author yutaka mogi

Yutaka Mogi, Nomura's Managing Director and Co-Head of Investment Banking, EMEA, outlines some of the key decisions made over the last three decades in Japan and how this may impact the future for some western Economies facing years of low growth. 

 “Deleveraging is necessary to survive”

Deflation is not a serious problem if you have a healthy balance sheet. However, overcapacity debt is a problem, as cashflow decreases. Therefore, in the last two decades, Japan Inc. wanted to decrease debt in their balance sheet.

Cash then began to pile up in corporates, as idle reserves. These reserves reach up to c.30-40% of Japan’s nominal GDP.  Japan’s cross shareholding structure allowed management teams to retain such large cash reserves.  These companies prepared themselves for survival in a low-growth environment.

Next step after survival

While accumulating cash and enjoying healthy balance sheets, corporates in Japan are facing a new trend influenced by the Corporate Governance Code.  Management teams are committed to interacting more with shareholders who require improvement on ROE by either using the cash for growth strategies or returning it to shareholders.  Banks and insurers who supported cross shareholding structures are reducing their stakes due to the tighter regulations on capital adequacy.

Corporates decided to aggressively use their cash for growth strategies in particular, cross border acquisitions.  Such acquisitions rebalance their operating portfolio to move from a reliance on low return Japanese assets to more diversified and higher return assets.  Their first choice was the emerging markets, especially in Asia, with a view to long term growth expectation.  This provided good top line growth potential but not much meaningful bottom line return.

More recently, Japanese corporates have tried to expand their focus to M&A opportunities in developed markets such as the EU and US. This provided a bottom line payback that, whilst with not as much growth as emerging markets, was more stable.

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