30 Aug 2021
Japanese investment activity in Australia was significantly higher this year than 2021, notwithstanding the uncertainty in global markets.
International travel between the countries recommenced in October which served as a turning point for investment activity as site inspections and face-to-face meetings resumed.
“Australia has the advantage of sunlight, a large land mass and strong winds conducive to large-scale solar and wind projects. Japan, by contrast, has limited land availability and is limited in developing large-scale offshore wind projects due to typhoons and deep seabeds.”
Many Japanese companies have internal rules which prevent investment without physical due diligence being undertaken. In 2022, there were 50 merger and acquisition (M&A) deals and 51 new partnerships.
- 15 were in mining (including critical minerals), traditional energy (such as LNG) or renewable energy (including hydrogen)
- 12 related to companies with software intellectual property or technology know-how
- 23 were a mix of financial services, real estate, consumer, infrastructure, construction/housing and services
LNG and coal (together with iron ore) have always been the centrepiece of the Japan-Australia trade relationship. However, Japan is now embarking on an energy transition, driven by a domestic energy strategy to achieve net zero carbon emissions by 2050.
The challenge for Australia is how it can remain the chosen exporter of energy to Japan. An opportunity for Australia is to use its natural resources advantage to develop export technologies for sustainable fuels such as hydrogen, ammonia and methanol.
Promisingly, a milestone was reached in the blue hydrogen sector last month. The Japanese Government’s Green Innovation Fund committed A$2.35 billion to Japan Suiso Energy (a joint venture between Kawasaki Heavy Industries and Iwatani Corporation) and ENEOS to lead a project to export blue hydrogen in Victoria’s Latrobe Valley to Japan through the Port of Hastings.
Under this project, a joint venture between J-Power and Sumitomo Corporation will supply 30,000 tonnes of hydrogen a year. This was a direct commercialisation of the Hydrogen Energy Supply Chain (HESC) Pilot Project which concluded on 31 December.
Critical minerals are an important component of this transition as they are required for many new energy storage technologies (such as batteries and high-powered magnets). In October the Australian and Japanese trade and industry ministries announced a partnership to develop and promote a critical minerals supply chain.
Australia has the advantage of sunlight, a large land mass and strong winds conducive to large-scale solar and wind projects. Japan, by contrast, has limited land availability (due to being mountainous) and is limited in developing large-scale offshore wind projects due to typhoons and deep seabeds.
While Australia possesses many advantages, factors influencing competitiveness in renewable energy trade are complex and establishing a competitive advantage will require significant up-front effort.
Australia currently supplies Japan with about 75 per cent of its thermal coal and 43 per cent of its LNG – as well as 60 per cent of its iron ore. While these traditional energy sources will continue to play a part in Japan’s energy strategy in the short to medium term, the long-term energy transition to net zero will have serious implications for the Australian economy.
There is little room for complacency if Australia is to seize the opportunity to remain Japan’s natural partner in decarbonisation and energy security. Sudden and unpredictable changes in Federal and State government policies in 2022 caused concern among the Japanese Government and Japanese companies.
Although there have been reassurances from senior government figures about the importance of the export market to Japan, an increase in the risk profile will potentially reduce Australia’s competitiveness as an investment destination.
Herbert Smith Freehills has published the sixth annual report on Japan-Australia M&A and partnerships, analysing, and the prevailing trends driving cross-border investment. Click here for the full report.
Ian Williams is a Senior Adviser, Damien Roberts is a Partner and Edward Watson is a Solicitor at 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.
30 Aug 2021
25 Mar 2022