COVER STORY • Foreign direct investment in Japan • 9

T
By Robert GRONDINE
rends of FDI
in Japan for 2009
The deepening global recession raises many difficult questions
for both international business and governments around the world
was less than 2% as compared to the nation’s gross domestic prod-
uct, the measure most commonly used for this factor within the
as to how to cope with these drastic reductions in consumption and OECD. Whereas all of the other major economies in the world had
corporate investment in order to be able to revive each national FDI levels in double digits and in some cases reaching as high as
economy as soon as possible. So companies are aggressively 30% in Germany and Britain, Japan’s FDI level had been extremely
reducing debt and conserving – some would say even hoarding – stubborn at this anemic base. Even China and South Korea have
cash by slashing expenses, reducing employment and either cancel- built their FDI base very significantly in the period since 1995 to
ing or postponing significant new corporate investments across the substantial double-digit levels (Chart 1).
board. The current global economic projections all increasingly Prime Minister Koizumi’s government set out to double Japan’s
point to this trend continuing at least to the beginning of 2010. All FDI base in a five-year plan period to 2005-2006. Through positive
of those influences will directly depress the amount of global M&A changes to the Commercial Code and then the adoption of a com-
transactions that will be seen in 2009 and into 2010. pletely new and modernized Company Law in 2006, as well as
However, within that global trend there will undoubtedly be varia- strong information campaigns and efforts to assist foreign compa-
tions. Cash-rich companies with access to reasonable amounts of nies with their new investments into Japan by matchmaking ser-
debt will be in an enviable position to be able to acquire assets with- vices, low-cost loans and facilities and facilitation of cross-border
out many competing bidders, at very reasonable prices in this eco- M&A activities, Japan did manage to meet this FDI-doubling goal in
nomic environment. Companies that have weak access to operating 2006. The government of Koizumi’s successor, Shinzo Abe, then
funding or whose cash flow is impaired by reduced sales or by their reaffirmed and renewed that goal to again double FDI within the fol-
banks demanding debt repayment will be forced to sell assets in lowing five years. The first Koizumi doubling plan had the great for-
order to survive – even at the currently unattractive price levels. tune to coincide with the years 2003-2005 when the global M&A
International currency values have been undergoing very rapid market and global economies were in a positive growth mode after
swings as well during this period as investors repatriate their funds recovering from the IT bubble implosion in 2001-2002 and the
to protect their home base operations and repay debt. How do all of effects of the September 11, 2001 terrorist attacks in the United
these trends potentially affect the level and pace of international for- States. As a natural result of the ebullient global investment envi-
eign direct investment (FDI) into Japan for this period? ronment in those years, FDI into Japan demonstrated significant
year-on-year increases. In the opposite direction, Japanese invest-
Recent Background ments abroad were low due to (i) the negative effects on Japanese
corporate balance sheets of the 1990s “Lost Decade” and especially
In the period 2000-2007, the administration of Prime Minister the weak balance sheets of Japanese banks, impairing the equity
Junichiro Koizumi issued its “Double FDI” policy to address what and debt appetite and capacity of Japanese companies and (ii) the
had become an increasingly glaring problem that FDI into Japan wider availability of acquisition finance to international companies,
CHART 1 CHART 2
FDI stocks as percentage of GDP in 2000/2005 Japan’s total FDI in 2000-2007

Source: World Investment Report 2006, OECD Note: Figures were first released in Japanese yen and converted to US dollars using
Bank of Japan average interbank rates for the applicable period.
Source: Prepared by JETRO from Ministry of Finance and Bank of Japan balance of payments
and cross-border investment statistics and Bank of Japan foreign exchange rates

JAPAN SPOTLIGHT • May / June 2009 29

private equity and other investment funds to make their bids more New Targets of Opportunity
competitive at higher prices than the Japanese companies could
usually muster (Chart 2). Notwithstanding these rather dismal global trend outlooks, I
Thus this period of 2000-2007 could be seen as one of the most remain quite optimistic for new FDI into Japan in this 2009-2010
active and successful periods ever for FDI into Japan. However, period, especially through M&A. There are three basic reasons
with the severe downturn of the global economy in 2008, new cases underpinning this optimistic view.
of FDI into Japan have been falling rapidly. Coupled with the rapid First, precisely because Japan’s FDI base as a percentage of GDP
appreciation of the yen against not only the US dollar but all other continues to be so low, this represents the fact that global investors
currencies from mid-2008, how will these macroeconomic trends and especially strategic investors remain very seriously under-invest-
affect the ability of the Japanese government to meet the second ed in the Japanese market. The Japanese market of course contin-
FDI-doubling goal that had been affirmed by Prime Minister Abe in ues to be the second largest single integrated economy in the world.
late 2006? Major global industries need to have a greater presence in this mar-
ket for improving their global consumer market penetration. Many
Reversal of Perceived Trends in 2007-2008 industrial groups that are leading global competitors in autos, heavy
machinery, electronics and other leading-edge high-tech industries
Starting from 2007 with Vodafone’s sale of its Japan investments are based here in Japan. Suppliers to these global industrial giants
to Softbank and the sale of GM’s investments in Isuzu, Fuji Heavy need to increase and improve their platforms in Japan to be able to
Industries and Suzuki, the new incoming FDI was to a significant effectively supply these companies on a stable and advantageous
degree offset by these and other substantial divestitures. At the basis. Although there is likely to be a severe reduction in the amount
same time and to some degree related, the increase in outward of M&A and investment into the Japanese financial services market
investment by Japanese companies also overtook the figures on net as a result of the global crisis in financial institutions, still that should
new foreign investments into Japan. This dual phenomenon gave be more than compensated by new acquisitions and investments by
rise somewhat to an impression globally that new investment into international companies into the auto parts, precision machinery,
Japan had fallen dramatically in 2007. healthcare and other key industrial and consumer sectors.
At the same time amid the controversies over investments by Second, the global economic downturn is having an equally if not
Steel Partners Japan Fund into Sapporo Beer, Bull-Dog Sauce and greater negative impact on Japanese companies along two lines.
other companies, as well as the tsunami-like trend of hundreds of The first impact is that Japanese companies seem to have been dis-
Japanese companies adopting “poison pill” defenses under the new proportionately adversely impacted by the global credit crunch due
Company Law from 2006-2008, totaling to date well over 500 com- to their concentration in the high-value-added (namely “most expen-
panies representing a very significant percentage of Japan’s publicly sive”) market segments. When US consumers have not been able to
listed companies, a strong perception began to arise globally that borrow money to buy Japanese cars, televisions and other high-end
Japan had suddenly become inhospitable to foreign investment. items, these rapidly dropping sales in North America and Europe,
But quite the opposite, at the practical level, M&A activity contin- combined with an equal consumer slump in Japan, have meant a
ued to spur increases in FDI into Japan during that period on an massive negative impact on the Japanese economy to the level of an
active basis. The very successful acquisition by Citibank of Nikko annualized 12.7% GDP contraction as measured in the period of
Cordial to rescue it from possible insolvency after disclosure of its September-December 2008. As a result of this first impact, operat-
accounting scandal in late 2006 was truly a landmark transaction ing profits have disappeared, cash flow is impaired and Japanese
where for the first time a foreign company succeeded in purchasing companies (just as Japanese consumers) have begun to hoard cash
one of Japan’s blue-chip financial institutions. This Citi transaction to try to soldier through this downturn. The second impact in Japan
took the form of a two-step acquisition, first for Citi to acquire in has also been a very severe credit crunch quite like had been experi-
excess of 70% of the ownership of Nikko Cordial by an open market enced in the worst stages of the late 1990s. The number of bank-
publicly registered friendly takeover bid (TOB), and then later using ruptcies has been increasing rapidly in Japan over the past six
the newly approved triangular merger structure under the Company months, with predictions that the number will grow substantially
Law to squeeze out the remaining shareholders of Nikko Cordial to higher for the next 12 months. Cash shortages at even major
make it a 100% subsidiary and privately held company in Citi Group Japanese companies have led to major Japanese banks calling in
as a subsidiary of Citi’s newly established Japan holding company. loans from smaller customers and focusing their lending capacity
As a net result, however, new FDI growth as a percentage of GDP toward their major corporate customers. The direct result will be
has begun to go in reverse in this period, primarily due to the size of large numbers of bankruptcies in Japan’s small and medium-size
the divestitures. Now with the severe global economic downturn businesses (Chart 3).
depressing global M&A generally, and with the sudden extreme Third, as a direct result of the above deepening Japanese credit
appreciation of the yen, what should be the expectation for new crunch, and just as the first real FDI surge in Japan in the late 1990s
M&A activity to build Japan’s FDI base in the 2009-2010 period? was fueled by broad availability of assets to foreign purchasers for

30 JAPAN SPOTLIGHT • May / June 2009

Source: Teikoku Databank

the first time, this currently building wave of new bankruptcies heavy investment by Japan into China in the last 10 years, acquisi-
should place a large volume of attractive assets into the market for tions of some Japanese companies will also bring with them manu-
acquisition. As Japanese companies are pushed to the brink, they facturing capacity in China that can also be integrated into the global
will be increasingly open to friendly acquisition proposals from for- group.
eign suitors who can bring them (a) greater economies of scale in Although the global automotive industry is currently undergoing
procurement and distribution, (b) new technology and management severe shock from sales levels that have fallen to those of the late
expertise that can again drive production and distribution economies, 1970s, the fact that Toyota assumed the mantle of the world’s
(c) access to new markets and customers to also build on largest auto manufacturer at the beginning of 2009 is still emblemat-
economies of scale and (d) access to critical new sources of equity ic of the leading status of many Japanese iconic brands in the global
and debt finance. These opportunities for mutual benefit should pro- marketplace. That continuing high level of technological and manu-
duce attractive global alliances by Japanese companies and acquisi- facturing quality and brand recognition globally will continue into the
tions by major international companies who are still seriously under- foreseeable future, regardless of the status of the Japanese domestic
invested in the Japanese market. economy. Therein lies the basic attractiveness of acquiring assets
Pessimists will say that the very high value of the yen could derail and operating platforms in Japan in this time frame while the eco-
such acquisitions because of high prices, but the high yen will be off- nomic crisis makes such opportunities available that usually cannot
set by seriously reduced asset prices and lowered multiples against be found in more healthy economic times.
low profits that will produce enterprise valuations far lower than in With the high yen, newly acquired operating revenue streams in
any recent memory. Moreover, once past the purchase price stage, Japan will deliver a premium contribution to enhancing any global
the high yen value actually becomes an attraction to the foreign pur- company’s total global revenue flows as well as contribute to benefi-
chaser when the continuing revenue flow from the acquired compa- cial currency hedging of yen assets against those based on the dollar
ny’s operations translates into larger financial contributions to the and other currencies.
international company’s financial results and balance sheet. So, all The legal environment for investments into Japan has never been
in all, the high yen could be viewed as a net positive benefit rather more open. The Japanese government has varied low-cost loan pro-
than only as an entry-level negative hurdle. grams readily available for new FDI, which can also be utilized to at
least some degree for acquisition of existing operations, especially
Important Rare Investment Oopportunity where the foreign investor will be adding new investment, equip-
ment, technology and/or management techniques to the existing
The 2009-2010 period is thus shaping up to be a very significant Japanese operations. The need to sustain employment and create
buying opportunity for major international industrial and investor new employment opportunities will be as essential politically in
groups who remain under-invested in this important market. Japan during the coming 24 months as for all other countries seek-
Japanese technology remains at the leading edges of global techno- ing to combat the effects of this global economic downturn. All of
logical development in many fields. Major leading Japanese manu- these factors together make Japan one of the most compelling
facturers will be looking to preserve and enhance their network of opportunities that global corporate and financial investors should be
stable suppliers in Japan and globally. By investing into Japanese evaluating for new investments in the 2009-2010 time frame.
supplier platforms that can be integrated into the global group, inter-
Editor’s note: This article was completed on February 28, 2009.
national suppliers can gain a global entry point into these major
Japanese manufacturing operations to a degree that has been largely Robert Grondine is a partner at White & Case LLP in Tokyo. A former
impossible to this date, while at the same time also acquiring new president and chairman of the American Chamber of Commerce in Japan
(ACCJ), he also served as a professor of Keio Law School.
technology and resources from these Japanese bases. In light of the

JAPAN SPOTLIGHT • May / June 2009 31