Europe's trade supremo has condemned Japan's hostility to foreign investors as a “globalisation paradox” which could see companies turning their backs on the world's second-biggest economy.

In a speech in Tokyo yesterday, Peter 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 altogether.

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

That antagonism to foreign investors has been clearly demonstrated throughout corporate Japan and even in government circles.

Takao Kitabata, the top bureaucrat at Japan's 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, over the past 18 months, adopted poison pill strategies in an effort to forestall any takeover attempts by outsiders.

Many hundreds more have built “cross-shareholding” networks with friendly companies to further discourage any unwanted bids.

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

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 investors in Japan, pulled out of the market two years ago.

Last week the US investment fund Steel Partners said it had sold its entire stake in Bull-Dog Sauce, a food company, 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 Investment 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, causing 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. It was a paradox, he said, that Japan has taken advantage of an open investment climate around the world but been so defensive when outsiders have attempted to invest in Japan.

In 2006, Japan had net FDI outflows of $50 billion, while the entire EU invested just $0.5 billion in Japan over the same period. It was, he said, astonishing that the EU trades more with Switzerland than with Japan.

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