1. Japan in the world economy
Trade and investment are not separate subjects either for policymakers or for businesses. Policymakers know that investment brings about trade and they know that, increasingly, trade agreements and investment agreements are being combined. Businesses know also that in order to increase the growth of their enterprises they have to invest, either to be nearer their markets or to gain better access to materials, to people with skills, and to technology. In this regard, outsourcing and off shoring are merging. These issues are well known in Japan. Japan was a pioneer of fully comprehensive policy action in terms of agency functions, beginning with export promotion, followed by the promotion of inward foreign direct investment, moving then to promoting outward foreign direct investment, and completing the pattern with import promotion (MIPRO).
Japan has a large and diversified economy. This means that it cannot be only a niche player, looking for specialised narrow opportunities to be supported and emphasised. This will not provide sufficient growth impetus to maintain and stimulate the rest of the economy. Instead, Japan must look at where it is lagging in world market terms and take the necessary steps to improve the international performance of the sectors and sub-sectors concerned.
Japan’s share of world GDP was steadily rising from 1970 to 1994, and has been steadily declining since then. The trends are similar if we correct for price changes and exchange rate changes. The only difference is that the peak was then in 1990, and the rise and the fall are less sharp. In any case, a decline in the share is not a problem as such. Clearly as other countries, such as the BRICs and other developing countries pursue rapid growth, Japan’s share of world economic activity will decline, and the same is true for the US and other advanced economies. But a country share nevertheless gives an indication of what is good performance by individual parts of the economy. And given the increasingly interlinked production structures in the globalized economy, the share of world GDP is a good way of looking at things, because the rest of the world is the market, and is also the ultimate determinant of future progress in the economy of Japan. In 2014 the share was 5.9 per cent (current prices) and 8.2 per cent (constant prices). A range of 6 to 8 per cent therefore represents a reasonable performance indicator for Japan’s sectors globally.
Looking first at total merchandise trade, we see that Japan’s share of world exports has been declining from year to year almost in a straight line. In 1995 it was 8.6 per cent. In 2015 it was down to 3.8 per cent. There is some stability in this low share over the last three years of the period, but it is clear that the trade performance does not reflect the size and capabilities of the national economy.
Looking in more detail, we can examine the 3-digit classification for commodity groups in international merchandise trade. There are 255 such groups. However, they are not all equally important. The top 62 groups in value cover two-thirds of world merchandise trade. In how many of the top 62 groups does Japan have a world share of 6 per cent or more? Only seventeen. Of course, there are commodity groups that are dependent on natural resources, such as the most valuable single group of petroleum oils, etc. and Japan can never be a successful exporter of these. But there are others where more success may be envisaged. Aviation and space technology is an obvious example. Clothing and footwear are areas where Japan has luxury brands that are not known outside. Pharmaceuticals is another area with scope for increased share, as is electrical household equipment, the latter especially if it takes advantage of new control systems and internet linkage. Further down the list of 255 trade categories are a number of food categories, which again may offer growth possibilities, given Japan’s technological development in this field.
2. Services
World services trade has been growing more rapidly than merchandise trade. With increased disaggregation of production globally, fostered by cross-border investment, some services have increased in importance, such as transport and telecommunications. But others are growing independently, such as financial services, of which there are two main kinds, banking (which international financial statistics usually call “financial services”) and insurance and pension fund management.
International services trade is dominated by the United States, which has about 15 per cent of the world market, and China’s share of world services exports has increased from 3 to 6 per cent between 2005 and 2015. Japan’s total was 3.3 per cent in 2015, and it was higher in 2005. Its detailed performance is mixed. In banking its global share is 2.5 per cent, and it is not showing much of an upward trend. There ought to be some scope to increase this share, because the share of other countries such as the UK, Germany and Switzerland has been declining. The strength and global reach of some Japanese banks should offer potential for a greater market share for Japan in the future.
In services exports, even though it has lost market share in recent years, one of Japan’s greatest strengths at present is construction. Japanese construction companies are leaders in R&D and in automation of construction equipment and techniques. Moreover, advances in detection systems mean better monitoring of building use, and significant progress has been made in areas related to care of the elderly.
A big change in international statistics in recent years means that charges for the use of intellectual property are now recognised as part of services trade. These cover licensing and royalty fees. This is an area where Japan is doing well. It had over 10 per cent of the world market in 2005 and this has risen to 12 per cent in 2015. It is nevertheless a long way behind the United States, which still has 42 per cent of the world total in 2015. These charges are not only technology-related, since they include publishing rights or the use of brand names, for instance. Also, multinational corporations license their technology to their own subsidiaries in other countries. But still, given Japan’s technological prowess, there appears to be scope for more licensing of technology abroad.
3. Innovation in Japan
The Global Innovation Index 2016 (GII) , which is an international ranking prepared jointly by Cornell, INSEAD, and WIPO, shows Japan in position 17 worldwide. The GII rankings are composed of a large number of indicators under seven different headings, for each of which the rankings are as follows: Institutions 15, Human capital and research 13, Infrastructure 7, Market sophistication 8, Business sophistication 10, Knowledge and technology outputs 13, Creative outputs 36. These headings cover a range of different ideas, and are not easy to summarise, but the compilers give three: the innovation output sub-index, where Japan’s rank is 24, the Innovation inputs sub-index, where Japan’s rank is 9. This implies that Japan is less successful at realising its potential in innovation, and, tellingly, it is in position 65 worldwide in the Innovation Efficiency Ratio. The EU carries out a similar exercise for its member states and some global competitor countries: the European Innovation Scoreboard 2016. While Japan performs better than the EU, the Republic of Korea is in the lead, with the US also ahead. In global innovation growth rates, China is in the lead, followed by Korea and the EU.
Both these comparative studies, and there are others, point to the need for Japan to mobilise its great strengths in scientific and human resources in a way that allows it to capture more of the benefits of innovation. An important part of this will be cooperation. The so-called “open method of innovation” is well-adapted to Japanese conditions.
Standards in general must also be a policy concern. Clearly standards are largely determined by commercial mastery of particular technologies. But the closer that Japan’s enterprises are to these discussions, and the more forthright they are in participation in the relevant standards bodies, the more likely it is that Japan’s enterprises will see rewards from this engagement in the future. The Japan Industrial Standards Committee (JISC) is a member of international standards setting bodies, notably ISO and IEC. “… Japan is vigorously taking on the role of Secretariat in 50 committees, consisting of 36 ISO, 11 IEC and 3 ISO/IEC joint committees (JTC1). The number of Secretariats assigned to JISC has increased recently, although the number remains relatively low compared to the major countries in the EU and the USA”. Also, some key sectors of great importance to Japan, including ICTs, food and pharmaceuticals, are not on the list.
4. Linkage and FDI
Participation in global value chains is not the only way of doing business in the world economy. But it is the most secure way, because it means conscious and committed access to markets, to supplies, and to technologies, ideas and economic information at first hand. Japan’s total GVC participation is about average, with 47.4 per cent of total gross exports. That is not much different from that of other developed economies (48.0 per cent) or developing economies (48.6 per cent). But breaking down this participation into forward and backward participation shows a very different picture. Japan has a very high forward participation (32.8 per cent, compared to 24.2 per cent for developed economies overall), and correspondingly a low backward participation (14.6 per cent compared to 23.8 per cent for developed economies).
At the sectoral level, very few of Japan’s sectors reach the global average for backward GVC participation. Only Chemicals and metallic mineral products (25.84 per cent), as well as coke, refined petroleum products and nuclear fuel (56.77) are above the 24.2 per cent level for developed economies. This means that it is not a matter of dealing with a few recalcitrant sectors: a cross-sectoral approach is needed.
Japan’s relative position in terms of the global economy can be examined in a number of different ways. In looking at trade and investment, we are essentially looking at how Japan is connected to the rest of the world. The graph shows how Japan compares to other countries in this regard. The horizontal axis uses OECD calculations to measure how much foreign value added arises from the country’s exports. As noted above, Japan has a low value for backward participation in GVCs, indicating that most of the value in exports remains in Japan. The indicator shows that Japan’s exports are not heavily dependent on imports from elsewhere. From one point of view, this is good, because more of the value-added form exports accrues to Japan itself. But from a dynamic point of view, it is not so good, because it means that Japan is not as integrated into the world economy and perhaps not specialised enough. The vertical axis measures the stock of inward investment relative to GDP, and here Japan has by far the lowest value among all the countries.
In general, therefore, the relationship between Japan and the world economy needs to be re-balanced, or, to put it another way, the interdependence with the world economy needs to be enhanced. At the moment, Japan is more at the beginning of GVCs than in the intermediate or final stages. Repositioning Japan in GVC terms means more inward FDI and new and more diversified export markets. With Japan playing a more central role in GVCs it will be better placed to withstand asymmetric shocks to the international trade and investment system, and will have more opportunities for its businesses to find and develop new markets.

Table: Linkage and FDI (Sources: FDI and GDP from UNCTAD database; GVC participation from OECD TiVA EXGR_VASH indicators)

5. What else needs to happen?
Japan must build on its many strengths. Japanese enterprises have major achievements in the field of customer care. In fact many Japanese firms are reported as being reluctant to increase their foreign trade exposure because they feel unable to guarantee the same levels of customer care that they could in Japan. Process and product quality is also a significant strength of Japanese enterprise. These strengths have enabled Japanese enterprises to not only export successfully but also to, through outward direct investment, to improve their growth prospects further by delivering to both developed and developing country markets.
Japan also has other strengths that have not yet been fully exploited. The arts and culture of Japan are widely admired worldwide but the commercial possibilities have not yet in realised in anything near their potential. The success of anime and manga in many developed country markets is one indication and in the world of art and music Japanese achievements have been well regarded. However it is clear that more could be done in terms of licensing successful achievements through formal marketing processes,  rather than allowing foreign companies just to pick and choose particular items. Arts and culture needs to be showcased through specific exhibitions and fairs worldwide, with carefully coordinated promotion campaigns in media and through diplomatic action and business interaction in order to achieve maximum impact.
Logistics is another area where Japan has been highly successful, both in  international trade and investment and also within Japan in building and maintaining effective supply chains throughout highly urbanised neighbourhoods. These skills could be marketed abroad.
Retailing, complementing some of the logistics achievements, is another area where Japan has much to offer. Its strengths in the organisation of the retail sector including supplier and customer relations and represent very high potential sector for further international development. As yet, Japan with the exception of Fast Retailing Co. Ltd. has failed to make much international impact in the retail sector. Retailing tends to be overlooked by governments in general, and is usually not seen as an area for promotion, but it has an important role in encouraging international trade and the development of services.
Financial services is an important sector in Japan. Specifically in insurance and pension services, however, Japan’s share of world exports is tiny, and the combination of expertise, prudent management systems and customer orientation in Japan ought to offer potential for more growth in this field.
E-commerce is part of everyday life in Japan yet its platforms have not achieved a degree of international appreciation or use that have been attained by US and other counterparts. For Japan, it is an obvious channel to increase its exports. While language plays a part in the lack of global reach, there are also design considerations. Different cultures take different approaches to the user interface, and new approaches need to be developed that encompass not only different languages, but different approached to the display and handling of information and the user experience. Existing e-commerce platforms may present too much information in a way that can be confusing, and they often lack the seductive clarity and restraint that is at the heart of much Japanese artistic achievement.
Mobile is another important sectoral development, and the mobile sector is the focus of much attention both as a channel for e-commerce, for entertainment, and for the multitude of new applications that are emerging in the “Internet of Things”. Historically Japan has always preferred to develop its own standards and pursue them. Now it needs to become intensively involved itself in standards development internationally and make sure that it plays a role in determining the shape of standards for the future in this field. This will include adapting to the changes that technology will bring, such as more responsive screens and new methods of user interaction, including more sophisticated speech recognition, and cyber security measures, power management new types of batteries etc.
The food industry is another important sector for Japan. Its progress in this field is remarkable and not yet fully appreciated outside the country. The development of different types of processed foods including health-related and sports related foods, nutraceuticals and the like, as well as complex products that can be rapidly prepared and are suited to today’s hurried lifestyles are achievements that could be very successfully promoted abroad, including though increased investment by foreign companies in the food sector in Japan.
Silver technologies, i.e. those that make the lifestyles of the elderly more manageable and the monitoring and intervention within their healthcare also more productive and successful are areas in which Japan has also significant strengths. With a significant ageing population, Japan has had to not only develop suitable technological solutions but also build those into a management framework, especially through healthcare systems and local systems of public support as well as healthcare cooperatives. This achievement needs to be widely shared, especially in the developed countries which are also or will soon face similar problems of caring for their elderly populations and ensuring not only their health but a vigorous and creative lifestyle for as long as possible.
Energy is another sector where enormous challenges face the world economy. It is also a sector where, in spite of the tragedy of Fukushima, Japan has much to offer the world. Even the extraordinary resilience and significant mastery of the new techniques involved in recovery from the disaster amounts to important learnings from which the rest of the world community can benefit. Because of physical and geographical conditions, the experience of Japan in areas such as earthquake detection and recovery, and in flood prevention and management is varied and of long standing. This again provides a good basis not only for humanitarian intervention globally with government support but also for Japanese construction and civil engineering firms to make a further contributions to infrastructure development throughout the world, especially in those subject to climate hazards. Energy itself and the challenge of continued global growth in the face of climate change, is an area where Japan’s expertise in all aspects is of great potential. Both conventional and nonconventional sources of energy represent important challenges and the restructuring of national energy systems will need both technological and organisational change. In the past Japan seems to have been better at offering technology than in offering the management skills that are needed to best exploit it. Yet the two are closely interlinked and indeed delivering one without the other, and relying on the target market to supply what is missing, is at best suboptimal for both sides.  Japan’s commitment to development of the field of energy has been strikingly shown in its technology foresight exercise in this regard and can mean great potential for Japanese companies if they can convincingly put together packages of goods and services that respond to the needs of countries struggling to adapt their energy systems.
Partnership with other countries is always regarded as a good thing and is always acknowledged in agreements as being important. But partnership means different things to different people and there is potential for Japan to increase and broaden the scope of partnership to include the full range of relationships between it and other countries in. A coordinated set of measures in the field of trade, investment, education, science and technology, health, tourism and the arts, can yield good returns in terms of offering wider opportunities for complementarity and self-sustaining growth of the bilateral relationship.
Unlike a number of other countries, Japan has been slow to conclude trade and investment agreements. The growth of these worldwide has been very significant in recent years. Especially now that the WTO process has stalled, increasing focus is being put on such agreements by many countries. In comparison with other countries of similar scale and ambition, Japan has not made many trade and investment agreements and this strategy needs to be urgently reconsidered. It came late to the TPP process and so lost an opportunity to influence the agreement as it began to take shape. That agreement itself is by no means certain to come into force: the political climate in the United States is even less favourable to it now. If TPP fails, Japan will have the difficult task of trying to replace it with the remaining countries. Japan should take a pro-active, leadership role in this regard. A trade and investment agreement with the EU also appears to be stalled and needs to be revived.
Language will always remain a barrier, to some extent, to expanding international trade and investments between two countries that have different languages. With the growth of English as an international business language, at least for primary contact, additional language capabilities will continue to be a pressing need for Japan. But also more focus will have to be put on automatic translation and interpretation and the skills of Japanese academia and industry need to be further focused in this regard.
In spite of the traditional view of Japan as a closed society, there are important links with Latin America, especially through people of Japanese descent in Brazil and Peru. There is scope for increasing trade and investment links through better contact with those whose ancestry is Japanese, the so-called diaspora, as other countries have done, using their knowledge of local markets and developments to foster economic linkages. Some trade links happen anyway just from the presence of a diaspora, but a targeted intervention can encourage this further.
International servicing: a new services trading company should be established to help Japanese companies deliver after-sales service to overseas customers, similar to general trading companies. This could be of interest especially to smaller Japanese companies who are reluctant to begin international activity.
Innovation: a new technology licensing initiative is needed. Firstly, incentives, including tax incentives should be considered to encourage companies to license their technologies, especially abroad but also domestically. Secondly, the present international marketing arrangements for technology should be reviewed and if necessary a new agency should undertake the international marketing of technologies, especially on behalf of the smaller companies.
In conclusion, it is true that statistical and economic analysis may point to opportunities for increased Japanese trade and investment and growth in interdependence with the global economy. However the findings have to be checked against the day-to-day experiences of businesses competing in global markets, and these businesses will have their own perceptions and strategies. Dialogue and open communication between government, agencies and business is vital. But it must be structured in a positive way, intended to lead to conclusions in a timely manner. Speed of decision-making has to increase in line with the accelerating pace of change in the wold economy.