Japan country risk analysis - Assignment Example

Task: Japan Country Risk Analysis Introduction In assessing the viability of locating or starting a business in a foreign country, a country risk analysis is vital in allowing investors to identify associated risks or opportunities that might affect the business in future. This is because a country risk analysis undertakes an in depth investigation on the economic, political and social factors that affects the financial and strategic derailment to the firms in realizing their business objectives (Wagner, 2012). This helps the investors in realizing the profitability and sustainability of a business they intend to start in a given country. Consequently, this paper undertakes a country risk analysis of Japan to understand its business environment for investors intending to invest in that country. Japan is located in the Eastern Asian market that is home to the top five countries with the largest growth domestic products (GDP) (AMB, 2012). Country Risk Analysis Japan has for long been considered to be a peaceful and calm environment for investors intending to expand their investments worldwide. This has been due to its stable economic, political and social environment that is favorable to the growth and survival of a business. However, the country has experienced unprecedented external forces in the latest times such as the recent global financial meltdown in 2009 and tsunami earthquake in 2010 that negatively affected its economic environment (SEB, 2012). Economic environment of a country is very crucial in enabling the survival of a multinational entity since it enables a positive demand for its products. Furthermore, it enables the investors to access credit at lower and affordable rates to start a business (Carbaugh, 2011). This series of negative external forces caused the GDP of the country sink to -5.8% for the first time since the end of East Asia financial crisis of 1990 (AMB, 2012). Nevertheless, due to the diversified modern economy of Japan, it has been able to weather this negative series of events smoothly in the last two years. The economy of Japan was able to recover in 2012 due to the government supported post-tsunami reconstruction and car purchase subsidies that were geared at boosting the consumer consumption. Indeed, the market has experienced a growth rate of 2.8% at the end of 2012 that has been stimulated by domestic consumption (Global Edge, 2013). This is as shown in the graphical representation from IMF below. Source (IMF, 2012). Source (IMF, 2012). Consequently, this reflects that the domestic demand of commodities is expanding positively to enhance the sales for organizations operating in Japan. This means that Japan is a vital place for multinationals to locate since it is able to enhance their sales revenue due to the rising local consumption that is currently experiencing shrinkage in many countries worldwide. Indeed, a market population of 127.8 million coupled with the rising private demand in the market, Japanese market promises to be the best destination in the global market for multinationals. However, the deflation or the fall in prices in the market (0.3%) as indicated in the table above has threatened the savings in the economy that is vital in promoting the availability of credit for the investors intending to set up new or expend businesses in Japan. Nevertheless, the proposal by the government to increase the consumption tax has seen the households opting to save more which has pushed the saving to 6% currently form the previous 2.2% on their disposable income (S$P, 2011). Thus, the credit market is experiencing a rising deposit to enable foreign investors to acquire credit to set up their business. Furthermore, the economic strength of Japan is one of the crucial factors that make the country one the best attractive destination for multinational organizations globally stimulating a concrete trade surplus (SEB, 2012). Owing to the surplus and steady balance of payment structure, the country is experiencing a reserve level that is the highest in the world. Thus, the savings of the country are high enough to support new investments through credit facilities in the local market. The economic environment of Japan as reflected by its domestic consumption and savings means that the economic risk is low for multinationals to survive and grow in the market. Indeed, the economic risk survey that has been conducted by the International Monetary Fund (IMF) show that Japan has one of the lowest economic risk in East Asia. This is as shown in the graphical representation below. Source (IMF, 2012). Consequently, Japan stands as the best destination for multinationals intending to invest in Asia since it has the best economic risk rating by a credible institution. This means that the financial and strategic objectives of the multinationals setting up their business in Japan are likely to be accomplished due to the favorable economic environment. Indeed, a country risk tie of 1 means that the country has a business infrastructure and legal environment that is transparent and predictable. In addition, its financial system regulation is highly sophisticated with a solid capital market and an insurance industry that has a mature framework (AMB, 2012). This means that multinationals operating in the Japanese market enjoy an economy that allows them to realize their financial targets by following their planned strategies and policies. In addition, they are able to hedge financial risks and seek credit in the capital market with certainty due to it level of maturity. Furthermore, Japan has been advantaged economically by the demographic location of the market it operates. East Asia has the best infrastructural network that makes it easier to transport goods and services at the lowest logistical cost. Furthermore, the region boasts of the biggest consumer market concentration in the global market. Thus, owing to the economic rating of Japan in supporting the survival and growth of multinationals, Japan stands as the best location for multinationals to set up their operations to serve the rich East Asian market. Another crucial factor in establishing the country risk of Japan is the political risk in enabling the realization of financial and strategic objectives of multinationals. Political risk assessment is vital since it enables a multinational investor in realizing the national tensions, bureaucratic inefficiencies, poor legal systems and international anxieties that are likely to affect the development of the country. Consequently, when the political environment of a given country is unfavorable to the development opportunities, businesses and consumers in the market are negatively affected. Japan has for long experienced a stable political environment due to its democratic and advanced government. This has been occasioned by the societal tensions on the running of the economy after the global financial crisis and tsunami earthquake. However, the country has experienced political instabilities of recent due to the frequent turnover of the leadership recently. Indeed, the current prime minister Naoto Kan is the sixth prime minister of Japan in the last six years (Klingner, 2012). This illustrates that the country is experiencing an average turnover of one prime minister per year. A political leadership that is experiencing frequent changes raises the fear of stability in the economic policies and laws of the government. Consequently, the market lacks predictability of the market environment for investors to realize their financial and strategic objectives in setting up their businesses in Japan. This means that Japan has of recent depicted a negative environment for multinationals intending to set up business. Multinationals intending to set their businesses in Japan are likely to be faced with frequent change of economic policies and laws as new political parties are elected to offer new economic recovery policies. Thus, a prudent multinational investor will likely avoid investing in Japan currently due to its unstable political turnover. However, the legal system allowing multinational firms to enter the Japanese market has proved to be favorable in the global market. Indeed, the subsequent governments that have been elected by the populace of recent have all been concerned on increasing the foreign direct investment in the country to boost employment. Furthermore, incentives have been developed in the foreign direct investment economic act of Japan for organizations that are interested in investing in green energy to end the nuclear power generation regime. Moreover, the country has developed a rigid patent law that is expected at protecting the intellectual property. Indeed, the government of Japan came up with a strategic framework policy in 2003 to protect the intellectual property and enacted the basic law on intellectual property. This is geared at promoting innovation and international harmonization of products and services manufactured in Japan (Motohashi, 2010). Thus, a multinational moving to East Asia has the opportunity of protecting their intellectual property by investing in Japan. This will enable them to trade their products in Asian market without the fear of losing their original right of owning the design and creativity of the product that is highly experienced in East Asian markets. This depicts that Japanese legal development towards multinational investors is favorable for their survival and growth. However, environmental and labor laws that have been developed recently have proved to be a hindrance to a number of multinationals intending to start business in Japan. Environmental and labor unions in Japan have led to the introduction of stringent laws on organizations doing business in Japan. This has seen the firms doing the business in Japan incurring heavy costs to comply with the stringent costs. Another political risk that has disadvantaged the Japanese market as the best destination for multinationals is the international tensions. Recently, Japan and China have been embroiled in a heated debate over ownership of some islands in Pacific Ocean (Perlez, 2013). This has raised the tension of war between the two countries if the ownership of the islands is not solved amicably. Similarly, trade barriers for goods produced between the two countries may be raised by each country if the issue is not resolved. Consequently, multinational companies operating in Japan will be negatively affected since they will not be able to export their goods and services to the Chinese market. In addition, if the issue causes a rise in military war between the two countries, organizations operating in Japan will incur infrastructural and financial losses due to the bombing of their properties. Social risk is another factor that multinationals intending to move their business in Japan should consider. This involves the understanding of the social characteristics of the country’s population that may hinder the realization of financial and strategic objectives of the business. One of the major social factors that are present in Japan is the issue of populace age. Japan has the highest number of aged population in the world that is expected to expand to 40% of people aged above 65 years by 2060 while that people aged 15 to 65 is expected to shrink by half (CBCnews, 2012). This is critical challenge to the future labor resource available in Japan due to the shrinking work force labor in the market. Consequently, multinationals moving to Japan will be forced to import labor force in future that is usually expensive to sustain. However, the education level of Japan has proved to be among the best in providing intelligent and creative work force in the global market (Dave, 2012). This means that multinational organization moving to Japan will earn the opportunity of possessing a labor force that is innovative in adding the competitive advantage of their products. This will enable the firm to compete effectively in the global market to increase its profitability and positive reputation of superiority. Consequently, a multinational organization should consider expanding its territory to Japan to be able to realize the best innovative labor force to improve its financial and strategic objective in the global market. Conclusion The country risk analysis of Japan shows that the country has a mixed signs of attractiveness to multinational organization intending to expand their international territory. This is shown by its favorable economic risk rating due to its economic environment the country offers to prospective multinational firms. In contrast, the political risk depicts a negative environment due to the current political tensions surrounding the future stability of the country. Furthermore, the aging population of Japan reveals a destination that may be expensive in acquiring an effective and efficient work force. However, the education system of Japan has the capacity of producing the best effective and efficient work force in the global market. Nevertheless, Japan has shown that it is capable of supporting the profitability and survival of multinationals even after tragic series of events (S$P, 2011). This means that Japan offers a good destination for multinational firms seeking to expend their international territory operation. Work Cited AMB. "AMB Country risk report." 2012. Japan. April 2013 . Carbaugh, Robert, J. International Economics. London: Cengage, 2011. CBCnews. Japan's population logs record drop. 2012. 15 April 2013 . Dave, R. Japan 4th in Global Education Rankings: Shurely Shome Mishtake? 27 November 2012. 16 April 2013 . Global Edge. Japan: Risk assessment . 2013. April 2013 . IMF. Regional comparison of CRT. 2012. 2013 . Klingner, Bruce. U.S. Should Use Japanese Political Change to Advance the Alliance. 2012. April 2013 . Motohashi, Kazuyuki. "Japan's Patent System and Business Innovation: Reassessing Pro-patent Policies." 2010. April 2013 . Perlez, Jane. As Dispute Over Islands Escalates, Japan and China Send Fighter Jets to the Scene. 2013. April 2013 . S$P. Banking Industry Country Risk Assessment: Japan. 19 December 2011. 16 April 2013 . SEB. "SEB merchant banking – country risk analysis ." 2012. Japan. April 2013 . Wagner, Daniel. Managing Country Risk. Boston: CRC Press, 2012. Read More