As if prolonged negative interest rates weren’t inducement enough for firms to seek enhanced returns through cross-border M&A, Japanese lawmakers may soon be spiking the proverbial punch bowl with new tax perks.

Earlier this week, Akira Amari, chairman of the ruling Liberal Democratic Party (LDP) tax committee, told Japan’s Nikkei newspaper that the party may propose new tax credits to incentivize Japanese companies to put a record $4.3 trillion in idle cash to work through more deal activity.

Amari said the incentives would aim to encourage “big companies lacking in innovative spirit to grow with new vigor, like second-time startups.”

Record deal flow still not enough

The party’s renewed push for more, more and more M&A comes after Japanese cross-border deal activity set a fifth consecutive record of 777 transactions in 2018. These deals totaled $171.8 billion in the fourth-quarter of 2018 alone, with one-quarter of the deals valued at over $1 billion. North America was the largest regional destination for Japanese capital, accounting for 36% of Japanese outbound M&A.

Speaking at Japan Society in New York City on Thursday, Bank of Japan Deputy Governor Masazumi Wakatabe commended the recent years’ increase in M&A activity by Japanese firms, saying “I think the expansion of such initiatives can be seen as a positive change for Japanese firms, which used to be considered cautious about taking risks after the [late-1980’s] collapse of the bubble economy.”

Private equity paradaisu 

A long list of potential M&A targets in Japan, as well as increasing public and official acceptance of the value creation role of private equity and activist investors looks set to increase deal momentum. Deal arrows seem likely to point in both directions, with Japanese firms acquiring abroad, and foreign firms investing in Japan.

Per Private Equity International,  Japan is home to 2.5 million small and medium-sized companies facing succession issues, along with other distressed industrial sectors that could present compelling opportunities for private equity carve-outs. With many Japanese listed companies trading at lower valuations than other markets, activists and private equity investors may see an opportunity to improve margins and boost returns.

Fundraising among Japan-based private equity firms has by some accounts remained solid despite concerns over global growth. Data released this summer from Preqin found that first-quarter 2019 capital raising in Japan-based private equity firms was tracking at 3.8X the capital raise of the same quarter last year.

As part of its “first priority” push in Japan this year, private equity giant KKR is expected to seek targets among old-guard conglomerates like Panasonic and Toshiba as these sprawling companies slim down and shed non-core assets. KKR co-founder George Roberts told the FT this spring that he felt “more comfortable investing in Japan than I do in China.”

Send in the activists 

The anticipated M&A boom is occurring in tandem with a wave of activist investing in Japanese companies. All told, Japan has more activist investors involved in domestic companies than anywhere outside the U.S. A recent example is the well-known U.S.-based activist fund Elliott Management, which raised its stake in Japanese real estate investor Unizo just prior to a second, competing bid to buy that company in what has in recent days escalated into a contentious takeover battle.

Hostile bids are also targeting traditionally hidebound sectors. In August, Japan’s $130 billion real estate investment trust market saw its first hostile takeover with private real estate investor Star Asia‘s acquisition of Japanese REIT Sakura Sogo.

Meanwhile, the push to unlock value in Japanese listed companies may come from a sense of unease at the Bank of Japan’s outsized role in the country’s public market. The BoJ is already a top-ten shareholder in 50% of all Japanese listed companies (due in large part to its extensive holdings of ETFs) and is expected to surpass the national pension fund as the single-largest shareholder in Japan’s public companies as soon as 2020.

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