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Japanese direct foreign investment : sources and sustainability Price, Tracy J.E.


In 1984, Japan became the world's leading creditor nation. Although most of this capital has been in the form of foreign portfolio investment (FPI), foreign direct investment (FDI) has contributed significantly to the total. The rapid acceleration of Japanese FDI is evidenced by the fact that the nation's accumulated foreign direct assets in 1988 exceeded $96 billion (in 1980 U.S. dollars) roughly 3 times the 1984 total and 6 times the 1980 total. This startling change in Japan's role in global FDI raises two important questions. Firstly, why has Japan been able to substantially accelerate its foreign direct investments in the 1980s? This study suggests that the country's rapid expansion in FDI is the result of macro-economic developments which have taken place in Japan since 1973. These developments include the transition of the country from a high-growth to slow-growth economy after the first oil crisis; the resultant decline in capital formation requirements and sustained savings surpluses in the private sector; and the committment of the Liberal Democratic Party (LDP) to fiscal austerity after 1978. The second question concerns the future sustainability of Japanese FDI. As described in this study, the answer to the second question depends largely on the answer to the first; namely, that the future rate of Japanese FDI will be determined by the extent to which the macro-economic developments noted above prevail. In format, this study first provides a historical perspective of Japanese offshore direct investment, concentrating on the changing level, nature and motivation of Japanese FDI in the post World War II period. The study then provides a brief analysis of modern FDI theory and its inadequacy for explaining past Japanese FDI or for predicting its future sustainability. After introducing the theoretical rationale behind the study's two main contentions, the analysis then turns to an identification of the forces which are generating the huge amounts of capital currently available for offshore investment. In particular, the study suggests that the dramatic appreciation of Japanese land prices has been a primary cause of excess savings in the private sector. It is these excess savings, coupled with the LDP's committment to balanced budgets after 1978, that have sponsored Japan's remarkable increase in FDI in the 1980s.

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