Business Environment and Key Challenges
Overseas Business Deployment of Strong Japanese Industries
Despite the slowdown sparked by the global financial crisis in 2008, foreign direct investment by Japanese companies returned to a level exceeding $100 billion in 2011. Thereafter, it remained firm, reaching $248.7 billion in 2019 (Figure 1).
Foreign direct investment by Japanese companies, which remains stable, particularly overseas M&A activity has grown rapidly since 2009 thanks to a stronger yen. This trend continues despite subsequent currency movements. Since surpassing 500 deals in 2012, the number of overseas M&A deals has been steadily increasing and reached a record high 826 deals in 2019. Looking at the value of these M&A deals, the value of M&A deals decreased compared with 2018, when the largest-ever M&A deal by a Japanese company was recorded. Of the top 20 M&A deals in terms of value during 2019, 13 deals were overseas M&As, with the total amount exceeding ¥10 trillion (Figure 2). Japanese companies have proactively conducted overseas M&As to acquire technologies to survive in international competition as well as develop new markets replacing the shrinking domestic markets. This indicates that the use of M&A continues to be an important strategy for Japanese companies to expand abroad.
In order to put the Japanese economy back on a growth trajectory amid structural issues such as a shrinking population and an aging society with a falling birthrate and to create a much more affluent society, it is indispensable to increase the productivity of the entire economy and strengthen earning power. To this end, it is increasingly necessary to proactively encourage Japanese companies to enter overseas markets for seeking new business opportunities.
Value of Japan's Exports Turns Downward
The value of global export transactions rebounded in 2017, the first positive growth in three years, thanks to accelerating growth of the world economy and soaring resource prices. Subsequently, despite favorable growth in global exports that continued from 2017 up to the middle of 2018, global exports decelerated from the second half of 2018, impacted by trade problems, such as U.S.-China trade frictions and a slowdown of emerging country economies. As a result, the value of exports in 2019 amounted to $18 trillion, down from $19 trillion in 2018, marking the first decline in three years.
The value of Japan's export transactions was affected by a lull in demand for automobile-related goods in developed countries and for information-related products in Asian emerging countries, which were driving forces of growth up to the middle of 2018, as well as the slowdown of the world economy. Accordingly, the value of Japan's export transactions in 2019 amounted to $705.5 billion, marking the first decrease in four years similar to the decline in value of global export transactions (Figure 3).
There were expectations that a favorable turnaround in the IT cycle and progress with trade problems would spur a pickup after a bottoming out at the end of 2019. Since the start of 2020, however, the spread of COVID-19 has led to a sharp decline in the global economy and it appears that considerable time will be needed for a rebound in exports to Europe and the U.S., where there is particular concern about lagging economic recoveries. A downside risk to Japan's export shares in global markets still remains due to the uncertain direction of the global economy and the expanding export shares of emerging countries. Amid the diversification of overseas sales channels of Japanese companies which intend to increase their export shares in the world, evaluation of creditworthiness of importers in foreign countries and uncertainties about their business transactions are becoming major concerns for Japanese companies. To ensure that they can cope with business risk in an appropriate manner, JBIC is required to participate in projects from the early stage of the project development process and to supply funding for projects with relatively high-risk profiles by capitalizing on its various financial tools.
Overseas Business Deployment of Mid-tier Enterprises and SMEs
Japanese mid-tier enterprises and SMEs are accelerating their move to seek business opportunities outside Japan by meeting demand in overseas markets as well as responding to the needs of major Japanese manufacturers for local procurement of parts and equipment. JBIC annually surveys Japanese manufacturers regarding their medium-term prospects for overseas operations in its survey called "Survey Report on Overseas Business Operations by Japanese Manufacturing Companies." In the FY2019 survey, 97.0% of mid-tier enterprises and SMEs which responded to the survey stated that they will "maintain present level" or "strengthen/ expand" their overseas business operations. This suggests that their willingness to conduct overseas operations remains high (Figure 4).
Diversification has been seen in the fields of business invested by Japanese mid-tier enterprises and SMEs, their investment destinations, and funding needs.
Meanwhile, compared with larger companies, mid-tier enterprises and SMEs might face greater constraints on various fronts, such as fund raising and the collection of information about overseas investment. Due to this, it is important that JBIC provides further detailed support to mid-tier enterprises and SMEs, while strengthening partnerships with regional financial institutions which serve as a major financing source for those companies.
Furthermore, from the start of 2020 the global spread of COVID-19 has dealt a severe blow to the overseas businesses of mid-tier enterprises and SMEs and these circumstances require timely and appropriate financial support.
Supporting Overseas Business Expansion Using Various Financial Instruments
In the Third Medium-term Business Plan (FY2018–FY2020), JBIC has designated support for the overseas M&As by Japanese companies as one of the priority areas to focus on. In FY2019, JBIC continued to flexibly provide long-term financing for Japanese companies to carry out M&A activities in various fields, including steel, automobiles, leasing, industrial gas, and foods.
Apart from support for M&A transactions, JBIC supported the real estate complex development project in Myanmar consisting of a hotel, long-term stay hotels, offices, and commercial facilities. JBIC also provided support for an ESCO project that utilizes renewable energy and a project for the manufacturing of sheet glass that is essential for solar power generation. These projects contribute to strengthening the international competitiveness of Japanese companies in the field of global environmental preservation.
Additionally, JBIC provided loans in various local currencies such as Thai baht, Chinese yuan, and Indonesian rupiah in order to further encourage Japanese companies to expand abroad.
Supporting the Exports of Japanese Companies
(Note) A ship of virtually the same size as the one being financed
JBIC also actively supports the exports of Japanese companies. In FY2019, JBIC supported the export of equipment to Malaysia's largest integrated complex consisting of a refinery and ethylene, propylene, and other petrochemical plants. In this project, JBIC contributed to the smooth structuring of project financing with its abundant experience and knowledge of project financing by participating in the project development from the early stages of discussions with public institutions of other countries. This project contributes to maintaining and improving the international competitiveness of Japanese industry by creating business opportunities for Japanese companies in the field of petroleum refining and petrochemicals in Malaysia.
As for the export of ships, JBIC contributed to maintaining and improving the international competitiveness of Japan's shipbuilding sector by supporting the export of ships manufactured by Japanese shipbuilders. This also plays a significant role in the development of the Japanese regional economy where mid-tier enterprises and SMEs are engaged in manufacturing materials and components for building ships.
Supporting Overseas Business Deployment of Mid-tier Enterprises and SMEs
Since FY2012, JBIC has enhanced its capability to assist Japanese mid-tier enterprises and SMEs in expanding abroad through its business units dedicated to this purpose at its Head Office and Osaka Branch. In FY2019, the number of loans, equity participations and guarantees to mid-tier enterprises and SMEs totaled 82. JBIC encouraged mid-tier enterprises and SMEs to expand to overseas markets through its direct loans in U.S. dollars and local currencies such as Thai baht or the credit lines (TSLs) at Japanese regional financial institutions by providing them with long-term loans in foreign currencies. In FY2019, JBIC strengthened cooperation with regional financial institutions, such as by forming co-financing with 23 regional financial institutions, including six regional financial institutions involved in forming co-financing for the first time.
JBIC also proactively responded to the local currency needs of the overseas subsidiaries of Japanese mid-tier enterprises and SMEs by providing loans in local currencies such as Thai baht and Chinese yuan in addition to U.S. dollars and Euro.
Besides support in raising funds, JBIC held seminars and consultation meetings across Japan to provide various information from its overseas representative offices such as on overseas investment environment.
Responding to the Diverse Needs of and Crises Faced by Japanese Companies
The international economic conditions surrounding Japan, such as political conditions in each country and economic trend in emerging countries, are constantly changing. During 2020 in particular, the spread of COVID-19 has been having an enormous impact on the global economy since the start of the year. While accurately responding to these changes, to trends in the global economy, and to the funding needs of Japanese companies, JBIC continues to provide support to maintain and improve the international competitiveness of Japanese industry.
Taking the impact of COVID-19 on the Japanese economy and industry into consideration, the Industry Finance Group will provide prompt support for the crises faced by numerous Japanese companies large and small, including mid-tier enterprises and SMEs. Capitalizing on various financial instruments, the Industry Finance Group will provide further support to Japanese companies which plan to expand overseas. We will also strive to explore and create new business opportunities for Japanese companies that can lead to Japan's sustainable growth particularly in growth areas and new fields, as defined by JBIC's Third Medium-term Business Plan (FY2018–FY2020), and will continue to play a role in connecting Japan to the world by enhancing its risk-taking capability to finance various projects while responding to the needs of customers in a timely and accurate manner.