Ashby: Can foreign investment help Japan to rebuild?

At first glance, the sharp fall in global equity markets on the back of the dreadful humanitarian and infrastructure disaster in Japan was understandable.

Despite its anaemic growth over the past 20 years, Japan is still an economic powerhouse – with the international monetary fund calculating its GDP in 2010 as the fourth largest in the world after the European Union, the US and China. Indeed, to put this into perspective, Japan’s estimated 8.7% share of global GDP in 2010 was similar to the combined economic output of both Germany and the UK.

A closed economy

However, as noted in its 2008 Economic Survey, the Organisation for Economic Co-operation and Development (OECD) calculates the Japanese domestic market is the least open of any of its 30 member states. As the tables on page 31 show, this is despite the rapid emergence of China as Japan’s principal trading partner for both imports and exports in recent years, which has to some extent substituted the historically strong trading relationship with the US.

There are three key reasons for Japan being a somewhat closed economy:

Japan continues to be a net exporter of goods. Its globally recognised expertise in just-in-time manufacturing and reputation for high quality mean Japanese exports continue to be in demand – despite the general perception that the yen is overvalued.

In addition, Japan’s conservative and ageing population generally has little appetite for imported products, particularly those produced by Western companies (with the notable exception of luxury branded goods). Instead, the primary area of imports in recent years has been for basic commodities from China, which are then re-exported around the world in finished goods.

High historical cultural and trade barriers. After 215 years of self-imposed isolation ending as recently as 1854, Japan has slowly opened its markets to international companies. However, progress continues to be slow. For example, despite the successful mapping of the human genome (which showed that the human race is extraordinarily similar in its genetic composition), the Japanese authorities continue to insist that pharmaceutical companies carry out bridging studies with the local population alongside global trials, delaying the introduction of new and well-established drugs used in other developed countries.

Superior economic growth elsewhere. With the Japanese domestic economy virtually in constant recession over the past 20 years, Western companies have often found it easier to target growth in the developing markets of the Asia Pacific region and Latin America rather than allocating valuable resources to Japan.

Western exposure to Japan

As a result of the above factors, the geographical exposure of many UK, US and European listed companies to the Japanese economy is fairly limited – although there are some notable exceptions. For example, Investec forecasts that Japan will account for approximately 15% of Burberry’s profits in 2012 – one of the highest geographical exposures to Japan in the FTSE 100 index. Similarly, Cross Current Research calculates that AstraZeneca derived 8% and GlaxoSmithKline 6% of their revenues from Japan in 2010, although in both cases this represents less than Japan’s share of global GDP.