fivehundred magazine > Practice area spotlight: M&A > What does the future hold for Japan’s M&A market?

What does the future hold for Japan’s M&A market?

As its domestic market shrinks, the recent EU-Japanese Economic Partnership Agreement set a positive signal for Japan’s cross-border M&A market, write Nagashima Ohno & Tsunematsu’s Kei Asatsuma, Shuichi Nishimura and Kuhlmann Axel

Please give us an overview of the current legal market in Japan and how any recent developments have impacted your practice?

The Japanese legal market remains very business and investment friendly. One of the most significant changes in the past was the introduction of 2015’s Corporate Governance Code, with the goal of promoting sustainable corporate growth and increasing corporate value by securing rights and equal treatment of shareholders. As a consequence, Japanese companies are now under closer scrutiny of their shareholders who request better return rates, forcing companies to look for attractive investments. At the same time, the June 2018 update of the code urges companies to reduce strategic cross-shareholdings which may also lead to more movement in the market.

On an international level, the recent execution of the EU-Japanese Economic Partnership Agreement set a positive signal for the cross-border M&A market. Although hurdles for foreign investments in the EU and Japan have already been very low, the envisaged cut of almost all import taxes and other
trade barriers will foster import and export which usually also has a positive effect on cross-border investments.


What significant trends exist in the M&A market presently? Are you seeing these just domestically or internationally?

The number of M&A transactions by Japanese companies hit a record high in 2017. Nevertheless, many Japanese companies still have a significant amount of cash and continue looking for attractive targets. As the Japanese market is shrinking, outbound transactions will remain the main driver for the Japanese M&A market. While Japanese companies have traditionally focused on the US, the number of acquisitions in the EU and South-East Asia has increased in recent years and we expect this trend to continue.

At the same time, we see global private equity funds getting much more active in Japan to diversify their portfolios in times of a relatively strong global economy.

Looking at transaction specifics, we see more and more Japanese companies showing interest in W&I insurance, which has not been common until recently. We expect a growth of the Japanese W&I insurance market in the upcoming years.


What are the three biggest challenges to practising M&A in Japan at the moment?

Main challenges in particular in cross-border transactions are cultural differences, a lack of M&A experience of Japanese companies, and the language barrier (many Japanese still have difficulties with the English language). For example, the traditionally complex decision-making process of Japanese companies oftentimes confuses foreign business partners and can lead to misunderstandings or hick-ups in the transaction process if not properly managed. It is, therefore, one of the most important tasks of a good M&A counsel to bridge these cultural differences as intermediator to ensure a smooth transaction.


How does M&A fit into the firm as a whole? Is it easy to collaborate with other teams?

Although Nagashima Ohno & Tsunematsu is a full-service law firm covering all relevant areas of business law, M&A has always been one of our strongest pillars. On each transaction we work with a customised team of lawyers to offer seamless service across all relevant areas of law. We believe that close communication and collaboration among all advisor teams is a key to a successful transaction.


What advice would you give to the next generation of M&A lawyers?

Apart from a solid and broad legal education, lawyers who are interested in doing M&A should also work on their soft skills. Considering the increase of outbound transactions, being fluent in English is crucial. In addition, obtaining a good understanding of business and the economy is important to quickly grasp and effectively protect and enforce our clients’ interests. A good M&A counsel should have a hands-on mentality and always keep an eye on trends and developments in the market, not only in Japan but also around the rest of the world.


What are your predictions for M&A in Japan over the next five years?

M&A will remain one of the most important drivers for Japan’s economy, not least due to the corporate governance reforms putting pressure on companies to improve their performance. Outbound transactions will continue to increase due to the shrinking domestic market. We also expect a certain (but less significant) increase in inbound transactions, mainly by financial investors.