Japanese investment in Australia hits record high of $133.8b

Japanese finance has been described as one of the "great untold stories of supporting Australian prosperity" by the authors of a report into the country's investments here in 2023, with a record high for foreign direct investment (FDI) of $133.8 billion and a record number of Japanese inbound M&A deals at 53.

Mitsubishi UFJ's $1.2 billion acquisition of Link Administration, Kirin's $1.9 billion Blackmores takeover and partly Japanese-owned 7-Eleven International's $1.7 billion buyout of 7-Eleven Australia were among the largest transactions.

Other deals included LNG Japan's US$880 million acquisition of a 10 per cent stake in Woodside Energy's (ASX: WDS) Scarborough LNG Project, Kao's $450 million acquisition of skincare producer Bondi Sands, Sojitz’s acquisition of prestige car dealer Dutton Motors from private equity.

The latest Japan-Australia Investment Report 2023: Partners in Prosperity prepared by law firm Herbert Smith Freehills and The Australian National University shows that Japan accounted for 12 per cent of FDI in Australia last year, with a key investment trend of Japan wanting to be at the technological forefront of the energy transition.

The authors also point to two takeovers of listed Australian companies by way of a scheme of arrangement so far this year, compared to three for the entirety of 2023, including the $9.1 billion acquisition of Australian-founded printed circuit board (PCB) design software group Altium (ASX: ALU) from Renesas, and J-Power's $381 million takeover bid for Genex Power (ASX: GNX).

"Economically and politically, Japan and Australia have never been closer,” explains Ian Williams, senior advisor at Herbert Smith Freehills and co-author of the report.

"Two-way trade between Australia and Japan was valued at $143.3 billion in FY2023, a 24 per cent increase compared to FY2022, which itself followed a 75 per cent increase from FY2021.

"It is no surprise that Japan was Australia’s second-largest trading partner and second-largest export destination at $115 billion."

Williams describes a further deepening of the Japan-Australia relationship over the past 12 months during a period of growing international turbulence.

"Changes in the global geopolitical environment have brought the two countries closer together as indispensable economic partners, particularly in the mutual pursuit of the energy transition to net zero by 2050," he says.

"Japan has been proactive in driving regional and broader collaborations on new energy technology. We expect that energy transition-related investment will be a major trend for the next 30 years, but coal, LNG and iron ore will remain critical to both economies and the energy transition in the short to medium term.

"There are numerous energy transition-related investment opportunities in the midstream and downstream sectors."

Herbert Smith Freehills partner Damien Roberts, who advises Japanese clients on cross-border acquisitions, joint venture operations and energy projects in Australia and the Asia-Pacific region, notes that increased Japanese M&A deals in Australia are in contrast to global trends.

"While global M&A decreased in 2023, we saw a record 53 transactions of inbound Japanese M&A in Australia— the highest number that we have seen since we started this report in 2017," Roberts says.

"2023 saw an acceleration of sector diversification in Japanese investment in Australia, a trend that has long shown signs of promise but was briefly interrupted by the COVID-19 pandemic.

"Investments occurred across a large number of sectors, with the top performing being real estate, consumer goods and mining. It is also clear that the energy transition and ESG factors are increasingly considered in M&A decision-making and strategy."

Roberts also points to an increasing number of large Japanese corporations acquiring small to medium-sized Australian start-up enterprises.

"These acquisitions were designed to secure access to the unique technologies developed by these start-ups and scale up for global application," he explains.

The report noted there were four Japanese M&A deals in the Australian technology sector last year, including for Link, Fujifilm Business Innovation acquiring Sydney-based IT services company MicroChannel Services, Komatsu buying fleet management outfit iVolve Holdings, and Fujitsu's purchase of digital transformation (DX) consultancy, MF & Associates.