Capital flows in Japan

Capital began to flow in and out of Japan following the Meiji Restoration of 1868, but policy restricted loans from overseas. In the aftermath of World War II, Japan was a debtor nation until the mid-1960s. Subsequently, capital controls were progressively removed, in part as a result of agreements with the United States. This process led to rapid expansion of capital flows during the 1970s and especially the 1980s, when Japan became a creditor nation and the largest net investor in the world. This credit position resulted both from foreign direct investment by Japanese corporations, and portfolio investment (holdings of foreign exchange by the central government). In particular, the rapid increase of Japan's direct investments overseas, much exceeding foreign investment in Japan, led to some tension with ths US at the end of the 1980s.

Motivations for Japan's drive to invest overseas included: to obtain access to raw materials; to overcome barriers to exports from Japan; and to maintain the international competitiveness of traded products in the face of the high value of the Japanese yen.

After the Meiji Restoration, as Japan ended sakoku, the policy of isolation and opened up to participation in international markets, the state followed a policy of discouraging foreign investment. Borrowing abroad was only done if deemed necessary and unavoidable, given state concerns about vulnerability to foreign debt. There were fears that Japan could see a challenge to her sovereignty if debts became large, and foreigners could find a justification for intervention, as happened to some contemporary states of the time like Mexico and Egypt. Encouragement and state support was given to domestic investors, including the sponsorship of new industrial ventures under state ownership, and then their eventual privatization (to Japanese investors).

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