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FTA could see massive Japan cash splash

The Australian, Canberra

FTA could see massive Japan cash splash

By Rowan Callick

7 April 2014

A new report to be released today reveals that Japanese companies have stashed away $1.56 trillion cash reserves, the equivalent of Australia’s entire annual economic output — and potentially a source of massive new investments in Australia under a free trade deal.

The report by PwC titled “Sleepers wake: Corporate Japan on the march” notes a massive 46 per cent collapse in overseas mergers and acquisitions from Japan last year to $50 billion, despite a surge in corporate optimism following the arrival of the Shinzo Abe government.

“We haven’t had anything of the importance of the FTA since the commerce agreement between the countries in the 1950s,” Japan PwC partner Jason Hayes, an Australian, said.

The report has been released to coincide with the visit to Japan of Tony Abbott.

The value of the deal would be reinforced, he said, by other events this week aimed at complementing the Prime Minister’s visit.

They include an infrastructure mission by the Australia Japan Business Co-operation Committee, whose focus includes fostering joint projects in third countries, a tourism event hosted in Tokyo by James Packer on Wednesday, and a visit by Foreign Minister Julie Bishop to Hiroshima, the constituency of her Japanese counterpart Fumio Kishida.

The depreciation of the yen — a cornerstone of “Abenomics” — is blamed for the M&A lull, along with a corporate focus on cutting costs and boosting efficiency, and on seeking to ensure that they maximise this rare opportunity to enjoy organic domestic growth as inflation returns.

The report quotes AJBCC chairman Rod Eddington as saying: “Australia maintains a leading position in Asia that many other countries envy, but greater attention and focus are needed by both government and the private sector to highlight the strategic appeal of the country and our non-resource sectors, to foreign investment, including from Japan.”

Mr Hayes, who has lived in Tokyo for seven years, said that the global profile of Japanese investment includes prominent holdings in financial services, health, technology and other sectors — raising his expectation of the diversification of Japan’s involvement in Australia beyond the scope of the top-10 deals to date, all in metals and mining.

He said that the big Japanese trading houses — which helped build Australia’s modern mining and energy industries — were now looking to rebalance their Australian interests. The PwC report cites a recent story in The Australian about Mitsui looking to shift its emphasis from mining towards agriculture.

The Australian constraints cited most often in Japan, he said, were high wages and labour inflexibility, though the profile of Australian expertise is growing, with Australians heading Japanese branches of high-profile global corporations including Nike, BMW and Adidas. But he said that Australia had a strong opportunity to partner Japanese corporations investing in southeast Asia as those countries started to open up and make the transition to higher consumption middle-class status.

“Japan has been the No 1 aid donor there for a long time,” Mr Hayes said. “That will start to pay dividends.”

Japanese firms would probably continue to acquire minority stakes, he said, as a low-risk approach, especially in areas where they lacked in-house expertise.

But in sectors in which its firms were already particularly skilled, such as brewing — with Kirin and Asahi both already massive in the Australian market — they would seek large market shares, although “they won’t take a smash-and-grab approach”, through hostile takeovers.

Mr Hayes said that the profits of Japan’s top companies “have improved exponentially”, for which Abenomics should receive much of the credit, with the return of confidence nationwide.

“But the next step has to be taken by the businesses themselves. They acknowledge that the domestic market won’t grow as much or as fast,” as most of the rest of the region, including Australia, he said.

“So they will have to look outside Japan,” he said.

The report found that less than 1 per cent of Japan’s small and medium companies have a presence outside the country — “underlining that the coming wave of M&A activity will keep growing”, he said.

“Australia is positioned nicely. We have a strong relationship with Japan,” which is being reinforced this week, especially if the visits and meetings are capped by the head-turning effect of the announcement of the completion of an FTA.