Insights

Japan has come to earn more from abroad thanks to active overseas direct and portfolio investments by Japanese businesses. Income from dividends, interest and other foreign sources topped 50 trillion yen ($378 billion) on an annualized basis in the July-September period, up 2.8 times over the past decade and close to 10% of the nation’s gross domestic product. The steady growth is attributable to a series of corporate acquisitions made by Japanese businesses over the past decade or so.

However, not all earnings flow back to Japan. If the money stays at overseas subsidiaries, it will not help boost the Japanese economy.

“We will aim to become a leading global retail group,” Ryuichi Isaka, president of Seven & i Holdings, said at an earnings briefing in October, stressing a plan to boost overseas investment. In the year through February 2023, Seven & i expects to chalk up roughly half of its operating profit from overseas convenience store chains, including Speedway, a U.S. chain it acquired in 2021.

“Corporate Japan has pursued a strategy of cross-border mergers and acquisitions over the past 20 years to cope with the shrinking domestic market, snapping up overseas bases and customers at the same time,” said Masaya Kato, a senior adviser at management consultancy KPMG FAS.

Many companies have already shifted their focus to overseas markets for growth. Among them is Asahi Group Holdings, which has stepped up corporate acquisitions in Europe and elsewhere. Recruit Holdings logged a record net profit for the April-September half thanks to U.S. online job site Indeed, which the company bought in 2012.

Macroeconomic data makes this trend clear. Japan’s annualized real GDP reached 546.8 trillion yen in the July-September quarter. Gross national income, which equals GDP plus net receipts from the rest of the world, came to 561.2 trillion yen, indicating that an inflow of income from overseas investment more than offset an outflow caused by higher materials costs and the yen’s depreciation.

The outstanding balance of overseas investment assets totaled 1.25 quadrillion yen at the end of 2021, according to the Ministry of Finance and Bank of Japan. The total includes 228.8 trillion yen in direct investments, such as acquisitions of equity stakes in companies overseas, up three times over the past decade. Net overseas assets, after subtracting liabilities, stood at 411.2 trillion yen, the world’s largest for the 31st consecutive year.

According to balance of payments statistics, Japan in 2021 logged a surplus of 26.6 trillion yen in primary income balance — a net of payments and receipts of dividends, interest and other income from direct and portfolio investments. The amount of surplus was also the largest in the world, marking the second straight year Japan topped the ranking, according to the International Monetary Fund.

However, the flip side of the surplus is that Japan has attracted a relatively small amount of overseas investment, which limits a cash outflow from the country.

The opposite case is Britain, which continues to see a deficit in primary income balance. “Britain has a net outflow of payments due to increased investment from overseas,” said Hideaki Matsuoka, a senior economist at the finance ministry’s Policy Research Institute. “Meanwhile, its receipts have fallen due to slowed growth in Europe, its key investment destination.” Japan‘s surplus, too, could shrink if growth slows in Asia and the U.S.

Another problem is how companies spend the money earned from overseas investments. “The money is not necessarily flowing back to Japan,” said Jun Saito, a senior research fellow at the Japan Center for Economic Research. Of the receipts totaling 38 trillion yen in 2021, 20.8 trillion yen was from direct overseas investments. Of that amount, about 9.1 trillion yen flowed into Japan in such forms as dividends, but a little more than 11 trillion yen stayed overseas as internal reserves at foreign subsidiaries.

Robust earnings at overseas units help boost the performance of their parents, leading to increased stock prices and shareholder returns for investors, but the proportion of households that can benefit from higher stock prices is much smaller in Japan than in the U.S. and Europe. Stocks and investment trusts make up only 14.7% of financial assets held by Japanese households at the end of March, compared to 52.4% in the U.S. and 29.9% in the eurozone, according to the BOJ.

The government is trying to solve this problem by promoting a shift from savings to investment. As the first step, it announced a plan to expand NISA, a tax exemption program for small investments.

Making more money from overseas investments will not necessarily lead to job creation at home, either. The government needs to offer businesses an incentive to boost output in Japan using technologies acquired abroad. For that to happen, effective economic planning and guidance will be indispensable.