Land of the rising yen
22 November 2010
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16 October 2012
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A rise in foreign acquisitions by Japanese companies shows that a sluggish domestic economy doesn’t mean the country’s legal market should be written off. By James Swift
Earlier this month Japan’s prime minister and its finance minister changed tack: from combating the country’s too-strong yen to urging Japanese companies to make the most of it and buy foreign assets.
“We must work to prevent [the yen’s continued rise], but in the meantime there are advantages to yen rises,” Japan finance minister Yoshihiko Noda is reported as saying during a parliamentary session. “Moves such as purchasing foreign assets as well as foreign companies should be actively pursued.”
Noda might have saved his breath. Japanese companies have been pursuing outbound acquisitions for some time, say lawyers. According to reports, the value of outbound deals so far this year has already outstripped last year’s total of $27.6bn (£17.03bn) by around half a billion dollars.
“Over the past two and a half years I’ve seen a fairly significant uptick in outbound work, particularly this past year,” says White & Case Tokyo partner Brian Strawn.
Strawn points to Japanese company JTEKT Corporation - historically a domestically minded company - and its acquisition of US company Timken’s needle roller bearings business for $330m at the end of 2009 as a good example of the changing mindset of Japanese companies.
Japanese companies do not have much of a record when it comes to taking over foreign companies and integrating them, and the shift in focus has had a knock-on effect on the legal market. One result, says Strawn, is that Japanese firms are taking on more international lawyers.
“It does seem that [Japanese firms] have started hiring more non-Japanese lawyers at associate or counsel level,” agrees Baker & McKenzie partner Yoshiaki Muto. “But they do not or cannot hire partners because they haven’t formed a foreign law joint enterprise - a ’gaikokuhou joint venture’ [GJV] - and thus are not allowed to make non-Japanese-licensed lawyers partners. If firms start registering as GJVs, that’s the real change.”
But it is probably more than coincidence that two Japanese firms have expanded beyond the country’s borders recently. In September Nishimura & Asahi, the largest of Japan’s big four firms, launched a representative office in Ho Chi Minh City, making it the only Japanese firm in Vietnam.
Also in September Nagashima Ohno & Tsunematsu tied up with Australian firm Allens Arthur Robinson in a bid to service Japanese clients across Asia and Australia.
“The competition posed by the international law firms for the outbound legal work of Japanese clients has increased tremendously over the years,” says Nagashima Ohno chairman Hisashi Hara. “We believe that our ability to compete in the future with these firms will be directly tied to our ability to develop our relationships with Allens Arthur Robinson and other firms in the Asia region.”
“The ’big four’ [Japan’s magic circle] clearly have strong appetites for expanding in the region by teaming up with local firms or putting their own people [on the ground],” says Muto. “But probably not much further than the Asian boundary. There’s no sign of such expansion in Europe or America.”
International firms in Japan are being forced to adapt too. Corporate activity is down and the strong yen, combined with an ageing and decreasing population and near-constant deflation, is threatening to cause a further decrease in consumption and domestic corporate activity, according to Mori Hamada & Matsumoto managing partner Toru Ishiguro, meaning the kind of growth the country has experienced in the past 20 or 30 years is unlikely to return anytime soon.
Investment goes west
There is also a shortage of cross-border deals flowing into Japan from the West.
“Probably the biggest reason for the stagnant inward investment is the economic performance of the US and Europe,” says Linklaters Tokyo partner Hideo Norikoshi. “Companies in developed countries simply don’t have the financial health to make investments in the form of M&A. We’re seeing some investment from China, but it tends to be small in scale - they seem to be most interested in Japanese technology and brands.”
The response of US and UK firms in Japan is split: some are shifting focus and resources to other Asia-Pacific jurisdictions, while others are using their international expertise to compete with Japanese firms for domestic clients and assist them on outbound acquisitions.
“Some [international] firms have adopted the strategy of downsizing here and focusing on servicing clients on inbound work,” says Strawn. “Most [international] offices in town have quietly got a bit smaller, cutting around 30 per cent, and I think we’ll see a number of firms simply closing offices here in the next 18 months.
“A select few firms have said they’re going to service Japanese clients on outbound work, but they’ll do so in a different way to Japanese firms.”
The legal market in Japan is changing; the country cannot offer firms the same opportunities it once did and, increasingly, US and UK firms are putting more resources into other Asian hubs. But this situation should not be confused with Japan taking a back seat. The country’s technology, knowhow and population, which despite decreasing still stands at more than 120 million, ensure that it is still relevant. n