Friday, August 06, 2010

Will Japanese Investment Overseas decline?

A consistent overseas investment by Japan was a critical phenomenon since the early 90s. Thanks to low interest rates at home and relatively benign economic growth outlook, Japanese were (to an extent) forced to invest overseas. 

Over the 90s Annaul Japanese overseas investment averaged $20 billion. In the first half of this decade, it inched up to about $ 30 billion. However, over the past five years it has accelerated from $50 billion to $ 100 billion in 2008. The net overseas investment reached a peak in 2008 and came off in 2009 according to recent report titled Japanese FDI: Recent Trends and Outlook Investment overseas by Japan institute of Overseas Investment.  It begets one question.

Will Japanese FDI reduces substantially or even reverses?
A lot of factors that contributed to Japanese investments have changed.
  • Japanese domestic economic climate may be about to change. We are not sure whether it will recover or fall into a depression, but it is unlikely that the economy will amble along directionless in the next decade.
  • The age profile and dependancy ratio has weakened over the years. At some point it will change from creating a pension and savings pool to using it. Thereafter we may see a draw on pensions and savings funds.
  • There is also a higher global uncertainty to deal with. 
So what?
With about $100 billion at stake, I was about to dismiss Japanese investments as marginal. These days scams and Ponzi schemes run into trillions. But that is not true. 
  • $ 100 billion is a substantially large FDI investment, it is almost size of a small country. 
  • There are bound to repercussions for a capital-starved world economy. World economy is capital starved with large-scale frauds and write-offs and thus a bit more vulnerable than otherwise. The sovereign balance sheets are stretched to the breaking point.  In many countries bond vigilantes are doing their proverbial dance of death. 
  • China may take up the slack with its large surplus. However, people are wary of Chinese influence.
In Sum
While it may not be earth-shattering, but changing preferences in Japanese investments is bound to have some impact on global economy. We need to understand it better.