Anime, sushi, robots, and an obsession for order and cleanness – Japan’s unique interests and culture can seem quite different to those in other parts of the world.

In terms of M&A deals, too, Japan looked as though it was on a different planet in 2023, according to Mergermarket data.

M&A deals involving Japan-based targets soared 38.8% in terms of volume from 2022, as the country appeared insulated from global inflation, surging interest rates and geopolitical turmoil afflicting other nations. By sector, technology topped the deal-making charts (30% share), followed by healthcare (23.7%).

The picture was very different in North America, which saw a 4.8% fall in total M&A deal volume; Europe, which tumbled 28%; and Asia excluding Japan, down 25% in 2023, per Mergermarket data.

Among other record-breaking numbers for Japan, private-equity deals hit their highest-ever rate of USD 44.2bn in 2023, according to data.

The country also saw a remarkable 235% spike in the volume of inbound M&A deals to USD 29.3bn from the previous year, as overseas buyers rushed  to seize deal opportunities in Japan. Outbound deals rocketed 43.3% to reach USD 65bn from 472 transactions.

Management buyout (MBO) deals more than tripled to a new high-water mark of USD 10.9bn, the data showed. These deals include Japan’s biggest MBO plan for Taisho Pharmaceutical Holdings [TYO:4581] to go private at a cost of USD 4.7bn.

Power to the people

What are the deal drivers behind these records? Industry experts point to a number of structural changes that Japan has undergone in recent years, which have empowered shareholders and activists seeking corporate restructuring and thus higher investment returns.

Among them are changes in corporate governance practices and rules, and strong pressure from the Tokyo Stock Exchange urging domestic companies to increase corporate values for stakeholders.

A prolonged struggle  between electronics giant Toshiba [TYO:6502] and activists finally ended in December, as the company was de‑listed via a USD 16.2bn privatization plan, the second-largest deal in Japan in 2023, per Mergermarket data.

The Toshiba privatization had been triggered by growing calls from oversea-based activists seeking transformation. The case demonstrates the power of activists and serves as a powerful reminder for Japanese companies of their responsibility to shareholders, say Japan-based M&A experts.

Meanwhile, many management teams have decided to carry out an MBO and/or go private because they feel stronger pressure from shareholders often makes it difficult to pursue a longer-term business strategy.

Last June, semiconductor materials maker JSR [TYO:4185] announced a USD 6.9bn privatization plan, sponsored by government-backed fund Japan Investment Corporation (JIC), the third-largest M&A deal in Japan in 2023.

JIC said that the privatization plan should enable JSR to carry out its “bold, medium-to-long-term strategic investments without being bound by the short-term impact on business performance.”

Banking on change

Aside from pressure from shareholders, the Bank of Japan’s (BOJ) ongoing ultra-loose monetary policy has also made it easier to secure low-interest LBO loans from local banks, say experts.

As at 22 January 2024, the yield on benchmark 10-year Japanese government bonds remained as low as 0.665%, compared with US government bonds at 4.129 % and Australia at 4.296, according to Sumitomo Mitsui Trust Bank.

Economists say the BOJ appears to be readying for a policy change, as Japan is finally seeing a continuing consumer price index rise and is moving away from decades-old deflation.

But even if BOJ modifies its ultra-loose monetary policy, interest rates are likely to remain considerably lower than those in Europe and the US, meaning M&A players in Japan should find more advantageous conditions than other regions, notes Tokyo-based EQT Group partner, Tadashi Maruoka.

Japan-based M&A players say they expect favorable conditions in domestic markets to remain throughout 2024, with many Japanese companies still trying to reorganize business portfolios and/or pursue industry consolidation.

For example in 2023, chemical giants such as Mitsubishi Chemical Group [TYO:4188], Mitsui Chemicals [TYO:4183] and Sumitomo Chemical [TYO: 4005] all saw the profitability of their petrochemical businesses plunge, heightening speculation over potential industry consolidation and carve-outs of low-profit units with significant greenhouse gas emissions.

Meanwhile, electronics and computer conglomerate Fujitsu [TYO:6702] is now trying to transform itself into an IT services provider from a hardware maker. CEO Takahito Tokita said in December that the company will expedite negotiations to sell its USD 730m stake in air-con manufacturer Fujitsu General [TYO:6755].