Japanese firms reluctant to expand business

KARACHI: Japanese companies operating in Pakistan are least interested in further investment to expand their businesses, while the country ranked lowest in the region.

“Unstable security, high inflation and an unstable exchange rate are major business concerns for Japanese companies operating in Pakistan,” said an official Japanese government survey on Monday.

The Japan External Trade Organisation (Jetro), the Japanese government’s trade and investment promotional arm, conducted an annual survey of Japanese companies in 20 countries and regions in Asia and Oceania to determine their business conditions in 2023.

According to the survey, the percentage of Japanese companies in Pakistan that responded “expand” to the question “business expansion over the next one and half years” was 43.5 per cent, ranking 11th among the 20 countries and regions.

Survey blames unstable security, exchange rate, high inflation for lowest interest since 2018

“This is the lowest level ever, along with the previous year’s 42.1pc (12th place),” said the survey.

“Even in 2020, the pandemic year, 53.5pc (1st place); in 2018, 66.7pc (5th place); and in 2019, 62.5pc (4th place), Japanese companies in Pakistan have consistently been eager to invest in the past,” it added.

However, amid the current economic crisis, Japanese firms’ willingness to expand investment has declined significantly.

Japanese companies in India responded to the same question at 75.6pc (1st place), while Japanese companies in Bangladesh responded at 61.2pc (3rd place).

“Among Japanese companies in Pakistan, 93.3pc cited “unstable political and security situation” as the biggest risk, and 86.7pc cited “unstable foreign exchange” as the second biggest risk.

“The 2022 survey reflected the significant depreciation of the Pakistani rupee,” said the survey, adding that the number one concern was “exchange rate fluctuations” and the number two concern was “higher procurement costs”. Japanese companies in Pakistan are facing higher import costs due to the rupee depreciation and the crisis in foreign exchange reserves is making it difficult to remit money overseas; these two factors are putting pressure on Japanese companies’ businesses, the survey disclosed.

Regarding “advantages of the investment environment,” 75pc of Japanese companies in Pakistan cited “market size/growth potential” and 70.5pc cited “low labour costs” as the main points.

It is understandable that Japanese companies have a high regard for the growth potential of the Pakistani market and a consistently strong desire to expand their investment, it observed.

The survey also examines wages at Japanese firms in the Asia-Oceania region. With regard to the “year-on-year wage increase rate”, reflecting domestic inflation, Pakistan ranked second in the manufacturing sector at 14.4pc, and first in the non-manufacturing sector at 18.4pc, which was outstandingly high among Asia-Oceania countries in the 2023 survey.

However, in terms of the “annual real burden of wages” in dollar terms, the summary of responses from Japanese companies in Pakistan showed that one employee’s burden for “manufacturing workers” ranked 15th with $2,370, while “non-manufacturing staff” ranked 18th in the region with $4,733.

The rupee’s significant depreciation against the dollar has increased import costs for firms. Inflation is also causing firms to face significant wage increases. “However, Pakistan is still one of the most competitive countries in the Asia-Oceania region regarding wage levels.”

“In Pakistan, unstable security, high inflation, and an unstable exchange rate are major business concerns for Japanese companies,” said the survey.

The government needs to urgently address insecurity, high inflation and an unstable exchange rate to get the economy back on a growth track, the survey added.