Australia-Japan investment pushes through roadblock

The COVID-19 pandemic had a significant impact on Japanese investment in Australia in 2020 with a slight decrease in the number of announced or completed transactions and the absence of any “mega-deals” valued greater than $A1 billion.

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Despite the decrease in activity in 2020, the fundamentals of the Japan-Australia relationship are deep and enduring and position both sides well for a strong recovery in investment - more promptly than many other jurisdictions.

"Japan continues to be one of the three largest investors into Australia, and the largest in our region, with $A109 billion of direct investment.”

The other noticeable impact was the predominance of existing players in the market with potential new entrants particularly impacted by travel restrictions.

Japan’s importance to Australia

Japan continues to be one of the three largest investors into Australia, and the largest in our region, with $A109 billion of direct investment. Only the United States ($A205 billion) and the United Kingdom ($A127 billion) have higher values invested. Japan remained Australia’s second largest two-way goods and services trading partner accounting for around 10 per cent of total trade.

Japanese companies remain amongst the highest taxpayers in Australia (especially companies with iron ore investments). They comprise half of the top 10 exporters of Australian iron ore, coal, LNG, oil, wheat, woodchips and salt, and have long been considered some of our best corporate citizens.

Relationship fundamentals endure

Japanese investment in Australia during 2020 can be characterised by five overarching trends:

  • None of the underlying macro-economic factors that previously promoted investment have changed (stable government, economic strength, rule of law).
  • Very few new entrants to the Australian market, which is not surprising given the difficulty in undertaking due diligence and negotiations without being able to physically visit Australia.
  • An acceleration in implementing mid-term business plans which resulted in a mixture of divestments in traditional areas and an increased focus on investment in new emerging sectors.
  • Global trends toward decarbonisation (“zero net carbon”) and against carbon-emitting industries are having a very strong and swift impact, especially for listed Japanese corporates.
  • “New Energy” becoming a very attractive investment opportunity and being strongly supported by the Japanese and Australian Governments, financiers, energy companies, engineering firms, trading houses and funds.

Sector diversification continues

Despite COVID-19, there was a continuation of the sector diversification that will further expand once business travel restrictions are relaxed. Japanese companies are becoming increasingly sophisticated in both the way they invest and implement post-merger integration.

The year 2020 also saw longer-term geopolitical changes beginning to emerge. Specifically, there was an increasing focus on climate change targets, trade disputations with China, Brexit, change in leadership in Japan and a new Biden administration in the US that together have raised questions about the future of trade and investment policies.

These events have caused Australians to reflect on the importance of a trading partner in the region that shares Australia’s democratic and egalitarian values and its adherence to an international rules-based trading system. Japan is such a partner.

The value of the Japan-Australia relationship is more deeply understood and respected now than perhaps ever before and our mutual confidence in each other as economic and political partners and allies may well form the basis of new investments and trends as we look to weather the post-COVID investment environment.

Good corporate citizens

Environmental, social and governance (ESG) policies are now a major investment consideration driving decisions regarding the acquisition of new assets and the divestment of existing assets as Japanese listed-companies are particularly sensitive to reputational risk and being seen as good corporate citizens.

Japanese Prime Minister Suga’s target of zero net greenhouse gas emissions by 2050 will see Japanese corporate strategy and investment seek to align with that target as a minimum. In addition, the Japan Climate Leaders’ Partnership, a coalition of over 170 business, is urging the Japanese Government to set a domestic greenhouse gas emissions reduction target of at least 50 per cent by 2030 from 2013 levels.

This has serious implications for Australia’s export of energy, as Japan undertakes the transition towards new energy (hydrogen, solar, wind, biomass, pumped hydro). In 2020, coal and natural gas represented over 25 per cent of Australia’s total exports.

Together with increasing pressure from shareholder activists and the growing number of external non-executive directors, ESG concerns will undoubtedly influence investment decisions and drive sustainability objectives as a major requirement of companies’ social licence to operate.

There has already been an active start to 2021, which should continue – particularly from companies able to take advantage in the short to medium-term of an established network in Australia as they continue to invest in new sectors as part of their mid-term business plan to diversify revenue sources.

Ian Williams is Senior Advisor and Tatsuki Shiratsuchi is Solicitor at Herbert Smith Freehills

Click here for access to Japan-Australia M&A: 2020 Review and Future Trends by Herbert Smith Freehills

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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