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Economy

Japan Inc. drawing on foreign units for growth

Direct investment income from Asia stood out in 2017

Overseas units in China, as well as Southeast Asia, underpinned growth in direct investment income.

TOKYO -- Record earnings at overseas subsidiaries helped Japanese companies grow in 2017 as substantial investment abroad allowed them to tap into foreign markets and supplement exports.

Japan ran a 21.87 trillion yen ($200 billion) current-account surplus last year, its largest in a decade. Primary income -- the dividends companies receive from their overseas subsidiaries and income from lesser investments -- rose by 1.63 trillion yen over the 2016 level to 19.7 trillion yen.

Income from direct foreign investments, in particular, increased 20% on the year to a record 12.71 trillion yen. This refers to income from foreign subsidiaries in which the Japanese parent holds at least a 10% stake. Factoring out investment income earned in Japan by foreign companies leaves a still-substantial surplus of 8.79 trillion yen, also 20% more than in 2016.

This swell comes as companies turn to foreign markets to secure growth amid population decline and other challenges at home, and reflects brisk earnings at companies such as Seven & i Holdings with a strong overseas presence. A group of 135 major companies earned 53% of their operating profit overseas in the year ended March 2017, up six percentage points from a decade earlier.

Directly investing abroad, such as by establishing local subsidiaries, is growing more popular as a way to reach foreign markets. In 2007, income from direct foreign investments equated to just 6% of that from exports and 34% of income from portfolio investments -- both more traditional ways to make money overseas. By 2017, those figures had climbed to 13% and 82%, respectively.

Investment in Asian countries, including China and members of the Association of Southeast Asian Nations, is propelling this growth. Direct investment income from Asia grew 24% on the year for the nine months through September 2017, while that from the U.S. rose 10%. The weakening in the yen bolstered the value of dollar assets in conversion.

The value of foreign investments is likewise substantial. Takeda Pharmaceutical paid $5.4 billion last year to acquire American oncology drugmaker Ariad Pharmaceuticals. The $100 billion SoftBank Vision Fund -- backed by SoftBank Group and partners including Saudi Arabia's sovereign wealth fund -- has invested in technology heavyweights including Uber Technologies, the top ride-hailing service in the U.S.

Overseas economies are expected to remain brisk this year, according to Junko Sakuyama, senior economist at the Dai-ichi Life Research Institute. "But if financial markets stay volatile, companies could grow more cautious, drying up further investment," she added.

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