Japan’s Overseas M&A Boom Is Keeping the Yen's Gains in Check

(Bloomberg) -- One of the global financial market’s minor mysteries this year has been a lack of yen strength despite the jump in trade tensions and slowing global growth.

The currency has risen just 1.5% despite a 99 basis-point drop in 10-year U.S. Treasury yields and a $4.5 trillion jump in the global stock of negative debt. While fund outflows and seasonality have weighed on the yen in 2019, another important factor has been the steady growth in Japanese acquisitions abroad, according to analysts.

This year, Japan’s largest brewer Asahi Group Holdings Ltd is leading the charge, shelling out $11 billion for Anheuser-Busch InBev’s Australian operations, after a record $191 billion in offshore acquisitions by Japanese companies in 2018, according to data compiled by Bloomberg. The effect of the growth in deals is demand for foreign currency at the expense of the yen, damping the impact of haven buying at times of market stress.

“These flows are one-sided, unlike securities transactions, and the impact will be felt over time to overwhelm speculative buying and selling of the yen,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities Co. in Tokyo. “Such flows take place regardless of the external environment such as yield differentials.”

The dollar-yen has traded in its narrowest range in at least five decades this year -- about 8 yen -- even after experiencing a risk aversion “flash crash” in January, according to data compiled by Bloomberg.

“Yen-buying momentum on risk-aversion is undoubtedly weakening because of the changing composition in Japan’s net external assets,” said Daisuke Karakama, chief market economist at Mizuho Bank in Tokyo. “In risk-off, Japanese investors unload their overseas securities holdings to bring money home, but they won’t sell their acquisitions abroad.”

The net volume of outstanding direct investment by Japan has exceeded that of outbound portfolio purchases of securities such as Treasuries over the past five years, according to Ministry of Finance data.

This outbound drive, particularly in mergers and acquisitions, will remain a trend as Japan faces a shrinking domestic market with its rapidly ageing society, analysts say. The U.S. has been the primary destination, according to the Ministry of Finance.

Meanwhile, income from these overseas investments tends to be reinvested and not repatriated, removing a source of yen appreciation, according to Hideo Hayakawa, a former executive director at Bank of Japan. Overseas investment income of 21 trillion yen, about half from direct investments, nearly equaled the nation’s current account surplus in 2018, he said.

BOJ Boon

The M&A boom should be good news for the BOJ which traditionally have had an aversion to a strong yen as that could hamper efforts to reach its inflation target by exerting downward pressure on import prices.

“The ‘yen appreciation phobia’ is understandable but it won’t materialize so easily if there is a bias in flows,” Daiwa’s Ishizuki said.

--With assistance from Lisa Du.

To contact the reporters on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net;Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Cormac Mullen

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