December 2003

Haruo ShimadaSpecial adviser to the Cabinet Office

Professor, Faculty of Economics, Keio UniversityChairman of the Japan Investment Council Expert Committee

Two Messages for European Two Messages for European CompaniesCompanies

1

“The Japanese economy is changing and reviving through the structural reforms. There are great chances to invest in Japan.”

“The Japanese government welcomes FDI into Japan (and local governments, too). We make every effort to improve business environment of European companies in Japan.”

0.90.8

0.6 0.6

1

0.6

0

0.2

0.4

0.6

0.8

1

1.2

1Q2002FY

2Q2002FY

3Q2002FY

4Q2002FY

1Q2003FY

2Q2003FY

%

The Japanese Economy is RevivingThe Japanese Economy is Reviving2

After “The Lost Decade”, there are now many positive signs to reveal the revival of the Japanese economy.

1. GDP growth

2. Stock price

3. Profits of listed companies

GDP growth continues. It has exceeded 0% for past 7 quarters. Annual growth is estimated to be 2.1% (2003FY)

The price index of Tokyo stock exchange market (Nikkei 225) has grown over 30% for past 7 months.

A total of Consolidated recurring profits of major listed companies has grown 25% from 1H 2002FY to 1H 2003FY. Sales are also growing.

3646

4561

3000

3200

34003600

3800

4000

42004400

4600

4800

1H 2002FY 1H 2003FY

bil. Yen

7863

8547

92789612

1067010361

10847

700075008000850090009500

10000105001100011500

May-03

J un-03

J ul-03

Aug-03

Sep-03

Oct-03

Nov-03

Yen

Source: Nikkei Newspaper

Source: Nikkei Newspaper

Source: GDP statistics

The Structural Reforms has Strengthened the The Structural Reforms has Strengthened the EconomyEconomy

3

Prime Minister Koizumi urges structural reforms in many areas. Due to the reforms, the vicious cycle is changing into the positive cycle.

Non-profitable loans

The Vicious Cycle

The Positive Cycle

Lack of finance

Reduction of business

Bankruptcy

Wagerestraint

Unemployment

Consumptionrestraint

Decreasein sales

Excess faculties

Decreasein profitDeficit

Decreasein stock priceAssess deficit

RestructuringNew

Technology

Increase in sales

and profit

Increasein stock price

Revival of the finance sector

Finance to the growing sector

RaiseEmployment

Consumption increase

Investment in faculties, R&D

The Structural Reforms Create New Market The Structural Reforms Create New Market and Industryand Industry

- 5.3 million Employment Creation Plan -- 5.3 million Employment Creation Plan -

3

One main purpose of the structural reforms is to create new market and industry to meet potential needs or wants of consumers. It will be a great chance for foreign companies which already established business-models in foreign countries.

Service for individuals or families

Service for companies or parties

Education for adults

Housing

Medical service

Child raising

Legal service Environment

Nursing

High Potential for FDI into JapanHigh Potential for FDI into Japan

• The world’s second largest market (about 15% of the world’s GDP)

• The business hub of Asia’s growing economies( 2 hours to Seoul, 2.5 hours to Shanghai, 5 hours to Bangkok)

• Abundant highly skilled human resources

• Innovative high-level technologies

• Efficient infrastructure for dynamic business activities

• Reformed legal framework for investment

• Successful investment in Japan

• Lowered business costs

• Abundant market opportunities

• Excellent public safety and comfortable living environment

（ Reference: JETRO brochure “Invest in Japan” ）

10 Advantages of Investing in Japan

http://www.jetro.go.jp/investjapan/index.html

4

Japan has high potential for accepting FDI as below.

• Japan has the world’s 2nd largest market (about 15% of the world’s GDP, 4 times as much as China’s)

• Economic scale of some local areas are as large as the Chinese or Korean economies

• The Japanese consumers easily accept high-quality goods which satisfy their needs or wants.

The World’s 2nd Largest Market The World’s 2nd Largest Market

1,359

Kanto District(Tokyo,Saitama,Chiba,

Kanagawa)

1,440

Greece

Kansai District

(Osaka, Kyoto,

Hyogo)

657

Spain

475

115

Fukuoka District

(Fukuoka)

France174

※Unit: Billion USD Japan: 2000 FY, Europe and Asia economies: 2001CY

1,159

China

422

Korea

5

Improved Investment Improved Investment Environment Environment

through Structural Reformsthrough Structural ReformsDeregulation by Sector

Business Environment Improvement

Amendment of the Commercial Code (e.g., introduction of corporate divestiture system) and insolvency laws to promote business reform in industry

After the latter half of the 90s, entry barriers have been deregulated in the telecommunications, distribution, finance and energy sectors.

Competitive market brings lowered business costs

Accelerate corporate realignment through M&A

Cases of Market EntryTelecom: VodafoneDistribution: Calfure, Toys’R’usFinance ： GE Edison Insurance,

Nikko Citigroup

6

(Source: Bank of Japan/ Ministry of Public Management ,Home Affairs, Post and Telecommunications)

(Source: RECOF)

Consistency with International Accounting Standards & Auditing

System

Labor Mobility

Implement measures consistent with International Standards to ensure greater accounting transparency and reliance

Reduce due diligence costs by developing consistency with international evaluation criteria

The improved visibility of prompting labor mobility and foreign capital companies leads to foreign businesses being able to recruit human resources more easily.

The Labor Standards Law has been revised to promote a more flexible employee system and the Defined Contribution Pension system has been started to ensure further labor mobility. Number of foreign Number of foreign

companies in the top 100 companies in the top 100 popular companies for popular companies for university students in university students in JapanJapan

Humanities Students1995: 1 → 2002: 12Science Students1995: 9 → 2002: 24Source: Mainichi Communications

Ratio of Job Change by Sector

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

All Industries

(%)

1990

1995

2002

Source: Ministry of Health, Welfare and Labor

1999 Review the consolidation range, introduce cash -flow statement and tax-effect accounting, and review R&D expenses.

2000 Introduce retirement -benefit accounting and financial -instruments fair value accounting.

2005 Introduce impairment accounting. Under examination Business -combination accounting .

Agriculture &

ForestryConstructionManufacture

Transportation&

Telecommunications

Retail,Distribution

&Restaurant

Service

7

Japan Welcomes FDI into Japan Welcomes FDI into JapanJapan

Government Policy:Doubling the cumulative amount of FDI

in the next five years

General Policy Speech by Prime Minister Koizumi (January 2003)

“FDI in Japan will bring new technology and innovative management methods, and will also lead to greater employment opportunities. Rather than seeing FDI as a threat, we will take measures to present Japan as an attractive destination for foreign companies with the aim of doubling the cumulative amount of FDI in five years.”

8

JICEC: Collecting broad JICEC: Collecting broad opinionsopinionsJICEC (The Japan Investment Council Expert Committee) plays a

main role to consider policies to increase FDI.

JICEC consists of various members related to FDI and they discuss hotly about “How to invite foreign companies to Japan?” or “What is the obstacle for foreign companies to entry into Japan?”

23 members from professors, managers, lawyers, governors of local governments, etc.

14 members from related ministries (Director General, etc)

(Number of foreigners among the members is 10)

8

Through 10 times of meeting, JICEC drew up a report named “The Program for Promoting FDI into Japan” (See next page)

JICEC members

The Program for Promoting FDI The Program for Promoting FDI into Japaninto Japan

～～ Japan will develop into an attractive country for foreign Japan will develop into an attractive country for foreign businessesbusinesses ～～

The Program for Promoting FDI: 5 Priorities, 74 Measures

(1) Reviewing Administrative ProceduresMake the administrative procedures simpler, faster and clearerclarify legal interpretation.

(2) Improve business environment•Facilitate cross-border M&As•increase entry by the private sector to public services.

(3) Improve employment and living environments•Meet the need for diverse ways of working•improve systems related to entry and residence of foreign nationals

(4) Development of local and national framework•Support local governments' autonomous efforts to attract FDI•provide information and support procedures by JETRO.

(5) Disseminate information within Japan and abroadPromotion by national leaders, diplomatic missions abroad, foreign press.

http://www5.cao.go.jp/access/english/jic_main_e.html

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One-stop Support SystemOne-stop Support System• In May 2003, JETRO established the Invest Japan Business Support Center (IBSC) as a one-stop office to provide foreign companies with comprehensive information regarding investment into Japan.

• The Japanese Government also established “Invest Japan Offices” in each ministry, which cooperate with JETRO’s IBSC.

JETR

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Fore

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om

pan

ies

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Provide comprehensive

information

Consultations and inquiries

Response and introduction of

specialists

Advice

on a

dm

inistra

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pro

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http://www.jetro.go.jp/investjapan/index.html

MIN

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Major Progress in the Major Progress in the ProgramProgram• Major items are below.

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(1) Introduction of flexible merger techniques

(2) Enable operation of public institutions by private sector

(3) Enhance foreign law firms’ activity in Japan

(4) Enhance letter ruling system of National Tax Agency

(5) Enable easier TOB procedure

Thank You!

The EndWe make every effort to improve business environment of European companies in Japan.