Technical Tuesdays: The Japanese Conquest

Will Japan Keep Surfing the M&A Wave?

Will Japan Keep Surfing the M&A Wave?

The Japanese yen is at some of its lowest levels against the dollar since the big trough of 2015/2016, and it looks like it may even be on its way to hitting the nadir of 2007.

But even so, Japan is all set to keep riding the merger and acquisition (M&A) wave, as you can see in the graph below.

In recent years, China dominated the M&A volumes. But in an effort to protect its currency, it’s now backing off a bit.

And with the U.S. more concerned with Making America Great Again, the foreign competition faced by Japanese companies has become much less daunting.

By tapping into foreign markets, Japanese companies grew in 2017 with record earnings.

Japan also recorded its largest current-account surplus in a decade with 21.87 trillion yen (US$200 billion), and Japanese companies received 19.7 trillion yen from overseas subsidiaries – an increase of 1.63 trillion yen from 2016.

Also in 2017, income from foreign direct investments (FDI) increased significantly, by 20 percent to 12.71 trillion yen.

The reason for Japan’s increased enthusiasm for outbound investment lies with the country’s falling population and lagging economy.

That’s a challenging environment for any company, no matter what you sell.

Japanese companies need to look abroad in order to grow and need to strategically buy sensible businesses so as to not be too dependent on their domestic market.

And they sure have enough ammo for M&A.

Over the past two decades, the growth of the Japanese economy has been slow. This left companies with huge piles of cash.

Pressure to invest and changes to the corporate governance code regarding return-on-equity (RoE) have also driven Japanese enterprises towards M&A.

Due to this Japanese expansion overseas, Japanese demand for foreign currencies has risen.

The graph below clearly shows an increase in sales of foreign-currency bonds by Japanese companies, who are profiting from rock-bottom interest rates in the U.S.

These bonds give Japanese companies some extra firepower for their growth strategies, including M&As.

These overseas M&As mark a fundamental change in how Japanese companies make money, as they are switching their asset holdings from real estate and machinery to investments that pay dividends.

According to data from the Japanese Ministry of Finance, 47.8 percent of Japanese companies’ fixed assets were in stocks, bonds and other investment assets at the fiscal year ending in March 2017.

That’s a 10 percent growth from the previous year.

With more and more Japanese companies going abroad, such dividends are an increasingly important source of income.

The Japanese government is also lending a hand and encourages M&As by reducing the tax on no-cash deals.

Before, when Japanese companies used stocks to take over other companies, a tax on gains from selling their stock was imposed.

However, with the new rules, they don’t have to worry about tax until they cash in on any stock they received.

So it looks like the fun is not likely to end anytime soon for Japanese enterprises. They’ll probably keep riding the M&A wave – with the government cheering them on – for a while yet.