Japan’s ¥3.5 trillion ($44.2 billion) overseas shopping spree shatters bubble-era record

July 16, 2012

Business, International

Monday, July 16, 2012
Japan’s ¥3.5 trillion ($44.2 billion) overseas shopping spree shatters bubble-era record as hot money seeks new homes
The $5 billion buyout of a British media group last week was the latest in a line of huge foreign acquisitions by Japanese firms reminiscent of their heady overseas adventures during the bubble economy.
The announcement Thursday by advertising behemoth Dentsu Inc. that it would pay £3.16 billion for Aegis Group PLC came after figures showed Japan Inc. signed a record 262 overseas deals in the first six months of the year.
The buying spree, worth ¥3.49 trillion, topped the previous first-half record of 247 deals worth ¥1.16 trillion in 1990 — the final dizzying phase of the intoxicating bubble economy, according to Tokyo-based advisory Recof.
But this time is different, analysts say.
During the bubble, Japanese manufacturers were being tempted by a frothy stock market near all-time highs and were hunting for something — anything — to put their money into.
After rushing headlong over that investment cliff, the bubble’s implosion sent the Nikkei plunging, leaving the Tokyo Stock Exchange chastened and the benchmark index standing at a little over a fifth of its historical peak.
But in today’s more diversified economy, firms are selectively looking for growth in foreign markets to escape Japan, where weak demand, falling prices and high labor costs are sapping profits.
They are also wallowing in cash, with the yen worth around 50 percent more than it was five years ago.
“For nonmanufacturers, this is an excellent time to expand into foreign markets by taking advantage of a high yen,” said Shinichiro Kobayashi, senior economist at Mitsubishi UFJ Research and Consulting.
“For manufacturers, it gives great opportunities to take their production bases overseas,” he said. “You have to assume the yen’s strength is here to stay.”
The relatively safer yen, which is hovering around 79 to the dollar, has benefited from global economic uncertainty in the past few years as investors dumped the euro and greenback.
It stood at 88 to the dollar two years ago and 122 five years back, but has climbed sharply higher.
Exporters, the main engine of growth for Japan, have been badly squeezed by the rocketing currency, with overseas consumers balking at rising price tags. But imports — and by extension the companies that make those products — are now cheap by Japanese standards.
Food, chemicals and services firms have marched abroad in step with carmakers and machinery firms seeking investments that will generate returns.
The biggest acquisition in the first half was Sumitomo Mitsui Financial Group’s $7.3 billion purchase of the Royal Bank of Scotland’s aircraft leasing arm.
That followed a deal by Takeda Pharmaceutical Co. in May 2011 to buy Swiss drugmaker Nycomed for €9.6 billion (then $13.6 billion).
Canon Chairman Fujio Mitarai also said in an interview last year that the camera maker was setting aside ¥1 trillion for use by 2015 on mergers and acquisitions.
The authorities have encouraged direct private-sector foreign investment and promoted the mantra of “harnessing the growth of Asia and emerging markets” to boost the domestic economy.
“Many years ago, it was machinery companies or automakers leading Japan’s direct foreign investments,” said Naonori Yamada, deputy director of international economic research for the government-backed Japan External Trade Organization.
“Now it’s (consumer products or services) companies trying to firm up their access to emerging markets,” as the Japanese market remains sluggish, he said.
Trading houses in the resource-poor country have also intensified their search for foreign energy and mining deals.
Earlier this year Marubeni Corp. agreed to buy U.S. grain giant Gavilon LLC for about $3.6 billion, while trader Mitsubishi Corp. bought a 40 percent stake in Encana Corp.’s Canadian shale gas assets for about $2.9 billion.
“These (natural resources) deals bring together Japanese firms that have no place at home to put their money and foreign resources firms with investment needs,” said MUFJ’s Kobayashi.
Meanwhile, Japanese manufacturers, such as carmakers, are rushing to boost production in Asia, Latin America and Russia to cut costs and to make products for regional customers.
“Manufacturing jobs will leave Japan, regardless of forex rates,” said Kobayashi. “If you are making the same products, you are sure to lose against China and South Korea.
“It is not a case of Japanese firms abandoning Japan. They are going to places where there is demand, as they must.”
Video: Japan is buying



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