Foreign direct investment in Japan: Empirical analyses of interactions between FDI inflows and trade

Foreign direct investment into Japan has traditionally been lower than that occurring in most other developed economies. The cause has often been ascribed to uniquely Japanese characteristics; Government industry policy or the structure of Japanese industry. Many commentators have viewed such non-tariff barriers as an underlying strength of the Japanese economy. By using a traditional 'gravity model' of trade, this paper points out that foreign direct investment and the level of Japanese trade are mutually determined. Countries with large foreign direct investments tend to trade more with Japan and vice versa. By removing any disincentives to foreign investment, the Japanese government would be encouraging Japan's trade and its economic growth.