Japan Country Report

Infortal Worldwide Geopolitical Risk Summary  

Japan is domestically stable and a pillar of a now-industrialized East Asian region. Geopolitically,  Japan remains vulnerable in the event of a regional war involving China and Taiwan or a war on the  Korean Peninsula. In both instances, Japan’s partnerships with the United States render its  involvement likely if conflict evolves into open hostilities. Japanese firms face similar risks to Western  companies doing business with China in the broader region.  

Political Update 

Elected in 2021, Prime Minister Kishida Fumio is recovering from several scandals in late 2022 to early  2023. His party, the conservative Liberal Democratic Party (LDP), maintains its hold on the Japanese  Diet. Their primary policy goals involve reinvigorating Japan’s economy and increasing defense  spending.  

Political parties in Japan shift around often, but the current main opposition to the LDP includes the  right-leaning Nippon Ishin no Kai, the left-leaning Democratic Party for the People (DPFP), and the  left-leaning Constitutional Democratic Party (CDP). Though these parties overlap on many issues, they  compete for seats in the Diet. The LDP maintains a slim majority but must form a coalition  government with another party. The LDP has an alliance and a renewed coalition government with  center-right party Komeito. The coalition maintains a majority in both houses of the Japanese Diet.  However, the DPFP’s recently elected leader, Yuichiro Tamaki, would look to cross ideological lines to  form a coalition with the LDP if the current majority coalition loses seats in the Diet.  

Prime Minister Kishida has been expected to dissolve the Lower House and call a snap election to  cement the LDP’s dominance in the Diet for some time. He recently reshuffled his cabinet, balancing  the various LDP faction representations, losing some scandal-ridden cabinet members, and  promoting female politicians – likely to remedy falling approval rates. While the snap election did not  occur in 2023, the possibility remains in 2024, although now less likely.  

Economic Update 

Japan’s economy is finally showing some improvement decades after the bubble burst, but recently, this progress has slowed more than expected. The yen remains weak compared to the US dollar, the  Nikkei 225 index is up 30% this year, and the Bank of Japan has elected to maintain its ultralow  interest rate of -0.1%. Japan's main exports include motor vehicles, electronics, and machinery. 

The Japanese Diet passed a law in April 2022 called the “Economic Security Promotion Act” in  response to growing geopolitical risks from Russia and China. This law has four central pillars:  securing critical supply chains (such as semiconductors), ensuring connected infrastructure, utilizing  government and private research to identify leading developing areas of innovation and technology  to be competitive in these areas, and classifying certain Japanese patents to protect critical  technologies.

Prime Minister Kishida is prioritizing economic growth after the COVID-19 pandemic by promoting  “New Capitalism,” focusing government efforts on people, startups, and investments. New Capitalism looks to pursue economic growth and drive wealth distribution by raising wages and encouraging  investment in technology and startups. Kishida plans to implement tax incentives to make businesses  more amenable to wage increases. Japanese banks are starting dedicated sections for startups in  response to the Kishida Administration’s 2022 Action Plan.  

Recently, however, wages have slumped. Prime Minister Kishida plans to release an economic  stimulus package estimated at around 10T yen ($68B) to combat the fall, rising fuel prices, and  inflation.  

Defense spending now makes up a much more significant percentage of the Japanese economy. A  recently proposed defense spending plan aims to set defense spending at 2% of gross domestic  product by 2027. 

Key Investment Sectors 

• Information and Communication Technologies – Japan’s ICT industry is the third largest behind the United States and China, and growth remains a focus of the Japanese  government. 
• Electrical Machinery – Japan has recently sought to become a significant player in the  semiconductor race between the United States and China.  
• Manufacturing – Historically an industrial strength for Japan, recent supply chain issues  and subsequent lack of demand have caused the manufacturing industry to contract slightly, though it remains strong overall. 
• Defense – Japan has recently committed to increased defense spending over the next few  years. Political decisions in 2024 should provide more clarity on the plan forward.  

Note: A lot of the investment opportunities in Japan fall within heavily regulated areas, some  related to US national security. Conducting the required level of due diligence covering any  potential trade partners will be essential to avoid any regulatory failures or other risks.  

U.S. State Department Travel Advisory 

Level 1-Exercise normal precautions in Japan. No recent alerts.

Recommendations for Companies and Investors  

Japan is incredibly receptive to outside business investment and development. The Japanese  government encourages both Foreign Direct Investment and the establishment of companies. There  are, however, obstacles to mergers and acquisitions; the problem is not the government but the local  business culture, which is traditionally hesitant to outside unprompted mergers.  

The Japanese government’s eagerness to create a business-friendly environment can be extremely  useful to interested investors looking to benefit from their programs. U.S. companies may want to  monitor the progress of Prime Minister Kishida’s “new capitalism,” as its success or failure will likely  impact labor markets within Japan. 

Key Takeaways 

• After Prime Minister Kishida’s recent cabinet reshuffle, there are lingering talks about a  potential snap election to cement LDP control of the Diet’s Lower House. 
• Japan’s economic development is cautiously optimistic, with slower-than-expected progress. 
• Japan is very business and investment-friendly, with government policy directly supporting  foreign investment, especially in goal industries. 
• Defense spending has increased significantly, given regional threats. This presents  opportunities for US defense companies. It will be important to track the defense budget set  to be finalized in 2024.

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