Given the various formal and informal entry barriers, foreign direct investment (FDI) flows into Japan were little more than a trickle during most of the postwar period. However, toward the end of the 1990s, the trickle turned into what by the country's own standard can only be described as a deluge, and during the space of only two years, 1999 to 2000, Japan attracted more such inflows than in the entire preceding three decades. Foreign investments at this time were headline-grabbing news, including such prominent deals as Renault's acquisition of a controlling stake in Japan's second-largest motor vehicle manufacturer, Nissan, and the sale of venerable Long-Term Credit Bank to an American private equity fund, Ripplewood Holdings. Both the sums involved and the nature of many of the investments during this period – the acquisition of struggling or failed Japanese firms – represent a watershed in the history of FDI in Japan.

The aim of this chapter is to examine this surge in inward FDI and the underlying reasons in detail. It will be argued that a host of interrelated developments during the 1990s significantly improved the investment climate for foreign companies wishing to do business in Japan: the deteriorating economic situation during the “lost decade” eroded many of the real or perceived informal obstacles to FDI, such as high prices and cross-shareholdings, spurred the government to deregulate, produced distressed companies that became potential takeover targets, and led to a general shift in attitudes toward foreign companies in Japan.