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

Activity in the Japanese capital markets was sluggish before the dramatic natural disasters, which struck the country in early 2011. Now, as one partner puts it: "The market is very slow and very soft....

Activity in the Japanese capital markets was sluggish before the dramatic natural disasters, which struck the country in early 2011. Now, as one partner puts it: "The market is very slow and very soft."

Equity work has been hardest hit with IPO deals few and far between, and with those that do get started rarely getting over the finishing line. With the economic gloom hanging around the country this could be a trend that persists for some time.

The government has tried to encourage growth through low interest rates but so far little impact has been seen.

What hope there is in terms of new deals is around the potential capital raising activities of Japanese banks as they try to increase their capital bases in line with stricter regulations.

Debt work has held up slightly better with some activity seen in both Euro and Yankee bond issuances. Practitioners have also seen an increase in Renminbi denominated 'dim-sum bonds'. This is perhaps no surprise considering China's ascendancy as the dominant economic force in the region and peers will no doubt expect to see more work in this vein in the future.

Another area where practitioners were hopeful of seeing an upturn in mandates is high-yield. With liquidity restricted all over as banks try to tighten their belts and get their capital reserves in order, the bonds market have stepped in to fill the void, either fulfilling the entire financing requirement or as part of a bank/bond hybrid. So far, activity in this field in Japan has been limited but with Hong Kong having fully embraced the product there is optimism that it may cross the water and open up a new stream of work. If so the race will be on for firms to recruit practitioners (more than likely New York trained) able to handle the new work.

Bank financing work has been restricted ever since the 2008 financial crisis with banks being much more concerned in recent years with increasing their capital base to protect against future troubles and, more importantly, to bring themselves into line with new regulations. Although this has restricted the levels of new lending, firms have been kept busy advising on new rules, regulations and legislation, "A lot of bank regulatory work, not necessarily deals," says one partner....

Bank financing work has been restricted ever since the 2008 financial crisis with banks being much more concerned in recent years with increasing their capital base to protect against future troubles and, more importantly, to bring themselves into line with new regulations.

Although this has restricted the levels of new lending, firms have been kept busy advising on new rules, regulations and legislation, "A lot of bank regulatory work, not necessarily deals," says one partner.

Lending itself was further restricted after the natural disasters which hit the north of the country, with liquidity drying up further as the market lost confidence. What little new lending has been seen has been on the outbound side as Japanese banks looked to expand their portfolios overseas. The most popular destinations continue to be those jurisdictions in Southeast Asia which are seen as the next wave of growth economies, most notably Vietnam, which has drawn a lot of interest in recent years.

Much like the other areas of the capital markets, structured finance and securitisation work has been very patchy in the last year. With investor and consumer confidence at rock bottom after the country's recent troubles it is perhaps unsurprising that issuers have been less than ambitious in their undertakings....

Much like the other areas of the capital markets, structured finance and securitisation work has been very patchy in the last year. With investor and consumer confidence at rock bottom after the country's recent troubles it is perhaps unsurprising that issuers have been less than ambitious in their undertakings.

In truth, work around products such as CDO and CLOs was low before the earthquake and connected events. With their reputation damaged by the financial crash the market had not recovered enough to have been further effected in the aftermath of the natural disasters.

A small beacon of light is the subtle rise of convertible bonds. A relatively new product in certain parts of Asia, it is beginning to garner interest and a few deals have been seen in the Japanese market. There has also been a slight resurgence of work in terms of securitisation.

"We thought this would be adversely affected by the earthquake, but it hasn't decreased significantly". This view from one M&A partner summed up the surprisingly optimistic mood found across the market....

"We thought this would be adversely affected by the earthquake, but it hasn't decreased significantly". This view from one M&A partner summed up the surprisingly optimistic mood found across the market. In light of the earthquake and subsequent tsunami you might assume that shockwaves had been sent through corporate confidence as well, however though the quake did have some consequences, instead of blocking the pipeline of deals it seems to have instead merely redirected the flow.

Japanese companies have turned away from domestic targets, but instead of sitting on their hands the result has been an increase in outbound acquisitions as companies look for opportunities away from their own shores. "We've seen accelerating acquisitions outside Japan in Asia, the USA and South America," says one partner and another agrees: "There's a new group of Japan companies, second tier companies that used to be traditionally orientated but are now looking at cross-border M&A deals."

With the instability inherit in the local market this trend is perhaps not surprising, but it has also certainly been helped by the strength of the Yen which has encouraged Japanese companies in their endeavours. "A stronger Yen is also helping," says one partner, adding: "therefore the intention to buy overseas, particularly in the US has increased."

Both the US and South America have proved to be popular targets for corporates but they have also been casting their eye over closer targets including those in developing economies of countries such as Vietnam.

The same growth unfortunately has not been seen in the private equity sphere, which was hardly a great well of activity before the recent turmoil: "The activity of private equity firms has been slow since last year, since the earthquake it's even worse." With the current uncertainty in the market, it seems unlikely that activity will pick up any time soon.

It is strange to think that a natural disaster could lead to an increase in work in any practice area, (apart from restructuring & insolvency perhaps) but that seems to be exactly what has happened in the case of project finance.Thinking logically of course it makes perfect sense....

It is strange to think that a natural disaster could lead to an increase in work in any practice area, (apart from restructuring & insolvency perhaps) but that seems to be exactly what has happened in the case of project finance.

Thinking logically of course it makes perfect sense. With the earthquake and tsunami having caused huge levels of damage in physical terms to infrastructure and power production and in a psychological fashion to the country's love affair with nuclear power, the need for vital rebuilding and an alternative future energy plan is stronger than ever.

"Nuclear was going to be the next big thing," says one partner, "but the earthquake has changed all that". Amazingly there are still some who believe that Japan's aversion to nuclear power may only be short lived and that sooner or later demand for such projects will return, however the majority accept that alternatives will need to be found.

The most pressing task is simply to get the country back to its previous capacity, apart from the basic needs of its citizens, as one partner says: "The Japanese government was focused on boosting business with nuclear, now it can't." Plentiful power is a large and vital lure for any foreign investor looking to set up industrial operations.

In the long term of course the country will need to find a viable alternative to nuclear power to meet its energy demands. Thus far the two clear options seem to be renewables and liquefied natural gas (LNG). So far opinion is divided: "LNG is going to be the next big thing for Japan," says one partner, but another disagrees: "The Japanese government is switching to renewables. There's a bill. Renewable project finance will be good in the near future." Whichever route is chosen, or indeed if the country chooses a combination of both, there will be certainly be a need for substantial financing and with it plenty of mandates for firms.

Outside of power there is plenty of other rebuilding which will need to be done to general infrastructure and firms will be hopeful of a number of government announcements in the coming months.