Japanese investment on the rising horizon

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Ben Smith
MinterEllison, Sydney
ben.smith@minterellison.com

April Wong
MinterEllison, Sydney
april.wong@minterellison.com

Introduction

Since author Donald Horne nicknamed Australia as the ‘lucky country’ in his 1964 book, it has somewhat lived up to this hotly-debated reputation. The nation has experienced decades of economic growth and prosperity over the last 50 years stemming from its resource endowment. Australia was ranked as the sixth best country in the world according to the 2019 United Nation’s Human Development Index,^[1] and its cities are regularly featured among the ‘Top 10 Best Cities to Live In’ in various online surveys and studies.^[2] Australia’s economy powered through the global financial crisis  comparatively unscathed ,and it has been almost 30 years since Australia has experienced a sustained economic contraction or, according to former Prime Minister Paul Keating, the infamous ‘recession that we had to have.’^[3]

This time around, the Australian M&A market has not been so ‘lucky’ and is currently undergoing high levels of disruption caused by the Covid-19 pandemic. It would appear that the luck has finally run out, as bidders walk away from deals and chief financial officers in corporate Australia are seeking to pause or suspend discretionary project spend.

While the pandemic has been unprecedented for most Australians, Japan's ability to overcome SARS in 2002-2004, the 2011 Tohoku earthquake and the Fukushima events, has conditioned Japan to view the current pandemic as an obstacle which can be overcome through organisation and perseverance. These qualities have left Japan well placed to rebuild and reinvest in the post-coronavirus Australian economy and consolidate its position as the fourth largest foreign investor in Australia.^[4]

A timeline of Japanese investment in Australia

Since the early 1950s, Japan has looked to Australia for sourcing raw materials for domestic consumption, including wool, tallow, grains and coal. The soga shosha or Japanese trading houses, have led the way with Mitsui & Co investing over AUD 15bn in Australia from the 1950s.^[5] The import of essential raw materials for Japan's re-industrialisation and rebuilding efforts enabled Japanese companies to establish a global distribution network for Japanese goods.

Corporate Japan has since established itself as a foundation investor in Australia. The opening up and development of the Pilbara as a world class mining province in the 1960s, has been described by former Prime Minister Tony Abbott, as a ‘historic collaboration and partnership between Australian mining know-how and Japanese capital and technology.’^[6]

While Japanese investment historically centred predominantly within the iron ore and coal sectors, investment started to pivot into a broader range of industries as a result of the liberalisation of Japanese financial markets, strong economic growth and rapid appreciation of the yen, which coincided with the deregulation of the Australian financial markets. These factors drove Japanese banks and other financial institutions to establish or expand their presence in Australia. 

Although the financial markets experienced a downturn in the early 1990s, Japanese investors continued to do business in Australia with a focus on the real estate sector, including investments in hotels and property development in the Gold Coast. Later in the 2000s, Japanese companies turned their attention to the emerging natural gas industry, as well as the agribusiness, wood fibre and food and beverages sectors.

By the late 2010s, the large scale re-entry of Japanese financial services companies came as a result of the buoyancy of the Australian market and strong growth rates. We saw Japanese investors adopt more aggressive investment approaches, by acquiring majority interests in Australian companies. M&A thus became a means for Japanese companies to achieve inorganic growth.

2019 was a banner year for Japanese investment in Australia, with Australia being the second most favoured destination for investment after the United States.^[7] The Australian brewing industry is now a Japanese owned duopoly, with Kirin joined by Asahi through its US$11.3bn takeover of Carlton & United Breweries. We also saw Nisshin Seifun’s expansion into the bakery products sector though its AUD 574m acquisition of Allied Pinnacle, Nippon Paint’s entry into the Australian paint market through its AUD 3.8bn takeover of paint manufacturer Dulux, and Nippon Paper’s AUD 1.7m acquisition of Orora’s fibre-packing business.

Japan’s investors have also increased their interests in the Australian wealth management sector and financial services industries. There was initial interest in the life insurance sector, with TAL Dai-Ichi's AUD640m acquisition of Suncorp Life in September 2018. Gradually, the focus has extended into wealth and asset management and share broking, with Mitsubishi UFJ Trust and Banking Corporation's AUD 4bn acquisition of Colonial First State Global Asset Management in October 2018, and Nomura Research Institute’s announcement of its proposed acquisition of AUSIEX, CBA’s wholesale broking and portfolio administration services business in April 2020.

These trends are likely to continue well into the 2020s, signalling that flows of capital from Japan to Australia should remain strong in the short to medium term.

Why Australia?

Part of the attraction of investment into Australia by Japanese companies is due to domestic factors within Japan, particularly its ageing and declining population. Japanese companies are therefore incentivised to look beyond their domestic market for higher levels of growth, new markets and new consumers. Australia fits the bill as a strong economy, with high levels of population growth, a stable political environment, low public debt, a friendly foreign investment regime and its position as a net importer of foreign capital. The Australian Government has also demonstrated a willingness to further develop Australia's ongoing commercial relationship with Japan (see below).

While foreign investment is generally well supported in Australia, some commentators highlight potential disadvantages, such as a loss of control of strategic assets, a loss of national sovereignty and the scope for displacement of national workers, and the corresponding need to ensure this potential downside is mitigated. These types of considerations are taken into account by Australia's foreign investment regulator, the Foreign Investment Review Board (FIRB), as it must ensure that incoming investment is not contrary to the Australian national interest. It is also worth noting that even if Japanese companies own a majority stake in Australian strategic assets, these companies are nevertheless required to comply with Australian laws and regulations, and most importantly, pay Australian taxes which contributes to Australia's economic growth. It is also an incontrovertible fact that foreign-owned businesses stimulate employment opportunities for Australian nationals. One in ten workers in Australia are employed by a foreign-owned business and on average earn more each year than those employed by local companies.^[8]

Changes to Australia’s foreign investment regulations

In late March 2020, the Australian Treasurer announced temporary blanket measures to change the screening thresholds for foreign companies looking to invest in Australia. Significantly, the monetary screening threshold has been reduced to zero dollars for all foreign investments until January 2021, subject to some narrow exceptions. In addition, the FIRB now has up to six months to process applications for foreign investments, unless special circumstances apply.^[9]

Although most inbound Japanese investments will require approval by the FIRB, these regulatory changes are unlikely to deter prospective Japanese investors from doing business in Australia and the environment remains positive.

Ongoing cooperation between Australia and Japan

The rising growth of Japanese investment in Australia comes as no surprise in light of the maturing and evolving bilateral relationship between the two nations.

The signing of the Commerce Agreement in 1957 paved the way for the two countries to rebuild their respective economies. Several key agreements have been entered into since 1957, including the Basic Treaty of Friendship & Cooperation and Protocol (Nara Treaty) in 1976 and the Joint Declaration on Security Cooperation in 2007, which signal the appetite for a more rounded and diverse commercial relationship between Australia and Japan.

The Commerce Agreement also formed the building blocks of the Japan Australia Economic Partnership Agreement in 2015 which is recognised as one of the most comprehensive free trade agreements Japan currently has in force.^[10] Japan and Australia are also signatories to the Trans Pacific Partnership which will allow the mutual growth of business and investment with the remaining nine signatory countries. Fast forward to today, Japan is now Australia’s second largest trading partner and recognised as a top export market for many decades.^[11]

This dynamic relationship between the two nations is evolving, evidenced by the new areas of collaboration that Japanese and Australian corporates are working on. The development of Sydney's second airport is a good example. In 2019, Hitachi announced that it entered an agreement with the North South Wales government to establish the ‘Kyoso Centre’ within the Western City Aerotropolis.^[12] The ‘Kyoso Centre’ will be established in 2023 and is aimed at accelerating the growth of start-up companies to SMEs through job creation, product knowledge and technological development.

Japanese investment in Australia post Covid-19

Japan’s response to the Global Financial Crisis may foreshadow its appetite for offshore investment following the Covid-19 pandemic. In the immediate wake of the global financial crisis, 13 out of the 20 top Japanese M&A deals by value involved an offshore investment. Big ticket Japanese M&A deals during the Global Financial Crisis included the acquisition of a 21 per cent stake in Morgan Stanley (US$9bn) by Mitsubishi UFJ Financial Group and the acquisition of Lehman Brothers’ Asia Operations (including in Australia) for US$225m by Nomura Holdings.

Australia’s emerging hydrogen industry is one area which should attract interest, with the two countries signing the Joint Statement on Cooperation on Hydrogen and Fuel Cells in January 2020.^[13] We have seen the development of the world's first international liquid hydrogen supply chain (by converting brown coal into hydrogen) in Victoria’s Latrobe Valley,^[14] as well as the first export of hydrogen to Japan from the AUD 7.5m pilot hydrogen plant in Queensland.^[15] The general trend for Australian banks to dispose of their life insurance and wealth management businesses is another opportunity for Japanese investors to capitalise on.

Japanese investors have, and will continue, to view Australia as a friendly destination for long-term growth in light of Australia’s history of economic growth, oligopolistic market and its ever-growing population. There is no doubt that the strength of Japan and Australia’s bilateral relationship will bring more opportunities for growth and expansion despite the financial impact of Covid-19 on markets worldwide.