Encourage offshore M&As that utilize yen's strength
Taking advantage of the strong yen, an increasing number of Japanese companies have been boosting their overseas acquisitions.
According to data recently released by Thompson Reuters, a major U.S. corporate information service company, the number of offshore mergers and acquisitions conducted by Japanese firms in 2011 was up a record 20 percent from the previous year. The total value of such deals rose 80 percent, also an all-time high.
Because of low growth due to the stagnant domestic economy and years of deflation, Japanese companies tend to operate defensively. The growing trend for Japanese firms to go on the offensive by venturing offshore is definitely welcome.
If Japanese businesses can bring their overseas profits into this country, thereby leveraging their newly expanded overseas businesses to promote growth in the domestic economy and higher employment, they will surely help reinvigorate the national economy.
Buyouts spreading to Asia
The total value of Japanese companies' foreign M&As in 2011 was about 70 billion dollars (about 5.5 trillion yen).
In 2008, the value of overseas corporate buyouts by Japanese firms was much the same in dollar terms as in 2011, but was worth about 7 trillion yen when converted into the Japanese currency.
This means the costs of overseas M&As have fallen remarkably thanks to the strength of the yen. We can safely say hyperappreciation of the yen spurs the expansion of Japanese firms spending capital offshore.
Although the sharp uptrend in the yen's strength seems to be pausing for the moment, Japan's currency remains at a historically high level. We hope Japanese companies stay on the offensive in their outbound M&A deals.
Especially conspicuous among purchases of foreign firms by Japanese companies are large-scale deals by firms that were previously considered stay-at-home businesses, such as food processing companies. This is prompted by fears of a shrinking domestic market because of the nation's declining population.
Japanese firms have mainly sought foreign acquisitions in the United States and Europe, but they are becoming more active in China and other Asian countries. This reflects Japanese companies' strategy of expanding their businesses in emerging countries with high growth potential.
It is also noteworthy that major trading houses have been moving to boost their capital spending offshore, to secure resource development rights in anticipation of resources development projects becoming more profitable due to soaring prices of natural resources.
Bubble's bitter lessons
Japanese companies, however, should be scrupulous enough not to be overly optimistic when making outbound investments because they do not want to miss opportunities.
They should bear in mind that many Japanese companies during the high- growth days of the bubble economy suffered huge debacles in their overseas investments, including property deals.
It is vital for Japanese companies to scrutinize the actual financial conditions and business prospects of foreign firms they are planning to buy out.
The capabilities of financial institutions that advise Japanese firms in their offshore capital investments are being tested in this respect.
A stronger yen has such negative aspects as raising prices of export goods and resultant drops in sales competitiveness.
Especially worrying in this connection is that an increasing number of Japanese companies, in particular such export industries as electric machinery and automobiles, have been shifting their production bases overseas, threatening to accelerate the hollowing-out of domestic industries.
If Japanese companies' M&As are mainly an attempt to flee from the impact of a strong yen, their capital deals overseas could plunge into a vicious circle that further darkens already stagnant domestic business activity.
In another move worthy of note, Toshiba Corp. and Sony Corp. have applied for loans from a government-backed "emergency fund to cope with the yen's appreciation" that was created last autumn to support Japanese firms' M&A operations abroad.
The government and the private sector should continue to jointly propel growth in the national economy through outbound M&A deals.
(From The Yomiuri Shimbun, Feb. 25, 2012)