Opportunities in an undervalued Japanese market

The Bank of Japan recently announced changes to its ultra-low interest rate strategy that may impact, but there are plenty of other factors fuelling a robust Japanese M&A market. Global M&A activity declined in both volume and value in 2023, according to Pitchbook data, but the number of transactions involving Japanese targets held steady, with 186 deals worth USD 12.1 billion compared to 188 for a cumulative USD 21.1bn in 2022. Bain & Company’s recent report, M&A in Japan: Resilient Activity – But Now It’s Time for More, also highlights a record level of acquisitions by private equity investors in 2023.

Acquirers are sensing an opportunity as Japan’s delayed post-Covid economic rebound finally gathers pace. Slower to rebound than the rest of the world, the country is at last enjoying a modest recovery driven by strengthening business investment, while low interest rates make deals relatively less expensive than elsewhere.

A safe place to invest

There is no doubt that in the current environment of heightened geopolitical uncertainty, investors are more cautious than ever.

As a longstanding trading partner of the United States and Europe, Japan represents an attractive destination for risk-averse dealmakers. In the U.S. both President Biden and Donald Trump have gone on record to highlight the importance of the bilateral relationship moving forward, with Kamala Harris widely expected to take a similiar position as the Biden administration. These factors suggest ties will permeate U.S. and Japanese investment flows going forward regardless of the next resident of the White House.

Further, Japan’s benign political status makes it an attractive hotspot for multinationals looking to shore up global supply chains. It is a low-risk market in which to invest, with an easy to navigate legal and regulatory system, a court system that is fair and impartial and reliable domestic infrastructure. Most Japanese companies produce reliable and well audited data for investors, and the country is among the most trustworthy in Asia Pacific when it comes to tackling corruption and bribery. It currently ranks in the top 10% of 180 countries assessed in Transparency International’s Corruption Perceptions Index.

In line with elsewhere, Japan recently refreshed its foreign investment rules under the Foreign Exchange Act as it seeks to control investments in assets or industries that house sensitive technologies or information. The rules require a filing to be made before investments can go ahead in certain sectors, but most investors will find the regime straightforward to navigate and less blanket in its approach than others around the world.

Growing awareness

Japanese tourism is currently at record highs, driving a growing familiarity with the country and its culture among foreign visitors. That is supporting appetite on the buyside, while Japanese sellers are also increasingly open to inbound interest.

Aware of the need to optimise portfolios and cut unprofitable assets in the face of global competition, Japanese corporates are no longer as reluctant as they once were to sell off non-core parts of their businesses.

While Japan has historically been a destination for foreign investors looking to back passive assets like real estate or small-scale renewable energy facilities, the transition by domestic corporates towards more data-driven business models is seeing interesting disposals coming onto the market. Panasonic’s decision to sell its automotive business to US private equity firm Apollo Global Management in March is a case in point. Hitachi, too, has sold off nearly USD 20 bn worth of businesses over the past five years.

There is also growing appetite from both private equity investors and strategic acquirers in taking companies private just as Japanese targets are becoming more open to bids. Last year’s take-private of industrial conglomerate Toshiba by buyout fund Japan Industrial Partners was the culmination of many years of efforts by keen potential acquirers.

Key takeaways

Conditions are ripe for inbound Japanese M&A deals to continue to flourish. Given the somewhat unique nature of the market, investors require a good understanding of local business and culture, often turning to advisers on the ground for support on all aspects. We see increased appetite from overseas buyers, with a tendency to start with small deals, gauging the market and establishing a toehold before moving to build a more substantial presence.

As the Japanese stock market continues to perform well, business owners and founders will be increasingly open to the prospects of a sale. With robust preparation, the right support and a clear strategy, carve-outs and management buyouts should continue to attract foreign investors, who will find it relatively easy to get comfortable with the country’s straightforward and predictable legal and regulatory regimes.

This article has been previously published on July 16, 2024 in the following publication.