IFLR 1000
The Guide to the World's Leading Financial Law Firms

Even though the country had a reduced exposure to the credit crunch and the lending market was robust for the earlier part of 2008, even the sturdy Japanese banks could not hold back the tide of the global financial crisis that spawned from Lehman's collapse.After September 2008, in "a year of two halves", the final nail was hammered into the coffin of leveraged financing, which had already sputtered to a near-end in the summer....

Even though the country had a reduced exposure to the credit crunch and the lending market was robust for the earlier part of 2008, even the sturdy Japanese banks could not hold back the tide of the global financial crisis that spawned from Lehman's collapse.

After September 2008, in "a year of two halves", the final nail was hammered into the coffin of leveraged financing, which had already sputtered to a near-end in the summer. That domestic market has remained largely lifeless with interest beginning to percolate again this summer. Additionally, the real-estate finance market has been sluggish and few commentators are optimistic about a recovery soon.

Domestic banks are still very cautious about making new loans, but market commentators have pointed out that they will soon need to issue additional stocks to meet the capital requirements the government has outlined to offer a boost to the sagging economy. Stimulus packages have been injected and the lending market is beginning to slowly stir. Japanese banks are beginning to make loans again, albeit in small doses, and one lawyer predicts that by the last quarter of this year "they will be bullish".

Interestingly, acquisition financing did not entirely fade away, with some transactions still going through as corporates required capital to do distressed M&A. The syndicated loan market, which was primed for success at the beginning of 2008 but took a hit post-Lehman, is gaining momentum once again. Many of Japan's top legal players in the banking and finance sector have found themselves busy with refinancing and advisory work. The latter is due in part to the amendment in the Financial Instruments and Exchange Act in June 2008.

"The capital markets are in bad shape," says one market observer. Japan already saw deals drying up in the beginning of 2008, and after Lehman's collapse the equity capital markets hit rock bottom and have not yet been resurrected....

"The capital markets are in bad shape," says one market observer. Japan already saw deals drying up in the beginning of 2008, and after Lehman's collapse the equity capital markets hit rock bottom and have not yet been resurrected. The debt capital markets however kept afloat on several samurai bonds issued by Japanese corporates. "Straight debt deals have fallen off," notes one commentator, "but there is a demand for samurai bonds." Lawyers are hopeful this market will keep picking up as the government stepped in last autumn to mitigate risk by guaranteeing all samurai bonds.

"There's an insufficiency in the market and clients will be frustrated," explains one commentator on why he looks forward to a resurgence in the capital markets. "I'm an optimist that the market will come back later this year." Many deals started in early 2008 were stalled, but legal market practitioners have reported an increase in queries about re-starting some of these. Other trends noted were regulatory capital deals, debt restructurings and an uptake in liability management like bond buybacks.

Japan's structured finance and securitisation scene is glum. Although domestic securitisations have not completely tailed off and remain relatively active for local players, there has been a notable drop in cross-border work volume since the credit crunch....

Japan's structured finance and securitisation scene is glum. Although domestic securitisations have not completely tailed off and remain relatively active for local players, there has been a notable drop in cross-border work volume since the credit crunch. "It's an extremely tough market," says a commentator. "There are no new issues with the market turning on its head." The international securitisation market is still licking its wounds from the effects of the subprime crisis in 2007 and few commentators are optimistic for a return to health this year globally, including Japan.

The painful market situation has forced an increase in advisory work for law firms. This includes general advisory work along with special derivatives advice as counterparties have focused on preserving their rights. Innovative counterparty risk structure development, mitigation of collateral structures and restructuring work have also made appearances on the radar. An additional source of advisory work was the mid-2008 amendment to the country's Financial Instruments and Exchanges Act. "The changes have clients approaching us for help to ensure their structures and products are compliant," says one practitioner.

It has been a shaky year on Japan's M&A front, which saw fewer transactions being completed in the wake of the financial crisis. Despite the reduction in volume, the market remained robust relative to other economies in the region, and there was a rise in outbound work, with the country's strongest financial corporates regaining an appetite for cheap overseas targets....

It has been a shaky year on Japan's M&A front, which saw fewer transactions being completed in the wake of the financial crisis. Despite the reduction in volume, the market remained robust relative to other economies in the region, and there was a rise in outbound work, with the country's strongest financial corporates regaining an appetite for cheap overseas targets. An example of this saw Asahi buying Australian beverage manufacturer Cadbury-Schweppes.

The strength of the yen turned on Japanese exporters during the economy's decline into recession in the latter half of 2008. "Exporters are suffering big time," says one partner. This has resulted in some domestic market upheaval, with companies merging to fend off losses. The local market witnessed more integrations within sectors such as insurance in light of the economic downturn.

Management buyouts and takeover bids for take-private transactions remain the flavour of the moment, with more predicted to occur in the second half of 2009. Leveraged buyouts on the other hand were on the slide, with plenty taking flight pre-Lehman but then crashing to a halt after the investment bank collapsed.

A promising sign amid the economy's general doom and gloom is that Japanese firms with strong domestic shares and shielded from exposure to the export industry are actually very cash rich. These clients, for example telecoms giant NTT Docomo, are looking for targets overseas with greater confidence and taking larger listed stakes in foreign investments.

Active domestic companies that are flourishing include those in the technology, electronics and pharmaceuticals sectors. It has not been a banner year for inbound work, but it remains active, especially in the real-estate sector.

The strongest market in this jurisdiction, many commentators would argue, is the energy, natural resources and project finance sphere. Japan is the world's largest importer of liquefied natural gas (LNG) and a huge consumer of energy resources due to its lack of natural onshore supplies....

The strongest market in this jurisdiction, many commentators would argue, is the energy, natural resources and project finance sphere. Japan is the world's largest importer of liquefied natural gas (LNG) and a huge consumer of energy resources due to its lack of natural onshore supplies. Its need is enormous, so despite the recession and a slight increase in caution from lenders and sponsors, activity has kept buoyant.

The government's desire to keep investing in resources was showcased in the broadening of Jbic's (Japan Bank for International Co-operation) mandate to lend more. This quasi-government entity has been very active, pouring money into projects spanning the globe and is a much-sought after client for the domestic firms. Most top-tier international project finance firms maintain solid relationships with Jbic.

Japanese financial entities like Jbic are not shy about getting involved in overseas projects. Spotlighting Japan's growing confidence, they have been taking out larger listed stakes, and in many cases are now the majority shareholders. Notable regions of investment include south east Asia, Australia, Russia, the Middle East and South America.

However the sector isn't without its problems – banks are reluctant to make loans for long-term projects offshore. "Lenders aren't sure what will happen after 25 years, so they're much more cautious about giving out a 25-year loan," explains one practitioner.

Domestic projects have never made headlines really and this year marks no difference. "The domestic market is dead," says one commentator, but others with a more rosy view remark that the local PFI (private-finance initiative) and IPP (independent power producer) sectors are still busy, though numbers are decreasing and pure domestic projects are non-existent. Some market observers are hopeful that toll road projects will start up soon as infrastructure is bolstered around the country.