BUSINESS IN JAPAN: M.B.A.s, ENTREPRENEURSHIP, STRONG YEN AQUISITIONS AND LACK OF LEADERSHIP AND INNOVATION

BUSINESS IN JAPAN

In the July 2009 Fortune 500 list of the world’s top companies Japan had 68 companies, in second behind the United States with 140. However, in September 2011, Kyodo reported: “One Japanese firm -- bicycle maker and retailer Asahi Co. -- made it to Forbes' list of Asia's top 200 small- and medium-sized companies this year as China powered ahead, according to a statement released by Forbes magazine. The number of Japanese firms on the list has dwindled in recent years, dropping to just two last year from 24 in 2009 due to domestic economic woes.

In 2011, for the first time, corporate Japan was shut out of Forbes magazine’s ranking of the top 50 Asian companies. Claiming many of the spots on the list was always a matter of national pride. In 2012 Chinese firms overtook their Japanese peers on the Fortune Global 500 list of the world's largest companies for the first time. China had 73 firms on the list, which ranks the world's biggest companies by revenue, compared to 61 last year. Japan stayed steady, with 68 firms. The biggest Chinese firms on the list are state-owned energy and utilities companies Sinopec Group, China National Petroleum and State Grid , which grabbed the fourth, fifth and sixth spots on the list. China will continue to gain market share at the expense of Japan, Forbes said. [Source: Jean Chua, CNBC, July 10, 2012]

“William Pesek of Bloomberg wrote: “What some call the “Galapagos syndrome” seems to have an unshakeable grip on corporate Japan. The nation’s manufacturers make fascinating and status-quo-shattering gadgets in isolation. Domestic mobile-phone producers are the market equivalent of the endemic species that Charles Darwin found on the remote islands off Ecuador’s coast. Their products are highly evolved and distinct from anything found elsewhere, but not particularly suited to thriving beyond the water’s edge. [Source: William Pesek, Bloomberg, September 20, 2011]

A white paper released in July 2011 said that small- and medium-size companies were suffering as a result of the strong yen, high prices from oil and other commodities and problems associated with the earthquake and tsunami in 2011 such as disrupted supply chains and shortages.

The Japanese fiscal year is from the beginning of April to the end of March. Japanese companies seldom allow non-Japanese to occupy the majority of executive positions.

Problems with Japanese Business

Many feel that Japanese business is in decline. In 2009, Japan was surpassed by China in trademark patent filings. In 2010, only two Japanese companies made into the Forbes list of Asia’s 200 top small and mid-size companies, down from 24 the previous year, By contrast China had 71 and South Korea had 20.

Disclosure problems and delays by Toyota over the sudden acceleration problem in 2009; by TEPCO over the Fukushima nuclear power plant after the earthquake and tsunami in 2011; and by Sony in regards to security breach of PlayStation network in April 2011 and the release personal information from millions have raised questions about Japanese management. A Reuters article commented: “Blessed with first-rate technology that helps them compete around the world, Japanese corporations are sometimes hobbled by second-rate public relations.”

On top of that, analysts, companies need to rely less on the government to prop up the yen and create stimulus packages and reorient its economy toward more value-added industries like services and information technology---and raise its standing in these fields overseas.

Lack of Bold Leadership in Japan

“The great visionary businessmen like Sony’s Akio Morita seem to be gone. In their place are salaryman-shacho (or “hired-hand presidents”). “The salaryman-shacho is one of the biggest reasons why the Japanese economy went down. They don’t take responsibility,” Tadashi Yanai, the founder and boss of the Uniqlo chain of stores, told the Economist. Yanai is Japan’s richest man, worth around $9 billion. Japanese managers lack “assertiveness, vigour, energy and resolve”, says Kazuo Inamori, the 78-year-old founder of Kyocera, one of the country’s biggest producers of electronics parts. [Source: The Economist, November 4, 2010]

According to the Economist: “One problem is that in a consensus-based culture---with the ideal of lifetime employment, and promotions and compensation based more on seniority than performance---few bosses have a free hand, or even an interest, in forging a brash path. Such bosses are implicitly expected to keep things as they are and owe their position to so many internal colleagues that thorough corporate overhauls are almost impossible. Hence, when Toyota needed to take radical steps to rejuvenate the company in 2009, it named the founder’s grandson as president, hoping it would put a bold pair of hands on the steering wheel.” [Ibid]

“The leadership deficit translates into poor corporate performance. Japanese firms’ return on equity has long been less than half that of American and European companies. Since 1996 the number of Japanese companies among the world’s leading 50 firms by sales in sectors like manufacturing, retail, banking and health care has fallen by half or more. If the leaders of Japanese firms were able to make just basic improvements---increasing average sales growth from 2 percent to 5 percent, lifting earnings from 4.5 percent to 7 percent and boosting capital efficiency by 10 percent---the capitalization of Japan’s sickly stockmarket could triple from its current level, says Bain, a consultancy, in a recent study.” [Ibid]

“Yet bold leadership is rarely appreciated. In June Naoto Kan, Japan’s prime minister, scolded Carlos Ghosn, the boss of the Renault-Nissan alliance, for firing workers---even though Mr Ghosn rescued Nissan from bankruptcy and transformed the company. It also took an outsider to push through change at Sony, where Sir Howard Stringer, a British-born businessman, became boss in 2005. It has taken him years to shoulder stodgy executives aside.” [Ibid]

Lack of Innovation and Entrepreneurship

“Japan is unfriendly to entrepreneurs,” The Economist reported. “Like the rest of Japanese society, its businesses have traditionally placed a premium on harmony, which in practice has meant propping up weak firms and making it harder for new, more efficient competitors to rise. Though some stragglers have been allowed to go to the wall, this insiderish ethos still lingers. As a result Japan has the lowest rate of start-ups among rich countries: one-third of America’s rate and half of Europe’s. [Source: The Economist, November 25, 2010]

According to a August 2010 article in the Economist, “Bureaucratic organs such as the Innovation Network Corporation of Japan and Enterprise Turnabout Initiative Corporation have handed out $25 billion to revitalize ailing companies. Among the latter agencies first acts was to assist a dying wireless operators that bet on archaic technology...The system almost guarantees that fresh capital goes to the losers of yesteryear, because struggling companies rarely die new ones do not form. Japan’s bankruptcy rate is half of America’s; the rate at which it creates new firms is only a third. Japan’s venture capitalists are few and far between. Japan’s bureaucratic allocation of credit seldom sirs animals spirits. Rather it nourishes zombies.” [Source: The Economist, August 19, 2010]

“Japan has also lost its knack for getting the best out of its human capital...Young executives with good ideas refrain from speaking up. Retiring presidents are kept on as advisors, making it awkward for the new guy to undo his predecessor’s mistakes. A rising executive at a big trading company says he was advised by his seniors to keep his views hidden if he wanted to get on.”

“Japanese salarymen, who were once regarded as modern day samurai, and today known as soshoku-danshi (wussy, unambitious “grass-eating men”). Since 2003, the proportion of young Japanese entering the labor force who to be entrepreneurs has halved, to 14 percent , who those who seek lifetime employment has nearly doubled, to 57 percent. Bosses grouse that the young eschew overseas posts; even a Foreign Ministry official confides that Japanese diplomats prefer to stay home.”

Even when problems are identified by politicians and reforms are proposed the process gets bogged down when the initiative are handed over to the bureaucrats to be implemented.

Lack of Entrepreneurship in Japan

Tomohiro Ohsumi wrote in Bloomberg News: “Many social experts say a grim economy has added to the pressures to conform to Japan’s outdated, one-size-fits-all employment system. But perhaps nowhere are the roadblocks to youthful enterprise so evident, and the consequences to the Japanese economy so dire, as in the failure of entrepreneurship. The nation had just 19 initial public offerings in 2009, according to Tokyo-based Next Company, compared with 66 in the United States. More telling is that even Japan’s entrepreneurs are predominantly from older generations: according to the Trade Ministry, just 9.1 percent of Japanese entrepreneurs in 2002 were in their 20s, compared with 25 percent in the United States.

A survey in April 2010 by the Japan Productivity Center found that 57 percent of new company workers want to spend their entire careers with the same firm while only 12.8 percent said they want to eventually start their own businesses. The high percentage of those seeking job security was linked to fact that most of those surveyed looked for jogs in the recession that followed the collapse of Lehman Brothers. “Japan has become a zero-sum game,” said Yuichiro Itakura, a failed Internet entrepreneur who wrote a book about his experience. “Established interests are afraid a young newcomer will steal what they have, so they won’t do business with him.”

Many Japanese economists and policy makers have long talked of fostering entrepreneurship as the best remedy for Japan’s economic ills. And it is an idea that has a historical precedent here: as the nation rose from the ashes of World War II, young Japanese entrepreneurs produced a host of daring start-ups that overturned entire global industries. “I’d rather have the freedom to try different things,” one recent graduate told Bloomberg News. “But in Japan, the costs of doing something different are just too high.”

Business Programs Transform Japan Offices

Miki Tanikawa wrote in the New York Times, “As a young sales manager at a leading Japanese department store company, Masayuki Miyake struggled to find the middle ground between frontline sales workers who did their best to please their customers and the higher-ups who were intent on trimming costs. “I didn’t understand the management thinking on that,” he said. “They seemed out of touch with how employees think.”[Source: Miki Tanikawa, New York Times, September 11, 2011

He then enrolled in a graduate program at a business school in Tokyo. “I wanted to understand the mentality of the management, and then I figured I could bring my case to the top brass,” he said. While taking courses on weekends, Mr. Miyake, now 34, was later transferred to the corporate planning department, an elite division that devises strategies for the company, and he is playing a role he had desired: bridging the divide between frontline workers who find the most reward in delivering what their clients want and the management eager to make company operations rational, often to the detriment of worker morale.

“I acquired the language of the management, which a little while ago was almost a foreign language to me,” he said recently during a class break at the Tokyo campus of Nagoya University of Commerce & Business, one of the growing numbers of professionally oriented schools of management geared toward working professionals.

Mr. Miyake is part of an expanding number of Japanese business people who study for a degree while working, often getting their M.B.A. at unconventional schools. They regularly put in 20 hours of weekly study and spend more time networking and brainstorming with classmates from other companies. This is a nascent but growing phenomenon in corporate Japan. For years, big Japanese corporations emphasized in-house training and skills acquired on the job. Internally nurtured talents and know-how were thought to raise unique corporate value, experts on corporate Japan said. Generic skills like those taught at business schools were thought to be useless.

Number of M.B.A. Programs in Japan Increases

Miki Tanikawa wrote in the New York Times, “The number of business programs has grown from just a handful five to six years ago to more than 30 M.B.A. programs with more than 2,300 students admitted each year as degree candidates, according to Ministry of Education. Accreditation of such professional schools officially began in 2003. Some conduct online classes, others hold sessions in buildings in central Tokyo and Osaka so business people can attend in the evening after work. [Source: Miki Tanikawa, New York Times, September 11, 2011

In most cases these days, students pay their own way at Japanese business schools, which tend to focus on the technical and the practical---be it marketing, finance or organizational behavior---and have faculty members with management experience.

At Business Breakthrough University, or BBT, which conducts classes online, for example, all the professors come from the business world. One of them is the founder,Kenichi Ohmae, a well-known management consultant.The school delivers video classes over the Internet, and students are expected to participate actively via e-mail and blog postings.

Studying while working also seems to be a better fit for the Japanese. “If you are studying while working and sweating with your colleagues, you don’t lose loyalty to your company, don’t lose the momentum you have with people around you,” Mr. Ito said.

Many of the M.B.A. programs that rank high in student satisfaction surveys are not affiliated with well-known universities. Globis Graduate School of Management, an independent business school founded in 1992, started offering an M.B.A. program in 2003 and scored well last year in a survey conducted by Nikkei Career magazine. With 849 registered students, it is the largest business school in Japan.

This year, the graduate school of Nagoya University of Commerce & Business scored well, even though it is hardly a household name in Japan. Many students say they are selecting schools on the basis of usefulness and applicability. “I didn’t want to go to a school where they are studying cases 20 years old,” said Takayuki Maruyama, 51, an executive with an information technology company in Tokyo who completed his M.B.A. at BBT this year. He said BBT lessons were “connected directly to what’s happening in the forefront of the business---that was the single most important criterion for me.”

Students in Japan are also encouraged to think deeply about business problems in relation to issues they face at work. The problem with U.S. business schools has been that Japanese students “study a lot of outside business cases, but they didn’t encourage students to think about the company they currently work for,” said Hiroyuki Kurimoto, professor at the Nagoya University of Commerce & Business Graduate School. “So the returning students ended up leaving for other companies, because the knowledge they gained wasn’t applicable to their own firms,” he said.

Business professors say it is important to show relevance to students’ day jobs, and that is especially the case with studying organizational behavior. “The way in which people behave in Japanese organizations is different from the way people behave in Western organizations,” said Ariko Hibino, director of BBT. “What you might learn in organizational behavior classes in the U.S. would not be immediately applicable in the Japanese context. We blend both perspectives.”

Getting an M.B.A. in Japan in the Old Days

Miki Tanikawa wrote in the New York Times, “Until about a decade ago, the limited number of Japanese business people who obtained an M.B.A. went overseas to get one and were often sponsored by their employers. In the 1990s, Naoshi Takatsu, now executive vice president of IMD Japan, a branch of the Swiss business school, was sent to the French business school Insead by his Japanese employer at the time. The expectation was simply “to experience the rough and tumble of being in foreign cultures,” he said. “It wasn’t intended much to study business.” [Source: Miki Tanikawa, New York Times, September 11, 2011

Rather than return to their employer with an elevated status, “they simply returned to the same job and position they previously held,” said Yuji Nagasawa, a professor at the Nagoya University of Commerce & Business Graduate School who went to Harvard Business School at the expense of his Japanese employer in the 1980s. Demoralized, many of those young business people, who typically returned in their late 20s or early 30s, quit and joined American management consultancy or investment banks, he said.

“In the past, seniority rules made it difficult for young employees to make use of their management knowledge learned at a business school,” Mr. Nagasawa said.

M.B.A.’s and Changes in Japanese Management

“But things have changed. The seniority system is crumbling, and now employers are thinking more about making use of available talents and skills.” Mr. Takatsu said the phenomenon of attending business schools was to some extent generational, led by those in the 25 to 35 age bracket. “These are people who joined companies after the collapse of lifetime employment system,” in the mid to late 1990s, he said. “They have a keen awareness that what your employer provides alone isn’t going to be sufficient.” [Source: Miki Tanikawa, New York Times, September 11, 2011

That is different from those in earlier generations who joined their firms when the Japanese economy was more stable and where the assumption was that your lifetime employer gave you all you needed in terms of job training, he said. “These are people who understand, for example, what happens when you cut worker salary and/or lay off people,” said Yasushi Ito, provost of the university. “Academics won’t know what that means in reality.”

One recent graduate of BBT, Shigeru Hayashi, a business manager at Bunan Hospital in Saitama Prefecture, said the experience was highly relevant to the his daily work. Drawing on the technical and conceptual skills he learned, he recently helped bring the hospital’s accounting, which had been outsourced, back in house so that managers could have a firm grip on the flow of funds. He also hired two people to sell services like health checkups to corporations, a rare move for a nonprofit hospital in Japan.

“People used to say experience and instinct were paramount in handling my job as a hospital manager,” he said. “But those things alone won’t solve problems this day and age.” That is precisely an area that instruction at a school like BBT is meant to address, Mr. Ito said. “Many of our students are doctors, accountants and lawyers, who previously didn’t study business,” he said. “These days, a hospital must be managed well or it can go bankrupt. If you are a C.P.A., you need to know a lot about management so you can carry on meaningful conversations with corporate managers and understand what their needs are.”

Conflict Between M.B.A. Mentality and the Japanese Seniority System

Miki Tanikawa wrote in the New York Times: “The mismatch for the traditional M.B.A. was clear. Historically, company-paid M.B.A. graduates in their late 20s took in big ideas overseas and often outgrew the framework of their seniority-oriented Japanese employers. Frustrated, they left their companies, which were equally frustrated for having poured out tens of millions of yen in tuition and salaries for people the employers hoped would make long-term contributions to the organization when they reached management age. [Source: Miki Tanikawa, New York Times, October 19, 2011]

“Executive programs, on the other hand, are designed for more senior managers in their late 30s and 40s, who have a proven record of loyalty and usefulness to the organization. “Shorter executive programs are a great complement to the in-house program Japanese companies typically have,” said Jukka Majanen, director of sales and business development at Insead. “Unlike with the M.B.A.’s, retention is not really an issue. The benefit---besides the length and cost---is that they are more applicable to the job situation of the executives. They can put the learnings into practice straightaway and hence have more immediate impact on the business.” [Ibid]

“Western business schools for their part are eyeing the opportunities presented by changing dynamics at Japanese organizations. IMD, the Swiss business school, set up a Tokyo office last year to market its executive programs to Japanese firms. Dominic Turpin, president of IMD, said there is a surge in interest from competitive Japanese companies aiming to go global, precisely because they are not there yet. “Many Japanese companies are international but not global,” he said. “When we talk to C.E.O.’s and top executives, there is growing concern that they need to develop global leaders.” [Ibid]

“While most schools rarely publish accurate enrollment numbers, assignments from Japanese companies, especially in custom-designed programs, are generally on the rise. The top management training sessions---designed specifically for so-called C-level jobs, such as chief executive and chief operating officer---are one area of executive education in which business schools would like to see greater enrollment from Japanese firms. Mr. Turpin of IMD said very few Japanese companies were signing up for such programs---partly because at Japanese companies, education is thought to be for younger business people. “They believe in the training of new employees, and once they reach a certain level of seniority, they think they do not need to be educated anymore,” he said. [Ibid]

Japanese at Harvard Business School

David Yoffie, the senior associate dean and faculty chairman of executive education at Harvard Business School told the New York Times that Harvard’s strengths, especially in leadership and innovation, had proven to be useful for Japanese participants. “They get into a very large network of global companies, interact with people for a very long period of time and with an intensive experience with the faculty,” he said. “It gets people out of the Japanese shell they have been working in for many years.” [Source: Miki Tanikawa, New York Times, October 19, 2011]

“Miki Tanikawa wrote in the New York Times: “For Japanese companies that sign their managers up for executive training, one major challenge in making the most of the experience is the participants’ linguistic capabilities, a point that most business schools cited as an challenge. Yoffie said that the rigor of the classes required students to possess high participatory skills, and language could become an issue. “The single biggest challenge is usually not culture, but it is usually language,” he said. “Over the last several years, we have taken additional steps to make sure that people do not come to our program unless they have the language skills that are required.” [Ibid]

“That has meant interviewing the applicants by telephone before they arrive in Cambridge, although Mr. Yoffie said that filtering out candidates for language is not limited to Japanese students but applies to people from other Asian countries, like China. If participants are not sufficiently prepared linguistically, “You may not feel as comfortable launching into the middle of the debate because you are a half-step away from processing the language,” he said. [Ibid]

U.S. Displaces Japan in 2012 as Having the World’s Highest Corporate Taxes

In 2012 Japan's corporate tax rate dropped to 38 percent while the combined U.S. corporate tax rate rose to 39.2 percent, making it the highest in the developed world. In March 2012, Patrick Temple-West and Kim Dixon of Reuters wrote: The United States will hold the dubious distinction starting on Sunday of having the developed world's highest corporate tax rate after Japan's drops to 38.01 percent, setting the stage for much political posturing but probably little tax reform. Japan and the United States have been tied for the top combined, statutory corporate rate, with levies of 39.5 percent and 39.2 percent, respectively. These rates include central government, regional and local taxes. [Source: Patrick Temple-West and Kim Dixon, Reuters, March 30, 2012]

Japan's reduction , prompted by years of pressure from Japanese politicians hoping to spur economic growth, will give that country the world's second-highest rate. The average 2012 corporate tax rate for the 34 developed countries is 25.4 percent, according to the Organization for Economic Co-operation and Development.

Japanese Firms Shop Abroad Armed with a Strong Yen

In December 2011, The Economist reported: “Corporate Japan is on an overseas shopping spree. Japanese firms spent a record $80 billion on some 620 foreign companies in 2011, according to Dealogic, a firm that measures such things, exceeding the previous record of 466 deals worth $75 billion in 2008. [Source: The Economist, December 17, 2011]

“Kenya Hirose and Yu Toda wrote in the Yomiuri Shimbun, “Japanese financial institutions are increasing their purchases of affiliates or businesses from U.S. and European counterparts following the European debt and financial crisis. The trend is likely to continue, as Japanese financial institutions incurred much smaller losses in the European crisis than their U.S. and European counterparts, and the extremely high yen works to their advantage in such acquisitions. [Source: Kenya Hirose and Yu Toda, Yomiuri Shimbun, June 26, 2012] Hiroyuki Kachi wrote in the Wall Street Journal: “Faced with saturated demand at home, Japanese companies are striving to obtain a bigger slice of market share overseas. The yen's strength is also providing Japanese companies with spending ammunition to press ahead with the buying spree. Since the financial crisis of 2008, Japanese companies have amassed large stockpiles of cash and refrained from capital spending. With Japanese banks willing to finance deals, corporations are in a good position to make acquisitions. [Source: Hiroyuki Kachi, Wall Street Journal, December 14, 2011]

“Japan was the world's third-largest cross-border acquirer in 2011, behind the U.S. and the U.K. According to data provider Dealogic, the value of acquisitions abroad by Japanese companies in 2011 was a record $79.7 billion, led by Takeda Pharmaceutical's $14 billion purchase of Swiss competitor, Nycomed. [Ibid]

“In 2008, the strong yen helped fuel a record $68 billion in Japanese mergers and aquisition deals, before the full fury of the global economic crisis forced corporate Japan to retrench,” Reuters reported. “But now, having held back from investments, many companies have hoarded cash that many analysts say should be put to better use. Total cash held by nonfinancial companies in the main section of the Tokyo Stock Exchange reached a record high of $580 billion earlier in 2010, increasing their ''firepower for acquisitions,'' according to a report issued by Goldman Sachs in late August. "Increased M.&A. activity is likely to be positive for Japan as a whole since it can lead to higher growth potential and result in economies of scale to enable Japanese firms to compete more effectively in global markets,'' Kathy Matsui, chief strategist for Japan at Goldman Sachs, wrote in the report.

Japan’s Overseas Acquisitions in 2011 and 2012

The Economist reported: “Japanese trading houses are hungrily buying energy projects, especially those involving shale gas. This year they spent $10 billion, up from less than $3 billion in 2010. The pace of such deals accelerated after Japanese nuclear-power plants were suspended following the nuclear accident at Fukushima in March, which made many Japanese worry about their energy supply. Toshiba spent $1.6 billion on Landis+Gyr, which makes “smart” electricity meters for homes. Sony paid $8.4 billion for control of its cellphone venture, Sony Ericsson, a stake in the record label EMI and other stuff. [Source: The Economist, December 17, 2011]

“The Yomiuri Shimbun reported: “In June 2012, Shinsei Bank bought overseas remittance operations for individual customers in Japan from the Britain-based Lloyds Banking Group. Mizuho Corporate Bank said it would buy the midsized Brazilian bank Banco WestLB do Brasil from German bank WestLB. In the life insurance industry, Dai-ichi Life Insurance Co. recently made an offer to the Netherlands' largest financial firm, ING Group, to buy its life insurance division in Asia. [Source: Kenya Hirose and Yu Toda, Yomiuri Shimbun, June 26, 2012]

“Japanese firms mainly bought U.S. institutions in the 1980s. This time, however, their purchases and investments are focused on tapping into demand in emerging economies in Asia and elsewhere. Mizuho Corporate Bank is the main bank in Asia for the Italian brand Prada, which is emphasizing the Asian market. Sumitomo Mitsui Financial Group is moving to expand its strength in the Asian market, including the establishment of a special department dealing with loans to the overseas businesses of Samsung Electronics Co. and other companies affiliated with South Korean conglomerates. [Ibid]

“Due to the strength of the yen, Japanese banks have been bullish toward corporate buyout deals abroad. In January, SMFG, in a joint action with group firms such as Sumitomo Corp., purchased the aircraft leasing division of the Royal Bank of Scotland, one of Britain's major banks, for about 7.2 billion dollars (570 billion yen). Meanwhile, MUFG took over a U.S. regional banking group, Pacific Capital Bancorp, in March. MUFG, which is the nation's largest financial group, said it is considering spending a maximum of about 1 trillion yen on the acquisition of overseas companies, especially for those in the United States. [Source: Yomiuri Shimbun, May 9, 2012]

Japan’s Overseas Acquisitions in 2010

Japanese acquisitions of foreign companies rose in 2010 in part because the strong yen elevated Japan's purchasing power overseas. Japanese businesses spent $27 billion buying overseas companies in the first nine months of in 2010, already more than in all of 2009. That includes a string of deals by the telecom giant NTT, including its agreement to buy Dimension Data, a network service provider based in South Africa, for $3.24 billion. The convenience store chain 7-Eleven, owned by Japan's Seven & I Holdings, made a $2 billion offer to buy a smaller American rival, Casey's General Stores. [Source: Reuters, New York Times, September 15, 2010]

Reuters reported: “The soaring yen has weighed on Japan's export-led recovery as manufacturers like Toyota and Sony wring their hands, watching foreign competitors easily beat their prices. But businesses like Rakuten are mining the dark cloud's silver lining, using their high-value yen to go on global shopping sprees. Beyond mergers and acquisitions, the strong yen has helped other Japanese industries, too. Japan's airlines have benefited, as the rising currency has effectively lowered the cost of fuel from foreign sources, along with landing charges at foreign airports and other expenses. The yen's buying power has also encouraged Japanese to travel overseas, further helping the nation's airline industry. Almost four million people used Narita International Airport, Tokyo's main hub, in the peak summer season this year, up 8.6 percent over summer 2009.Japan's biggest airline, All Nippon, said last week it would set up a low-cost carrier---a plan that would very likely be aided by cheaper costs overseas.” [Ibid]

“The lofty yen could also help Japan in the global race to secure resources and develop infrastructure. The trading house Mitsui, flush with cash, has said it plans to make $14.29 billion worth of foreign investments over the next two years. In August, for example, Mitsui announced a $237 million water business venture with the Singaporean water solutions company Hyflux to enter China's water treatment and infrastructure business.” [Ibid]

Hiroko Tabuchi wrote in the New York Times, “Despite the disruption caused by the devastating earthquake and tsunami in March, Japanese companies spent $26.6 billion on mergers and acquisitions overseas in the three months through June, the highest quarterly volume in almost three years, according to Dealogic. “When the yen is on an upward trend, it creates a favorable environment for M.&A.’s,” Kotaro Masuda of the Institute for International Trade and Investment told the New York Times, referring to mergers and acquisitions. “It also becomes possible for companies to buffer against currency risks by producing more overseas.” [Source: Hiroko Tabuchi, New York Times, August 18, 2011]

The Asahi Group has used the strong yen to expand overseas. In August 2011 the beer company said it was buying Independent Liquor of New Zealand for ¥97.6 billion, or $1.3 billion, as the Tokyo-based beverage maker looked to increase its sales overseas to make up for a shrinking market at home. Asahi, the maker of Japan’s top-selling beer, Super Dry, and soft drinks, said that it would buy all outstanding shares of Flavoured Beverages Group, the parent company of Independent Liquor, from the private equity firms Unitas and Pacific Equity Partners, adding the Woodstock Bourbon and Vodka Cruiser labels to its family of drinks.

Asahi’s purchase followed a bigger overseas acquisition by its rival Kirin, which said this month that it would buy a controlling stake in Schincariol, a Brazilian beverage maker, for $2.6 billion.

“Japan was the world's third-largest cross-border acquirer in 2011, behind the U.S. and the U.K. According to data provider Dealogic, the value of acquisitions abroad by Japanese companies in 2011 was a record $79.7 billion, led by Takeda Pharmaceutical's $14 billion purchase of Swiss competitor, Nycomed. [Ibid]

Japan Is Being Pragmatic and Smart with Its Overseas Acquisitions

“Back in the 1980s Japanese firms hunted trophies such as golf courses and film studios,” The Economist reported:. Now they are taking a more pragmatic approach, buying solid firms in fast-growing markets and filling gaps in their product lines. For example, Kirin, a big Japanese brewer, is acquiring a majority stake in Schincariol, a Brazilian one, for $2.6 billion. The Japanese beer market is flat; Brazil’s is growing by 10 percent a year. The biggest deal of the year was when Takeda, a Japanese drug firm, bought Nycomed, a Swiss one, for ¥1 trillion. Almost 40 percent of Nycomed’s sales are in emerging markets. [Source: The Economist, December 17, 2011]

“In the past, Japanese firms would parachute in bosses from Tokyo to run the show. Many were monocultural and mediocre. Now, Japanese firms wisely rely on local talent. Many of the new generation of Japanese executives have lived and worked abroad, notes Shinsuke Tsunoda, the head of mergers and acquisitions in Japan at Nomura, a Japanese securities house. This means they are more comfortable doing deals with foreigners, and they are better at integrating the foreign firms they buy with their new Japanese owners. [Ibid]

“The foreign shopping spree is internationalising Japanese industry by the back door. Japan Inc is acting like a massive sovereign-wealth fund, placing its money abroad to earn investment income at home (and help Japan maintain a current-account surplus). When old people retire, they tend to live off their savings. They supply capital to younger, sprightlier, cash-strapped folk, who put it to work and pay dividends or interest to the retirees. That is, roughly speaking, what Asia’s ageing archipelago is starting to do. [Ibid]

Problems with Japanese Overseas Acquisitions

On Japan’s strong-yen buying spree, Kenya Hirose and Yu Toda wrote in the Yomiuri Shimbun: “There are hurdles to overcome, including how the Japanese companies should manage operational risk overseas. "There are quite a number of offerings [from U.S. and European financial institutions and others]. So Japanese firms are keeping their eyes open and making careful selections," a senior official of a major financial institution said. [Ibid]

“Japanese firms seem to be strengthening their presence overseas. However, they have had the bitter experience of being forced to sell numerous operations abroad from the late 1990s--despite competing to buy them during the bubble period--due to difficulties disposing of bad loans. Fuji Bank, the predecessor of Mizuho Corporate Bank, in 2001 sold the two affiliates it bought from U. S. finance company Heller Financial Inc. in 1984 to a U.S. major financial institution to eke out money to dispose of bad loans. Sanwa Bank, a predecessor of the Bank of Tokyo Mitsubishi UFJ, sold in 1998 a U.S. leasing company it purchased in 1984. [Ibid]

“There are many cases, however, in which overseas equity investments or acquisitions by Japanese firms do not directly lead to profits. Nomura Securities Co. bought the European division of the collapsed Lehman Brothers Holdings Inc. in 2008. Nomura Securities is still working to cut costs and rebuild its operation. Furthermore, with high expectations for growth, businesses in newly emerging nations are going for high prices. [Ibid]

New Growth Strategy for Japan Focuses on Environmental, Medical Sectors

The government has set a goal of creating an about 100 trillion yen market in the combined environmental and medical and nursing care fields to add more than 4.2 million jobs by 2020, according to the draft of a revitalization plan, the Yomiuri Shimbun reported. The aim of the plan is to escape deflation and achieve an average nominal growth rate of 3 percent with an average real growth rate of 2 percent by fiscal 2020. [Source: Yomiuri Shimbun, July 12, 2012]

“The two target fields are expected to grow significantly in the coming years, with the strategy designed to attain both economic growth and fiscal health. Besides these sectors, the strategy stipulates specific goals for nine other fields, such as becoming a "tourism-oriented nation." A goal has been set in the environmental sector to raise the proportion of electric and fuel-cell cars to up to 50 percent of new car sales, in addition to accelerating the use of renewable energy sources such as solar power.As a result, the market is expected to expand by about 50 trillion yen and create new jobs for 1.4 million people. [Ibid]

“For medical care, nursing care and other health-related categories, the strategy sets a target of developing an about 50 trillion yen market with 2.84 million new hires by 2020. It promotes aggressive advancement in overseas markets, development of regenerative medical technology and utilization of robotics, among other measures.In the tourism field, it aims to increase the number of foreign travelers visiting Japan to 25 million a year by 2020. The number of foreign travelers in 2010 was 8.61 million. If achieved, the increase in tourism is expected to generate a 10 trillion yen economic ripple effect and create 560,000 new jobs. [Ibid]

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Yomiuri Shimbun, Daily Yomiuri, Japan Times, Mainichi Shimbun, The Guardian, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2008 Jeffrey Hays

Last updated August 2012

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