Japanese Investing in Canada Now Totals $750 Million a Month

The Japanese are investing in Canada at a record $750 million a month, lured by firm interest rates, untapped consumer demand and the hope of dodging protectionism in the U.S. market next door.

“We don’t have any barriers here,” said Taizo Kadoma, president of Mitsubishi Electric’s Canadian subsidiary, which has expanded in eight years from a two-man, $200,000 distributorship into a $202-million empire.

Despite a record $1.27-billion trade deficit with Japan last year, Canada has refrained from what Trade Minister Pat Carney condemns as “Japan bashing.”

Taking a long-term approach in its second-biggest trading partnership, Canada is actively promoting trade and investment. Some analysts predict it may soon surpass the United States as holder of the world’s strongest economy.

Japanese investment in companies and factories in Canada currently totals just $1.5 billion, or 2% of Japan’s direct investment abroad, compared to 32% put into the United States.

But since last summer, Japanese investors have poured an average $750 million a month into Canadian government bonds and treasury bills, triple the amount invested a year earlier, according to Statistics Canada.

Eleven Japanese banks have opened subsidiaries here, and Daiwa Securities, the second-largest brokerage of its kind in the world, paid a record $270,000 for a seat on the Toronto Stock Exchange ahead of the deregulation of securities trading on June 30.

Honda, Toyota and Suzuki are spending more than $750 million on Canadian car plants, bringing parts manufacturers with them. They hope to avoid import restrictions and retain their share of the North American market, although Washington has protested Canada’s failure to ensure the plants abide by Canadian-content rules applicable to U.S. auto makers.

Because of its record trade surplus, Japan has become the world’s biggest exporter of capital. Like Arabs recycling petrodollars in the 1970s, the Japanese accumulated foreign assets worth $150 billion last year and turned increasingly to Canada as the U.S. protectionist lobby grew.

A high-level delegation sent here last fall by Prime Minister Yasuhiro Nakasone found “a new Canada” with a healthy investment and labor climate, and said the two countries would become driving forces in the Pacific rim.

But although Japanese companies are making color TVs and computer software here, many have delayed investment decisions until they know whether Canada secures a free-trade pact with the United States.

“If an agreement does emerge, you could expect three or four years of good foreign investment in Canada,” one analyst said.

For now, most Japanese investment is indirect, attracted by interest rates about 1 percentage point above U.S. rates.

The Canada-Japan Trade Council estimates that Japanese trust banks, life insurance companies and pension funds now hold Canadian bonds and other securities worth $18.75 billion, returning about 10% a year or $1.88 billion in interest.

The holdings represent 20% of Prime Minister Brian Mulroney’s federal budget for 1987-88, and there are dangers. A Japanese sell-off of Canadian bonds caused the dollar to tumble nearly two cents in one day last month.

“Should Japanese investors decide to disinvest rapidly, the Canadian bond market would almost certainly be thrown into chaos,” said a Trade Council report.

Acknowledging his company’s financial might, Daiwa Securities general manager Hajimu Watanabe said Japan’s entry into stock and bond trading will be gentle. “Our policy is not to cause any friction with Canadian companies,” he said.

Mulroney’s Conservative government, which abolished the former Liberal government’s investment restrictions, hopes the Japanese will open more job-creating plants here.

There are about 300 Japanese companies in Canada, according to Shuichi Kawano of the Japanese consulate in Toronto, but many are only representative offices. Half are in Toronto and most of the rest in Vancouver and Montreal.

Japanese manufacturers have been pleased with Canadian workers.

The Honda Accords rolling off a new production line in Ontario meet a higher standard than Accords assembled in Japan.

Mitsubishi’s Kadoma said Canadians are hard working, and the country’s low crime rate makes Japanese feel safe.

But he said Canada has slipped far behind in technology and productivity, and can learn from Japan in labor-management relations.

“Our philosophy is that everyone, whether the management force or labor force, has to cooperate first to make the biggest pie; after that, let’s discuss how to share it,” said Kadoma.