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SECURITY

Commentary: Japan’s economic security debate needs ‘offense’ as well as ‘defense’

  • September 3, 2021
  • , Nikkei Asia , 1:13 p.m.
  • English Press

MARIKO KODAKI, Nikkei staff writer

 

TOKYO — A U.K. hedge fund executive looked to relocate much of his Hong Kong staff to Tokyo last fall, wary of political uncertainty in the Chinese territory and encouraged by Japan’s stated intention of attracting financial talent from the city.

 

But the move did not go as planned. When trying to obtain visas or inquire about social benefits and education for his employees, the executive was shuffled among government agencies, making a smooth transition for his staff and their families impossible.

 

He eventually gave up and chose Singapore, which offers faster administrative procedures, thanks partly to its use of individual identification numbers.

 

Singapore “has a different culture and readiness for accepting foreigners. It was disappointing because Tokyo was the most popular destination for our staff,” the executive said with a shrug.

 

This story of a missed opportunity for Tokyo offers a different perspective on economic security, one of the hottest buzzwords in Japan’s government.

 

In budget requests for next fiscal year, economic security is a top priority for funding, along with cutting carbon emissions and shifting to digital services.

 

The Ministry of Economy, Trade and Industry has requested about 170 billion yen ($1.55 billion) for programs such as surveying important technologies held by businesses and restructuring supply chains. The Ministry of Internal Affairs and Communications seeks funding to bolster supply chains for telecom infrastructure, while the Financial Services Agency plans to establish an economic security office.

 

In terms of economic security legislation, the Foreign Exchange and Foreign Trade Act was amended last year to increase oversight of inbound investment in critical sectors — and the scope of the act continues to expand. It will encompass businesses involved in rare-earth elements as of November.

 

The number of companies for which stock purchases by foreign investors are subject to prescreening has risen about 40% to 715 in a year. The ruling Liberal Democratic Party has pushed stronger economic security measures in other areas as well, such as land transactions.

 

Japan is not alone in moving to protect vital economic interests. U.S. President Joe Biden seeks to bring supply chains onshore and out of China’s reach. Economic security has moved high on the agenda in the Group of Seven and other forums. Policymakers have become wary of China’s outsize presence in a range of fields including trade, investment, cyberactivity and natural resources.

 

The question is how to find the right balance between government intervention and the free market. Some countries view economic security as achieving diplomatic and strategic objectives through economic means. The most skilled hands at this game play both defense and offense.

 

The U.K. has revamped foreign investment regulations for the first time in about two decades. Parliament enacted the National Security and Investment Act, which strengthens prescreening of investment in 17 areas including communications. But at the same time, the government created a body dedicated to promoting investment in the U.K., signaling the country would put greater emphasis on attracting foreign money than before in strategic areas such as tech and renewable energy.

 

By contrast, the economic security debate among Japanese policymakers seems overly focused on defending against external forces. The issue of whether foreign investment rules would apply in the case of prized industrial group Toshiba, the target of a proposed buyout by a private equity firm, reminded overseas investors of the risk involved in the Japanese market.

 

“We’re watching to see if regulations are tightened further under the aegis of economic security,” an executive of an activist fund said.

 

Keio University professor Kozo Kiyota said Tokyo needs to do more on opening up even as it defends itself.

 

“Responding to China is important, but you need to examine ways to attract global investors and corporate assets and achieve results,” he said.

 

Lee Kuan Yew, Singapore’s late founding father and former prime minister, once said the city-state “must make ourselves relevant so that other countries have an interest in our continued survival and prosperity as a sovereign and independent nation.”

 

Lee knew that tiny Singapore had a limited ability to defend itself. He believed the country could hold its own against bigger powers by using deregulation and administrative efficiency to attract Western financial institutions and multinationals, creating a cluster of human resources, assets and money. The Asian statesman was a practitioner of “offensive” economic security.

 

Foreign direct investment represented 6.1% of Japan’s gross domestic product in 2019, far lower than the levels of other G-7 countries, which ranged between 20% and 70%. Faced with global competition for talent and an aging population, Japan needs a strategy that looks both outward and inward to serve its national interest.

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