Asian Market Update Series: Insights on Japan

23 September 2020: Multiple factors are combining to create an atmosphere in Japan for change and reform which could lead to new prospects for Australian business and investment.

This was one of the important messages to emerge from the latest online event as part of the Asia Market Update Series jointly hosted by Asialink Business and the Australia Japan Business Co-operation Committee (AJBCC).

Asialink Business CEO Mukund Narayanamurti moderated the webinar which featured a panel of expert speakers on the Japanese market who included:

  • Ian Williams: Senior Adviser, Herbert Smith Freehills and Vice President, AJBCC
  • Elizabeth Masamune PSM: Managing Director, @Asia Associates Inc, Japan  
  • Wendy Holdenson: Director and Executive Vice President, Mitsui and Co (Australia) Ltd
  • Andrew Gauci: Managing Director of Japan and Head of Telecoms and Data Infrastructure Asia, Lendlease

Mukund Narayanamurti said the focus on Japan was timely given the recent virtual leaders’ meeting between Australian Prime Minister Scott Morrison and Japan’s former Prime Minister Shinzo Abe, which reaffirmed the strength of the bilateral relationship.

Japan is Australia’s second largest trading partner with two-way trade valued at $88.5 billion and while Japanese companies have a long history of investing here, Australia’s investments in Japan have been more modest and only relatively few Australian companies are operating in-market.

Period of significant change

Japan is currently experiencing a period of significant change with a new Prime Minister in Yoshihide Suga succeeding Abe who was the country’s longest-serving prime minister. Prime Minister Suga’s initial focus will be on containing the impacts of COVID-19 and reviving the flagging economy, against a backdrop of geopolitical uncertainty. While real GDP in Australia contracted seven per cent in the April to June quarter, Japan’s GDP contracted an alarming 27.8 per cent during the same period, the biggest contraction since the GFC in 2009.

Elizabeth Masamune said these factors were creating a perfect storm for both change and further reform following the ‘Abenomics’ period. Slashing red tape, investing in infrastructure, improving coordination across the bureaucracy and taking government services online are among Prime Minister Suga’s priorities. Japan will also seek stability in US-Japan relations and regional stability.

Domestically, COVID-19 has been a catalyst for significant change. For example, doing business in Japan has been traditionally done face-to-face, but through necessity, large-scale teleworking and virtual engagement have been embraced. Japanese businesses are also adopting new management methods and business practices and we are seeing the relocation of major corporates from Tokyo to regional centres. 

Ecommerce and online sales have also surged during the pandemic with increased appetite also for new ideas and digital innovation. Service robots for example are assuming new roles in social distancing and public health.

Japanese investment in Australia

Ian Williams said over the last decade Australia had accounted for up to 50 per cent of the global annual profits of leading Japanese trading houses ITOCHU, Mitsubishi and Mitsui which were also among Australia’s top 10 corporate taxpayers.

Australia typically sits around sixth as a destination for Japanese investment, but rose to second in 2019 with 42 announced deals with a disclosed value of A$25.76 billion. These included five ‘mega-deals’ headlined by ASAHI Group’s A$16 billion acquisition of Carlton and United Breweries.

Some of the key factors behind the growth in Japanese investment, include Australia’s natural population growth, its skilled workforce bolstered by skilled migration, stability in legal and financial systems, regulatory certainty as well as low interest rates and a weakening Australian dollar.

This is weighted against investment pressures within Japan including negative interest rates, an ageing and declining population, the rise of activist investors and heightened environmental, social and governance considerations around domestic investments. Record levels of cash, low-interest loans from Japanese banks and the strengthening of the yen have also supported foreign investment.

Countries like Australia that have managed COVID-19 well in relative terms are expected to become even more attractive for investment and while earlier investments focused on mineral, energy and food exports, Japanese companies have become more active in participating in the Australian economy across a range of areas.

Mitsui: Australia’s fourth largest exporter

Mitsui’s investment history in Australia dates back to 1901 and the company has emerged as a key exporter of commodities such as wool, cotton, wheat and non-ferrous metals.

Today the company has a broad investment footprint in Australia in areas such as iron ore, coal, gas, steel, renewable energy, transportation, technology, and financial services. Mitsui is Australia’s fourth largest exporter and on an equity basis employs over 4,600 people.

Wendy Holdenson said Mitsui had many defining attributes in Australia but if she were to pick one, it would be the company’s attitude towards partnerships. Mitsui accepts that it cannot meet its objectives alone and through its partnerships here it was also supporting Australia’s economic shift towards Asia. It sees its relationships in Australia as mirroring the overall bilateral relationship, built on complementarity, trust and goodwill.

Important lessons from Lendlease

The success of Lendlease, which has operated in Japan for 32 years, offers several important lessons for other companies considering outbound opportunities. While Japan’s GDP growth over the past two decades has been flat compared to China and India, the economy is very stable. It rates highly in terms of ease of doing business, has strong levels of domestic consumption and relatively low inflation rates. Andrew Gauci said for Australian companies looking to enter Japan – a market where many had tried but few had succeeded – there were some important lessons to be learnt.

The first being that if you are not on the ground you have no chance of success. Patience is also essential while cultural understanding and language ability is perhaps more important in Japan than anywhere else. Building and maintaining a strong reputation is also vital and to do so you must always be able to deliver what you promise. As a foreign company this is critical to winning work while the relationships you build are also incredibly important in terms of accessing opportunity.

Lendlease brought project management in construction to Japan in the mid-1990s and its expertise proved its value in the emerging mobile telecommunications sector. There had been a clear market gap with many projects poorly managed, with costs too high and schedule delays common. The company has since project managed the construction of over 200,000 telecommunications sites across Japan and was trusted by government with a critical role in restoring infrastructure and services following the 2011 tsunami.

Japanese companies will also continue to look offshore for investment opportunities and through relationships in Japan, Australian companies can help direct capital towards their projects. Lendlease for example was able to secure one of Japan’s largest property companies – Mitsubishi Estate Asia – as a joint venture partner to effectively export back to Australia, through the Melbourne Quarter residential construction project. In turn, Lendlease will also undertake urban regeneration projects of a similar nature in Japan with its local partners.

The panelists felt that the future was bright for investing and doing business in Japan and that the post-pandemic period would see a greater preparedness to embrace external know-how to fill domestic holes in the market, but solutions needed to be tailored for the local environment.

Watch the full online event here: