TOKYO -- Japanese companies are seeing significantly slower growth in returns from their overseas investments as the global economy begins to sputter, threatening a business model that relies heavily on big earnings abroad.
Japan's direct investment income, which counts the amount of money Japanese companies received from overseas plus their retained earnings, reached a record 14.17 trillion yen ($129 billion) in 2019, according to balance of payments data provided by the Finance Ministry and the Bank of Japan.
But this income rose by just 2.6% year-on-year, following a similarly sluggish increase of 2.3% in 2018 -- a stark shift from average growth of 22% between 2012 and 2017.
Companies also are changing how they use this money. Businesses tend to reinvest these returns in local markets when the global economy is strong, so they can better capture demand in different regions.
But risks ranging from the U.S.-China trade war and Britain's departure from the European Union have prompted more companies to send that money to Japan. Retained earnings fell to 49% of direct investment income in 2019 after peaking at 56% in 2016.
In the U.S., where the economy is relatively strong, companies are reinvesting repatriated funds at home, supporting economic growth, according to Takuya Hoshino of Dai-ichi Life Research Institute. But Japanese companies are unlikely to step up domestic investment.
For example, Japanese materials group Teijin received a dividend of 70 million euros ($75.6 million) from a Dutch subsidiary in October.
"We have not necessarily earmarked this money for capital investment or other expenses in Japan," a company representative said, noting that it might be reinvested abroad eventually.
A Japanese electronics maker said it received about $55 million from a Southeast Asian subsidiary in the fall, mainly to help reduce the holding company's debt.
"Also, if we keep the money locally, it could be used as leverage by local workers to demand a pay raise," a company source said.
As the coronavirus outbreak originating in China spreads, Japanese companies are expected to bring more overseas earnings back home. But the domestic market faces issues including a shrinking population and low growth potential.
"It's unlikely for repatriated funds to lead to capital investments or wage hikes in Japan," said Hoshino.