Japanese companies have been on a gigantic spending spree this year in Southeast Asia.
Total Japanese investment into the region has already reached $8.94 billion this year, surpassing the full-year record. Banks and insurers such as Mitsubishi UFJ Financial Group and Meiji Yasuda Life Insurance are leading the way.
Their motivation is clear: capture faster growth than in their own sluggish economy using the still relatively strong yen and their ultra-low funding costs to knock out any competition.
However, the Japanese appear to have overpaid for deals and underestimated the economic, regulatory and operational risks of investing in such volatile emerging markets, say risk consultants, analysts and bankers.
"There is a high possibility that they may not be successful," says Yuri Yoshida, a Tokyo-based analyst with credit rating agency Standard & Poor's.
The overseas assets of Japanese banks and insurers are still small in proportion to their sprawling domestic operations, so a problem overseas could still be absorbed with little pain.
Nor are financial groups indulging in the sort of foreign trophy acquisitions of the 1980s and early 1990s, including the Pebble Beach golf course and the Rockefeller Center.
But international exposures among Japan's three biggest banks are rising. MUFG's overseas assets are about 28% of the group's, while Mizuho Financial Group's and Sumitomo Mitsui Financial Group's (SMFG) weigh in at about 20%.
These figures will rise. The value of Japanese companies' purchases in Southeast Asia at $8.94 billion so far this year has surpassed the full-year record of $7.6 billion in 2006.
It is also up from just $627 million in the same period last year when very volatile markets during the European sovereign debt crisis made M&A difficult, according to data provider Dealogic.
Southeast Asia is the top region for all Japanese acquisitions abroad this year, up from seventh a year earlier. Japan Inc's most targeted sector globally is finance, up from fifth place last year, with 84% of deals struck in Southeast Asia.
Japan's Prime Minister Shinzo Abe's visits to Malaysia, Singapore and the Philippines in July underscored his government's efforts to forge ties with fast-growing Southeast Asian countries and lift Japan's economy out of the doldrums.
The biggest deals done in the region included MUFG's $5.73 billion bid for a 75% stake in Thailand's Bank of Ayudhya, SMFG's $1.56 billion purchase of a 40% stake in Indonesia's Bank Tabungan Pensiunan Nasional (BTPN) as well as Meiji Yasuda's $750 million purchase of a 15% stake in Thai Life Insurance.
"These transactions have been extraordinarily priced," says John Spence, managing director at Asian Capital Advisors, a boutique advisory firm focused on cross border insurance and asset management transactions in Asia, speaking broadly about Japanese deals in the region.
He says the Japanese appear to be pricing in continued growth at the businesses they are buying at current profit margins, which he sees as unrealistic.
FinanceAsia’s August edition contains the full article.