Japan Special Report: A yen for investment
15 December 2008
Despite Honda’s decision to withdraw its Formula 1 team from competition, rumours of the Japanese economy’s demise are off the mark. Indeed, the country’s solvent companies will soon be looking for assets abroad, reckons Jonathan Ames
British Grand Prix driver Jenson Button and more than 800 staff at Honda’s Formula 1 team headquarters in Northamptonshire have become the latest victims of the effects of the global economic downturn.
Tokyo-based Honda – the world’s fifth-largest motor vehicle manufacturer – decided that a £300m-plus annual expenditure on two cars and 17 races could not be justified in an almost unparalleled climate of gloom for the international car industry.
But it is not just the Japanese motor trade feeling the pinch. A Reuters survey released at the beginning of December suggests that the world’s second-busiest economy is likely to remain in recession well into 2009.
Still, English lawyers practising in Tokyo maintain that current statistics and economic forecasts belie a relatively buoyant mood in the country.
“The Financial Times recently described Japan as the basket case of the world economy,” quips Steve Lewis, managing partner of Herbert Smith’s Tokyo office. “And I read reports about how cash-strapped people are and that there’s no business going on. It’s absolute rubbish in reality.”
Lewis and other lawyers from the City’s top 10 say that the streets of Tokyo are busy, cluttered with Lamborghinis of a Saturday afternoon, and that the restaurants in the city centre are as packed as ever. Perhaps not the most scientific of measures, but lawyers support that feel-good factor with hard arguments about the position of Japanese investors supported by an increasingly strong yen.
“Japan’s always been viewed as an economy that presented a great opportunity for foreign investors because of the perceived relative inefficiencies in Japanese companies,” comments Paul McNicholl, head of Linklaters’ Tokyo office. He finds it ironic that companies that were criticised in the past by foreign investors for having reduced their borrowings may now be able to go on something of a spending spree overseas because they are cash rich and the yen is strong. “There’s a strong belief that the roles have been reversed,” says McNicholl.
Lawyers predict that those Japanese companies without debt and with cash on their balance sheets will soon be looking for assets abroad. “My clients are telling me that there are M&A deals they want to do, but they want to wait for commodity prices and valuations to stabilise,” says Lewis. “They’ll start looking in the New Year. I’m expecting a big M&A drive from corporate Japan from January or February.”
Lewis points out that, during the boom period in the West, the big Japanese trading companies were outbid because of a combination of factors – not least an exchange rate that was then balanced against the yen and an accurate perception that doing M&A deals with the Japanese was complicated.
“If you wanted to get rid of your company quickly and smoothly, and you were a European or American, you were definitely going to sell it to a European or American, because it’s much easier to do the deal,” he adds. “The Japanese have a way and means of doing things and it’s very different – the M&A position can be a bit tricky.”
Essentially, the problem is a cultural one. At the start of an M&A deal in Japan, a report is drafted detailing how it will work, and for a fortnight or so that detailed plan is pushed up the organisation, finally going to the board of directors. If the board approves the deal, the members put their seal on it. If the members have some concerns, but not enough to block the deal, they put their seal on upside down. And if they do not approve, they do not apply their seal.
But once the format is given the seal of approval, it is almost impossible to change as the deal progresses. And it is that lack of flexibility that is unknown and frustrating to Western sellers. Indeed, so strict is the structure that several years ago one Western lawyer caused the corporate counsel of a large Japanese company to break down weeping when it was suggested that his seller-client wanted to vary the terms of the deal to put the business through a capital loss company.
There is also a perception in the West that corporate Japan lingers over decisions – something that has historically put Japanese investors at a disadvantage against their more nimble Western counterparts. But Linklaters’ McNicholl takes another view, saying: “Now that most financial sponsors are having difficulty obtaining leverage, there’s a good argument that Japanese strategic investors have the advantage – rather than leverage being the play, synergies can be the play.”
Geography could also help Japan, as the country sits on the doorstep of one of the world’s fastest-growing emerging markets – China. Historically the two countries have had hostile and at times brutal relations, but, as is often the case, commerce and trade has triggered a thawing in the mood.
In recent years there has been a big demand for Japanese heavy and high-tech machinery, which gave a significant boost to Tokyo. So much so that the slowing of the Chinese economy from 10 per cent growth to 8 per cent could have a serious impact on Japan.
As far as legal practice is concerned, the big breakthrough came three years ago when the Japanese authorities allowed local lawyers to form partnerships with foreign law firms.
“The practice rights situation has settled down,” comments Alison Hook, head of the international division of the Law Society of England and Wales. “There
are further issues that would help to do business, but they’re not insurmountable obstacles.”
One niggling point is that foreign law firms are not allowed to incorporate, and therefore cannot open more than one office in the country. While it is not a huge stumbling block, it does prevent overseas firms from merging with domestic practices with offices in, say, Tokyo and Osaka.
Nevertheless, compared with the practice rights position in India, or even the few miles west across the Sea of Japan in China, Japan is now viewed as a liberal and welcoming environment for Western law firms.
Jonathan Ames is editor of Dubai-based The Brief