic trends. Countries like Vietnam, Indonesia and Thailand have become key destinations for Japanese FDI.
The diversification of FDI also reflects Japanese companies’ strategy to mitigate risks associated with an over-reliance on any single market. By spreading investments across various regions, companies can better absorb economic shocks and geopolitical uncertainties. This approach not only ensures more stable and more resilient growth but also allows companies to tap into emerging markets and capitalise on regional economic developments.
Legal risk management
The importance of legal risk management in Japanese companies’ FDI cannot be overstated. Venturing into foreign markets entails various legal challenges and risks that, if not properly managed, can cause financial and reputational damage. Effective legal risk management ensures that FDIs are protected and optimised.
One of the primary legal risks associated with FDI includes compliance with local laws and regulations. Each country has its own regulations on business operations, taxation, labour laws and the environment. Non-compliance can lead to penalties, legal disputes, reputational damage and operational disruptions. Therefore, Japanese companies must thoroughly understand the legal landscape of the target country before making any investments.
Intellectual property (IP) protection is another critical area. Japanese companies often hold valuable patents, trademarks and trade secrets, which need to be safeguarded in the foreign market. Failure to protect these assets can lead to IP theft or infringement, undermining the competitive advantage of the investing company.
To navigate these complex legal environments, the roles of in-house and external legal counsel are indispensable. In-house lawyers support FDI strategy and execution, ensuring compliance with both Japanese and foreign laws. Their deep understanding of the company helps provide tailored solutions aligned with the company’s objectives and risk profile.
External lawyers, on the other hand, provide specialised expertise and an objective perspective. They are often well-versed in the legal systems of the target countries and can offer critical insights into local regulations, legal practices and potential pitfalls. Engaging local counsel is particularly beneficial for jurisdiction-specific issues and litigation. External lawyers can also conduct due diligence to vet all legal aspects of investments.
Effective legal risk management in Japanese companies’ FDI requires collaboration between in-house and external legal experts. Leveraging both helps companies navigate the complex international legal landscape, mitigate risks and secure investments. This dual approach strengthens legal compliance and supports the strategic growth and global expansion goals of Japanese enterprises.
AloJapan.com