Interesting article on Japan/yen investment prospects.
ECONOMICS
Japan: the great new investment destination
Foreigners are now big buyers of stakes in Japanese companies
By Vikram Khanna
W
E'VE always known Japan as a major source of foreign direct investment (FDI), but how many people view it as a destination? In the new millennium, as the Japanese economy recovers, its propensity to absorb inward investment flows will be a huge story -- already is, in fact. Historically, these flows have been but a trickle. From 1991-97, for instance, cumulative foreign direct investment into Japan totalled US$8.5 billion (S$14.3 billion). Over the same period, sub-Saharan Africa got more than twice as much, while the United States got US$362 billion.
There have been good reasons for Japan's unpopularity as an investment destination. The most important is the traditional difficulties associated with effecting mergers and acquisitions (M&A), thanks to a thicket of regulations: in recent years, the bulk of foreign direct investment in the US and the EU has taken the form of M&A, including through stock swaps. In 1997, for instance, cross-border M&A sales by US firms totalled US$65 billion, while the comparable figure for Japanese firms was a paltry US$1 billion. There were also the notorious keiretsu networks which obliged Japanese companies to buy only from each other, effectively locking foreigners out.
Then there were all the other familiar reasons: Japan's prolonged slump, its exorbitant real-estate costs, pricey currency, and generally less-than-welcoming attitude to foreign companies. But all this is fast changing. Over recent years, Japan has witnessed major deregulation, particularly in banking, finance, telecommunications and the retail sector, which has made mergers and takeovers easier.
In the face of hard times, the keiretsu networks are coming apart, with companies breaking long-established ties to find the most competitive suppliers, wherever in the world they might be -- a trend that will accelerate with the spread of e-commerce. Real-estate costs, while still high, are less than half what they were at the start of the 1990s. Cash-strapped and in need of partners, many Japanese companies have been welcoming foreign equity participation.
Even Japanese consumers and workers are changing their ways. Surveys by the Japan External Trade Organisation (Jetro) show, for instance, that foreign companies operating in Japan now find it easier to hire skilled and experienced staff, who earlier would rarely deign to work for foreigners. And Japanese officialdom has laid out the red carpet for foreign investors.
It all seems to be working. Foreigners have now become big shoppers for stakes in Japanese companies, and big buyers. Last year, for instance, there were more than 20 tie-ups, mergers and takeovers involving Japanese and foreign financial institutions, culminating in the US$1.2 billion buyout last month of the Long Term Credit Bank of Japan by US-based firm Ripplewood Holdings LLC -- the first time a Japanese bank has fallen into foreign hands.
There have been mega deals in other industries too. Earlier this year, French carmaker Renault paid more than US$5 billion for a 37 per cent stake in Nissan Motor. And British phone company Cable and Wireless forked out US$578 million for 98 per cent of the Japanese telecoms firm, International Digital Communications.
With Japan's economic recovery in place, we will see more of this. Dozens of deals are already in the works. Investors know that Japanese companies' stock prices will not remain cheap for long nor the companies cash-strapped forever. And many believe that getting in on the ground floor in Japan today, after a decade-long slump, represents a once-in-a-lifetime investment opportunity.
This year and next, therefore, we could see Japan attracting more foreign direct investment than it received in the previous decade, with figures running into the tens of billions of dollars. Even greenfield (as opposed to M&A-related) investment could soar. Japan is no cheap production base, but it does offer high skills, a quality-conscious culture and decent infrastructure.
In some cases, locating operations in Japan is simply unavoidable -- for instance where product cycles are short and time-to-market is critical, and in industries such as software, where local adaptation is essential.
Of course, above all, there is the lure of the Japanese market. And what a market it is! More than three times that of China and India combined, more than six times that of Asean, and almost 10 times that of Korea.
The Japanese economic recovery will be a mega event, which, from the point of view of an investor, will dwarf any bounce-back that occurs in the rest of Asia. Whether or not the Tokyo stock market booms in the millennium year, foreign direct investment in Japan looks set to rocket. And Asian investors should be in there too.
|
