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Japan Inc shops abroad to duck bleak domestic prospects
[TOKYO] With shrinking prospects at home and the threat of further yen weakness, Japanese companies are rushing to buy overseas and seem willing to pay top dollar, as shown by Japan Post's US$5 billion bid for Australia's Toll Holdings.
Over the long term, Japan's demographics give a bleak prognosis for domestic demand; the population has been falling for a decade and is projected to drop from 127 million to 87 million by 2060, 40 per cent of whom will be over 65.
But bankers and analysts say a more immediate impetus to the dash for overseas growth is the fear, in an era of deflationary pressure and huge monetary stimulus from Japan's central bank, that the weak yen will fall still further, making overseas targets more expensive if buyers don't strike now.
All of which demonstrates the counterweight to Prime Minister Shinzo Abe's efforts to kickstart the stagnant economy after decades of deflation and insipid growth.
The value of outbound Japanese acquisitions so far in 2015 is already at US$27 billion, nearly half of the US$56 billion total for all of last year, Thomson Reuters data show. By contrast, the value of domestic deals has more than halved since 2011, last year hitting a 16-year low of US$36 billion. "Companies are investing aggressively in places where there's a growing market. And since Japan is not growing, they're placing their bets on companies abroad," said Kazuhiro Kaneko, merger and acquisition consultant at Ernst & Young Transaction Advisory Services.
Japan Post's acquisition was designed to reduce its dependence on waning domestic demand. "The days are over when logistics companies can survive by shutting themselves in Japan," said Japan Post president Taizo Nishimuro announcing the purchase of Toll. "You could say that we bought time we would've spent on growth." Earlier this month camera maker Canon Inc and freight carrier Kintetsu World Express Inc announced their largest-ever overseas purchases. And this week brought news of deals by Hitachi Ltd and chemicals company Asahi Kasei Corp that will take Japan Inc's two-week shopping spree to around US$13.3 billion.
After two years of stimulus from the central bank to boost inflation, consumption and investment, Japanese companies, excluding financials, have amassed record holdings of cash, reaching 233 trillion yen (S$2.67 trillion), or 24 per cent of their total assets.
Some of that money is now being put to use in overseas acquisitions. "This trend is set to continue," said Kengo Nishiyama, senior strategist at Nomura Securities.
Japan Post Chief Executive Toru Takahashi said the Toll acquisition was just the start of the company's global expansion. "We want to use the experience and knowledge gained during the acquisition of Toll to create a global management base and expand further into Asia and North America," said Mr Takahashi.
Japan Post paid what Macquarie Securities analyst Sam Dobson called a "generous" 49 per cent premium over Toll's closing price on the day before the deal became public. "Typically you would look at a premium of some 25 per cent or so on this type of deal, and here we get double that," said Mr Dobson. "That's a lot." Canon's US$2.8 billion for Swedish network video surveillance firm Axis AB was also made at a premium of nearly 50 per cent, and Kintetsu's purchase of Singapore's APL Logistics was about 30 per cent above what sources said APL's parent company Neptune Orient Lines had been looking for.
The cost of overseas acquisitions funded in US dollars has already risen by more than 25 per cent in the last two years as the yen weakened to 119 against the dollar from 95.
Analysts expect the Bank of Japan to embark on more stimulus later this year, a Reuters poll showed this month, which is likely to put further pressure on the yen. "Everyone thinks that the yen is going to get cheaper, so they think it's better to hurry up now," Ernst & Young's Mr Kaneko said.
Japan's sensitivity to yen weakness has become particularly heightened since the 2011 Fukushima disaster led to the shutdown of its nuclear reactors, costing the country an estimated US$28 billion in extra fuel imports annually.
Asahi Kasei president Toshio Asano said the company decided to buy Polypore International Inc's energy storage business on Monday mainly because it fitted the company's growth strategy and would generate synergies, but the yen's trajectory was also a factor the company took into account. "We thought about it. The pressure is growing," he said.