Japanese companies’ “standby funds” are at an all-time high of “370 trillion yen,” and foreign capital acquisitions are likely to continue…

It has been revealed that Nippon Life Insurance will acquire American life insurance company Resolution Life for approximately $8.2 billion, creating a lot of buzz.

This is the largest M&A (merger and acquisition) deal in history, surpassing Tokio Marine Holdings’ acquisition of US insurance giant HCC Insurance Holdings (approximately $7.5 billion in 2015).

Direct investments such as investments in foreign companies, including acquisitions, are likely to involve currency outright transactions (i.e., selling or buying alone without conditions of repurchase or resale), so It tends to attract attention as an indicator of long-term direction.

This timeForeign direct investment (from Japan to overseas), such as Nippon Life’s acquisition of American life insurance companies, has been progressing at a pace that could be called a megatrend since 2011.[Chart 1]

On the other hand, theseAs a side effect of the increase in foreign direct investment, the ability to create added value domestically has been lost as production bases have been moved overseas, and the trade balance deficit has become entrenched.There are many people who view this as such.

In reality, what has been driving the increase in foreign direct investment is not greenfield investment that establishes local subsidiaries to build new production bases and sales channels, but rather investment through the acquisition of existing companies such as Nippon Life. However, in any caseThis was a business decision made in recognition of Japan’s limitations as a production and sales base, and from the perspective of the supply-demand relationship that determines the exchange rate, this is a sign that the yen should be sold.I can say that.

Is the “peak-out” theory of foreign direct investment true?

Although described as a megatrend in the previous section, some believe that foreign direct investment has peaked out due to the pandemic.

Although Japan’s trade balance recorded its largest ever deficit in 2022, it has been on a downward trend since then, and the focus on the demand for yen selling due to the increase in foreign direct investment and the acceleration of the yen’s depreciation has declined. There is no doubt that I did.

In order to understand the changes over the past 10 years, including the most recent situation, we take a look at the trends in the total amount (of foreign direct investment) from January to October for convenience.The trend continued to increase until 2019, and due to the outbreak of the pandemic, Although that trend broke and recovery continued after that, the period in which the economy could not recover to pre-pandemic levels continued until 2023[Chart 2].

As the situation described above continues, some voices point out that Japanese companies’ overseas acquisition capacity is running out.

However, as you can see from[Chart 2]above,2024 (for January to October) exceeded 2019, just before the pandemic, and the largest amount of foreign direct investment in the past 10 years. It is possible that this demand for yen selling contributed to the persistently weak yen market.

Checking various statistics,Japanese companies have accumulated cash on standby, and overseas companies’ acquisition capacity is not depleting, but is increasing.There is also an impression.

According to the Fund Flow Statistics published quarterly by the Bank of Japan,Cash and deposits held by non-financial corporations (business companies excluding financial institutions) are approximately 366 trillion yen as of the end of June 2024.reaching around 60% of the nominal GDP (gross domestic product).

Looking at the figures for the United States and the Eurozone for the same period, the nominal GDP ratios were around 6% and 25%, respectively, making the scale of cash and deposits held by Japanese companies remarkable[Chart 3].

TheseIn addition to the actual situation of waiting funds, if the domestic market is expected to shrink due to factors such as the declining birthrate and aging population, it is likely that Japanese companies will continue to actively acquire overseas companies.cannot be denied.

Direct investment in Japan remains sluggish

Let’s also look at trends in inward direct investment.

The previous Kishida administration had set the goal of raising the stock of inward direct investment to 100 trillion yen by 2030 as soon as possible, but no major changes have been seen recently.

As you can see by going back to Chart 2 in the previous section, the scale of inward direct investment does not even reach 10% of outward direct investment, and there is no sign of any particular change.

The balance of inward direct investment at the end of 2023 will be 49,646 billion yen, so an additional 50 trillion yen will be needed to reach the target of 100 trillion yen.

If we do simple calculations, we will need to bring in more than 7 trillion yen in direct investment from overseas every year for 7 years including 2024, but the reality is that in 2024, it will be just under 1.2 trillion yen (annual rate) from January to October. According to calculations, the total amount remains at approximately 1.4 trillion yen).

To be more precise, the balance is determined by market valuation that takes into account stock and foreign exchange levels at the end of the year, so even though it is approximately 1.4 trillion yen on a flow basis, there is a possibility that the balance on a stock basis will rise in the future.

However, the government’s intention is not to achieve such goals through market valuations, but rather that the influx of foreign capital will directly boost the employment and wage environment of the Japanese economy, and that technological innovation will be encouraged through the activation of research and development. It’s probably going to happen.

“Cheap Japan” alone won’t turn things around.

It goes without saying that steadily closing the large gap explained in the previous section between the flow of funds going out from Japan and the flow of funds coming into Japan from overseas will help alleviate the pressure on the yen to depreciate.

However, the situation will probably not be reversed simply by promoting the cost advantages of “cheap Japan,” which has recently become widely recognized.

In the first place, even though the yen exchange rate has basically been on a downward trend (weak yen) since 2011, instead of increasing inward direct investment from overseas, outward direct investment overseas has continued to increase. , we have no choice but to think that there is no “absolute” causal relationship between foreign exchange rates and direct investment.

An important point in driving direct investment is how (the government) can appeal to Japan’s appeals other than “being cheap,” such as its geopolitical safety, high educational standards, and good public safety. It will come.

*Contributions are personal opinions and have no relation to the organization to which I belong.