Softbank Succeeds Where Shirakawa Struggled on M&A Deals

Softbank Succeeds Where Shirakawa Struggled as M&A Weakens Yen
Japan central bank Governor Masaaki Shirakawa said in August the strong yen gave companies a good “chance” at mergers and acquisitions. Photographer: Kiyoshi Ota/Bloomberg

Japan’s biggest corporations are weakening the yen through record takeovers of everything from a U.S. phone company to a Swiss drugmaker, after central bank Governor Masaaki Shirakawa’s attempts to halt the currency’s rise proved fleeting.

The yen has depreciated 5.5 percent this year, the most among peers in Bloomberg Correlation-Weighted Currency Indexes, as companies from Softbank Corp. to Marubeni Corp. exchanged the currency for the equivalent of $103 billion to pay for overseas mergers and acquisitions. That’s the most in data going back to 1987 and 13 percent above the $91.3 billion in all of 2011. Options show traders see further weakness, paying record premiums for contracts that profit if the yen weakens.

The combination of an appreciating currency and stunted economic growth is prompting Japanese companies to buy overseas as official efforts to boost exports have failed. Since reaching a postwar record of 75.35 per dollar a year ago, 44 trillion yen ($553 billion) in asset purchases and intervention have left it 28 percent stronger than its 10-year average. Economists surveyed by Bloomberg say the central bank will probably loosen monetary policy at a meeting tomorrow.

“The BOJ’s easing on its own hasn’t been very effective,” Hiroshi Morikawa, an economist in Tokyo at the Institute for International Monetary Affairs, which conducts research projects commissioned by the government, said by phone on Oct. 26. “Even if the BOJ plays its tune, the yen won’t weaken unless businesses get up to dance.”

Currency Trading

The yen fell for eight days through Oct. 22, the longest streak in seven years, and reached 80.38 per dollar on Oct. 26, a four-month low. It was little changed at 79.60 as of 12:29 p.m. London time following a 0.4 percent decline last week.

Prices for currency options are signaling the slide will continue. The three-month 25-delta risk reversal rate, which measures market sentiment for the dollar against the yen, climbed to 0.75 percent on Oct. 19, the highest on record going back to 2003 and reflecting greater demand for rights to buy the greenback versus those to sell. The rate was minus 0.255 percent at the start of 2012, according to data compiled by Bloomberg.

Futures traders are losing confidence in the yen’s strength, building a so-called net short position in the currency for the first time since May.

Bullish Reversal

Wagers that it will fall against the dollar exceeded those betting on a gain by 18,196 contracts, figures from the Washington-based Commodity Futures Trading Commission showed. In January, there was a net long position of 59,657 contracts, or the most since March 2008.

The yen has traditionally been a haven for investors seeking safety during times of financial turmoil.

Because Japan has more trade and investment inflows than outflows, the country can finance deficits and the world’s biggest debt burden without relying on foreigners, who hold 8.7 percent of its government bonds, according to BOJ figures. Overseas investors own about 50 percent of U.S. Treasuries, Treasury Department data show.

Japan’s economy, which has fallen to No. 3 in the world behind China’s, probably failed to expand last quarter and may grow 0.2 percent in the final three months of this year, according to the median estimate of economists surveyed by Bloomberg.

Lagging Behind

The nation’s growth trailed the average of other major economies as domestic businesses cut wages to match falling prices for their products, data compiled by Bloomberg show.

Sony Corp., the maker of Bravia televisions and Cyber-shot cameras, and Sharp Corp., Japan’s largest maker of liquid-crystal displays, have fired workers and sought to cut expenses by outsourcing production to other manufacturers as the yen’s strength made their products more expensive overseas and reduced repatriated income.

Sony said Oct. 19 it plans to reduce about 2,000 workers by the end of fiscal 2012 through buyouts. Sharp is cutting more than 10,000 jobs, people with knowledge of the plans said last month, declining to be identified because the matter isn’t public.

Elpida Memory Inc., Japan’s largest maker of dynamic random access memory chips, sought bankruptcy protection in February. Honda Motor Co. today cut its full-year profit forecast 20 percent, citing the exchange rate.

Shrinking Exports

Japan’s exports fell 10.3 percent in September from a year earlier, the fourth-consecutive decline and the most since the aftermath of last year’s quake, the latest government data showed. Shipments to China plunged 14.1 percent.

Exporters break even if the yen is at 82 per dollar or weaker, according to an annual government survey released on Feb. 28. The BOJ’s latest Tankan report showed the country’s large manufacturers expect it will average 79.06 in the year through March 2013.

Stymied at home, Japanese companies are selling yen to invest overseas. Foreign direct investment, which includes mergers, stock purchases, lending and spending on expanding factories or branches, jumped 46 percent for the first eight months of 2012 to 6.27 trillion yen, the most since the record 6.51 trillion yen in 2008, official data show.

“Thanks to the yen’s strength, overseas assets have become substantially cheaper and that’s boosting acquisitions abroad,” Minori Uchida, Tokyo head of global market research at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest financial group by market value, said by phone on Oct. 23.

Softbank Spree

The spree is being led by Tokyo-based Softbank, Japan’s No. 3 mobile phone company, which agreed Oct. 15 to buy a 70 percent stake in Sprint Nextel Corp. of Overland Park, Kansas, for $20.1 billion. That’s equivalent to about 1.6 trillion yen, compared to the 4.5 trillion yen it would have cost to buy a similar stake five years ago when the yen averaged 117.79.

Marubeni said in May it would purchase Gavilon Group LLC, based in Omaha, Nebraska, the third-largest U.S. grain merchandiser, for $3.6 billion, the biggest deal for Japanese buyers this year after Softbank’s acquisition.

Bloomberg data shows that Japanese companies have been purchasers in 656 cross-border deals worth $103 billion so far this year, compared with $91.3 billion in 832 deals in 2011. Trading companies Mitsui & Co., Mitsubishi Corp. and Marubeni were the most acquisitive.

“A deal as large as Softbank’s serves as a reminder that cash-rich companies in this country would rather invest overseas than domestically,” Masafumi Yamamoto, chief foreign-exchange strategist in Tokyo at Barclays Plc, said by phone on Oct. 24.

Barclays predicts the yen will drop to 82 per dollar by year-end, and to 87 by the end of 2013.

Government Support

The government began a 10 trillion yen program last year using dollars from its $1.2 trillion of foreign-exchange reserves to help domestic companies acquire overseas assets, a package Vice Finance Minister Tsutomu Okubo said may be extended beyond its March 31 expiry date.

Shirakawa said in August the strong yen gave companies a good “chance” at mergers and acquisitions.

Purchases abroad may help strengthen the yen as companies bring home earnings and convert the proceeds back into their home currency.

The flows already are the primary contributor to the surplus in the nation’s current account, the broadest measure of trade. The gauge widened in August for the first time in 18 months, expanding to 454.7 billion yen from a year earlier, the Finance Ministry said earlier this month.


“To think of Japan’s M&A activity overseas as producing only weakness in the yen would be one-sided,” Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd., a unit of the country’s third-largest banking group by market value, said by phone on Oct. 23. “If those deals are successful, the resulting profits will make their way back into Japan.”

The yen may also gain against the dollar as U.S. central bankers expand the supply of dollars in the economy. The Federal Reserve said Sept. 13 it would buy $40 billion a month in mortgage bonds for an unlimited period, on top of $2.3 trillion in stimulus since 2008.

BOJ policy makers will probably expand its stimulus measures at a meeting tomorrow, according to all but one of 27 economists surveyed by Bloomberg News. The central bank held off on easing further Oct. 5 after boosting its asset-purchase program in September.

That difference in central bank firepower will help the yen rally against its U.S. counterpart, according to Monex Europe Ltd., the most-accurate dollar-yen forecaster in the past six quarters, according to rankings by Bloomberg. The yen will strengthen to 78 by the end of next year, Monex predicts.

‘Tight’ Range

“The Fed is really the ultimate, big central bank to deal with, and I think they trump the BOJ,” Eimear Daly, a London-based currency market analyst at Monex, said in an Oct 25 telephone interview. “We’ll be back under this 80 level and back in to the tight trading range we saw before.”

The 8.15 yen spread between the Japanese currency’s lowest and highest points this year is the smallest since 1973 when exchange controls ended, Bloomberg data show. As currency volatility cooled, overseas M&A heated up.

Seiji Maehara, appointed economy minister in Prime Minister Yoshihiko Noda’s Cabinet Oct. 1, has increased pressure on the central bank. He attended the BOJ’s last meeting, the first minister to do so in nine years, and has proposed it buy foreign bonds to weaken the yen. Shirakawa, due to step down in April, has resisted, saying such purchases amount to currency intervention, which is the government’s purview.

Inflation Target

Japan hasn’t intervened to influence the direction of its current since Nov. 4, the last in a series of sales in 2011 that totaled 14.3 trillion yen, the third-largest annual sum in the data going back to 1991.

The currency reached its peak of 76.03 this year on Feb. 1, 13 days before Shirakawa surprised investors by announcing a 1 percent inflation target and expanded the BOJ’s asset-purchase fund. The yen went on to weaken more than 8 percent against the dollar in the next four weeks.

“Japanese companies are vigilantly looking for opportunities outside,” Makoto Noji, a foreign-exchange strategist at SMBC Nikko Securities Inc. in Tokyo, a unit of Japan’s second-biggest financial group, said by phone on Oct. 16. “There’s no reason for them to remain in the country.”

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