Peter Mandelson, the EU External Trade Commissioner, has condemned Japan’s hostility towards foreign investors as a “globalisation paradox” that could lead to companies turning their backs on the world’s second-biggest economy.

In a speech in Tokyo today, Mr Mandelson described Japan as the most closed developed market in the world and that imbalances of investment between the EU and Japan were “truly staggering”.

His remarks come as many funds and corporate investors have either dramatically curbed their ambitions in Japan or decided to close their positions there altogether.

Many of them cite growing despair that Japan will ever embrace the principles of shareholder capitalism, or drop its scepticism of foreign investors.

Takao Kitabata, the top bureaucrat in the Japanese Ministry for the Economy, Trade and Industry, recently described short-term stock investors as “greedy, irresponsible fools to whom voting rights should never be given”.

More than 400 listed Japanese companies have adopted poison-pill strategies in an effort to forestall any takeover attempts by outsiders, and many hundreds more have built “cross-shareholding” networks with friendly companies to discourage further any unwanted bids.

The courts have also played their part, consistently ruling against any foreign fund that has attempted to buy controlling stakes in Japanese firms.

The result has been a virtual collapse of the Japanese mergers and acquisitions market, and, in 2007, one of the worst performing stock markets in the world.

Vodafone, one of the largest FDI (foreign direct investment) players in Japan, pulled out of the market two years ago.

Last week the US investment fund Steel Partners said that it had sold its entire stake in Bull-Dog Sauce after more than a year of court-thwarted attempts to buy the company outright.

Over the weekend, Chris Hohn, the managing partner of the UK-based Children’s Fund (TCI) warned investors against investing in Japan altogether.

His fund’s sole investment in Japan – a near 10 per cent stake in the electricity wholesaler J-Power – has generated massive conflict between TCI and J-Power management and caused the Japanese Government to step in to block further investment by the fund.

Reflecting the huge frustration felt by outside investors in Japan, Mr Mandelson said that the problem was not that Japan did not know how to exploit the benefits of foreign direct investment, but that at the moment it was a one-way process.

In 2006 Japan had net FDI outflows of $50 billion (£25 billion), and the entire EU invested only $500 million in Japan over the same period.

It was, he said, astonishing that the EU trades more with Switzerland than with Japan.

“Foreign direct investment is part of pretty much every credible growth model,” he said, “and it is ubiquitous in OECD economies ... the striking exception in this picture is, of course, Japan. Remarkably so.”

He added that potential investors had been turned off Japan by the lack of transparency, and by the lack of corporate laws written in English.

Japan would be the loser, he said, if EU companies turned to China as the target for their investments.

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