In seeking to understand Japan’s economic rebound, Michal Katz, Head of Investment & Corporate Banking at Mizuho Americas, was asked about the interplay between the challenges of the world’s second largest economy and the improving fortunes of Japan. She does not believe Japan is the new China, but it is experiencing an economic renaissance that is supported by structural, policy and regulatory dynamics that are conducive to investment and dealmaking in the region. Read her article below:
After nearly two decades of economic stagnation, price deflation and near-zero rates, the Japanese economy has regained its footing, spurring renewed investment interest in the nation and opportunities for cross-border dealmaking. Structural changes in government regulation and corporate governance along with tailwinds from monetary and fiscal policy point to a continuously improving outlook.
Japan’s GDP at the end of the third quarter of 2024 grew by 1.2%, exceeding expectations, while household (private) consumption was up 3.7% on the back of broadening inflation and higher wages. These conditions supported the Bank of Japan’s (BOJ) May decision to end its loose monetary policy and raise short-term interest rates for the first time in 17 years.
The BOJ also signaled further quantitative tightening at a “very moderate” pace (though held rates steady in its latest meeting), certainly an outlier on the global stage. This move is designed to reduce money supply and raise asset prices, which economists believe will create a virtuous cycle of wage and price increases.
Japanese government spending reached a record high in the third quarter of 2024 in a bid to stimulate the economy, and in order to reframe Japan’s cultural zeitgeist in favor of capitalism, introduced programs like the Nippon Individual Savings Account to motivate retail investors to invest in equities rather than hold onto savings.
The country has also made strides towards bringing itself more in line with global capital markets practices. The Ministry of Economy, Trade and Industry, which oversees Japan’s trade and industrial policies, released guidelines at the end of 2023 that seek to streamline and add transparency to the M&A process. This came about while the Tokyo Stock Exchange, conscious of Japanese corporations’ tendency to hold onto cash, announced that it was requiring listed firms to increase their capital efficiency and improve their price-to-book ratio. This resulted in a record number of share buybacks which Mizuho research has shown investors prefer over dividends because it demonstrates capital discipline. Earlier this year, Japan's stock market finally surpassed the previous high set 35 years ago, in 1989. Through December year-to-date, the Nikkei is up 17%, and, while still lagging the 24% return of the S&P500, it remains ahead of the 7% increase in the Euro STOXX50.
As the nation challenges its conservative and insular culture to open its doors to dealmaking, it may very well lead to increased deal activity in the short-term with the potential for a steady continuous flow of opportunities as time assesses the new policies’ impacts. The incoming U.S. presidential administration should serve as a cushion for Japan’s new posture. Whatever Trump’s policies may be, we are seeing a shift in the global economic order and Japan stands to gain favor in the U.S. as China looks inward and the U.S. begins to evaluate its relations with the second largest global economy. U.S. Steel/Nippon Steel deal dynamics aside, anticipation of regulatory easing is also likely to further open windows for dealmaking.
Opportunities Ahoy
A flurry of hefty investment activity from private equity and corporates illustrates faith in Japan’s promise to uphold its market-friendly policies. Corporate inefficiencies have been well documented in Japan with companies placing more emphasis on customer experience and maintaining full employment than on shareholder returns. Investors revere the opportunity to put money to work there, smooth out inefficiencies and promote synergies across businesses.
In 2020, Warren Buffet’s Berkshire Hathaway took a 5% stake in five Japanese trading houses (known as sogo shosha), boosting the investment in 2023 to about 9% in each. In October, Mizuho served as Active Bookrunner on the firm’s ¥281.8 billion yen ($1.9 billion) in a yen-denominated bond offer, which brought their total yen issuance in 2024 to ¥545 billion, by far the largest amount an issuer has raised in a single year.
Financial sponsor fundraising is also on the rise as is local hiring as firms seek to optimize and expand existing investments. In May, Carlyle closed a $2.8 billion Japan-focused fund, its largest for that country. Bain Capital has operated in Japan for several decades and has raised some $5 billion in the last decade, in addition to its 2018 $18 billion buyout of Toshiba Corp’s memory chip business. And, Apollo established a dedicated Tokyo office in 2019 and has deployed more than $7 billion across private equity, hybrid and credit solutions. In September the firm announced the $2.1 billion buyout of Panasonic Automotive Systems and provided a $700 million investment in Sony Music, an affiliate of Sony Group Corporate, one of Japan’s leading global corporations.
Technology hyperscalers such as Amazon, Microsoft and Google are also making sturdy investments in Japan such as expanding cloud computing, AI infrastructure and data centers and building out clean energy projects.
New Lease on Cross-Border
Japan’s M&A market constitutes 5% of the global M&A market with expectations for that to grow in 2025 and beyond. Overtures such as Bain and KKR’s bids for IT company Fuji Soft and Canada's Alimentation Couche-Tard for Seven & i Holdings, a Japanese diversified retailer and owner of the popular 7-Eleven chain, would have been anomalies a decade ago.
Japan’s seven storied trading houses have a cache of valuable interconnected assets and are looking to diversify and transact. In June, Mizuho advised on a transaction that saw Japanese trading house Marubeni Corp take a notable minority investment in Wheels, a leading fleet management company in North America.
Moving Forward
As one of the largest banks globally and top 3 in Japan, Mizuho is uniquely positioned to support clients as they navigate the new landscape of dealmaking opportunities. Over the past year, we’ve had an increasing number of clients, corporates and private equity alike, look for market insights, acquisition ideas, partnership opportunities and client introductions in Japan.
It certainly looks like a sea change is upon us.