The Japanese Economy, M&A and the Beautiful Game of Football: An interview with Yuuichiro Nakajima

You may listen to this interview from HERE.

Yuuichiro Nakajima is the founder of Crimson Phoenix, a cross-border Japan-focused M&A advisory firm based in Tokyo, London and Frankfurt. Yuuichiro started his working life at the Overseas Economic Cooperation Fund in Tokyo in 1982, following which he worked at S.G. Warburg (London/Tokyo), Crosby Corporate Advisory (London), PricewaterhouseCoopers (London/Tokyo) and Business Development Asia (Tokyo). He serves as Chairman (NED) of Japan H.L. Limited, which operates Japan House London, an art/cultural/gastronomy hub funded by the Ministry of Foreign Affairs of Japan, as well as on the boards of a London-listed investment trust and a UK charity as a non-executive director/trustee. Yuuichiro has also had a long involvement with football (soccer), in various capacities at the Japan Football Association, Asian Football Confederation, Association Football Development Programme as well as FIFA (Audit and Compliance Committee, representing Asia). He was a former member of the British Chamber of Commerce in Japan (BCCJ) Executive Committee and of the Board of Directors of the Japanese Chamber of Commerce and Industry in the UK. Yuuichiro was educated at Keio University, Tokyo, and London Business School. He is equally fluent in Japanese and English.

Q1. Please introduce yourself and tell us about your current interests.

I had something of a bi-cultural upbringing. My father was posted by his company to work in the UK and in 1964 the whole family moved to London, when I was four years old. There I spent a generally happy four years and, when repatriation time came about in 1968, I was convinced that I was actually British and did not want to go to some foreign land called Japan. The difficulty in readjusting to life in Tokyo, not to mention the cruel bullying that I was subjected to at school (and children can be very unforgiving to anyone different), is something that will stay in my memory. From the age of eight I had the rest of my education in Japan until I decided to enrol in the MBA programme at London Business School in 1985.

In 1987 I joined S.G. Warburg & Co. Ltd., at the time one of the best London “merchant banks”, where I was immersed in M&A advisory work, mostly on UK domestic or European deals. I specifically asked not to be put on the “Japan desk”, fearing being pigeon-holed too early and wanting to have a “mainstream” grounding in the job; that was one of the best decisions that I took at that stage of my career.

Many years on and several other firms later, I am still involved in M&A work, now firmly focused on Japan-related engagements. Being my own boss allows me to engage in other activities, mostly along the Japan-UK axis. I much enjoy bringing people together and value my involvement with Japan House London as well as The Japan Society (of which I was a Director until I served out my maximum term in 2023), UK-Japan 21st Century Group, etc. I am also lucky and fit enough at this age to be able to play football, with which I have had an unusual association at national, regional and world governing body levels.

Q2. In recent years, Japan has become a popular destination for international capital, investments, and tourism. What do you think has spurred this interest and do you believe it is sustainable?

Most countries try to attract companies and people who are willing to spend money there. The Japanese government has long made this an important national target, with mixed results. There have been attempts to turn Tokyo into the “financial capital of the world” and in the 1980s this did not look so much like the pipedream that it turned out to be; American and European banks rushed in to set up branches and subsidiaries there and at one point in 1990 the Tokyo Stock Exchange became the largest in the world by market capitalisation, accounting for a staggering 60% of the world total. The unwieldy regulatory framework, lack of depth of the talent pool and, most significantly, the burst of the bubble that soon followed put paid to that. In industrial policy terms, Japan was a significant exporter of capital but a very reluctant recipient of it from abroad. Management and shareholder apathy towards any “invasion” by foreign investors was strong. The perception that as a tourist destination Japan was difficult to navigate, with limited English language information/signage in public transport, high cost and strange food, persisted.

How times have changed. I credit much of this to the policies that Shinzo Abe put in place during his second term as Prime Minister between 2012 and 2020. The Stewardship Code and Corporate Governance Code (based largely on the UK models) that his administration introduced initially gave hope to (overseas) investors that changes were afoot and encouraged equity trades. Then came actual and concrete shifts, evidenced by the significant amount of share buy-backs as well as unwinding of cross-shareholdings, as the concept of improving (if not exactly maximising) shareholder value and returns on capital became widely accepted by issuers and market alike. Abe also promoted “Cool Japan” as a means of projecting the country’s soft power to the world, which helped to highlight the attractions of Japanese gastronomy, culture, art, craftsmanship, etc., abroad.

In many ways, the more recent weakness of the yen has proved to be a boon to the inflow of capital as well as people. Corporate valuation relative to net or operating profit has been reasonable for some time and the depreciation of the currency has made it much easier for overseas investors to buy Japanese shares, either as financial investment or with a more strategic/non-organic purpose. The Japanese government’s push to promote inbound tourism has also benefited much from the currency movement. Japan hosts large and energetic shopping tours from Beijing, Shanghai, Hong Kong, etc. (though the recent downturn in China’s economic prospects has tempered them somewhat), and Australian skiers crowd parts of Hokkaido during the winter months. Certain cities and regions of Japan have started taking measures to counter what are perceived to be the negative impact of “over-tourism”. It would appear that Japan is firmly on the map of even casual tourists.

Japan has a broad and deep industrial base with access to sophisticated end markets within and outside its borders. Its population may be ageing and contracting but it is still home to 120 million people. I am optimistic that Japan can be attractive as a capital/investment/tourist destination for decades to come, though in order to maintain that status the country would need to undergo further changes (as mentioned below).

Q3. What are some of the noteworthy corporate governance changes in Japan that have made the market more appealing for foreign investors and where do you feel there is still work to be done?

As referred to above, the Corporate Governance Code introduced by Shinzo Abe has, over the years, resulted in a major shift in the way corporate managers, financiers and institutional/retail investors think about companies and especially what it means to be shareholders in companies. Every country has its own particular type of corporate governance and Japan’s has certain features aligned with the history of its development of capitalism and of the economy. Even allowing for such idiosyncrasies, I would say that the conceptual framework has become much closer to that of the UK, where directors’ fiduciary duties are considered to be to the company. (In the US, directors are almost exclusively accountable to shareholders alone and the Japanese model does not go that far.)

In practical terms, this has meant that the emphasis for Japanese management has moved from keeping the balance sheet as un(der)-geared as possible, hoarding cash for security, to improving returns on equity by reducing cash holdings through share buybacks, increased dividends, acquisitions and other forms of external investment. An important development in all this is the reduction in cross-shareholdings between companies and their lenders or trading partners, which were originally designed to cement relationships and to defend each other from takeover attempts. Under the Corporate Governance Code, such protective arrangements are seen to go against the best use of capital, possibly anti-competitive and detracting from shareholder value. The government is actively encouraging cross-shareholdings to be unwound.

These changes represent a seismic shift, a break from the built-in financial conservatism which ruled corporate behaviour for most of the post-WWII period. Foreign investors have taken note of this and have been net buyers of Japanese equities over some years now.

More needs to be done to make the new ways of thinking “stick”. Return of capital through buybacks and dividend increases may not be tax-efficient to all shareholders and may make management appear devoid of ideas about how to use the cash. Acquisition of other companies could be done more to deploy capital in more productive ways. Listed companies in Japan are required to classify their holdings in other companies as either “strategic” or “financial”. Some banks and companies are accused of whitewashing their reluctance to sell off their stakes by reclassifying “strategic” shareholdings as “financial”, seemingly as a prelude to selling off the stakes, but without actually following through with disposals.

In the interest of improving return on equity, Japanese companies should become much more open about, and active in, selling businesses that no longer fit their strategy. For too long a sense of embarrassment has accompanied public discussions about selling subsidiaries/divisions, lest it be seen as an admission of failure by management, many of whom have spent their entire career at one company and could themselves have been involved in running the underperforming or non-core businesses. It is encouraging to see that divestment has become less of a taboo subject, but Japanese companies should be bolder in divesting businesses in a strategic manner, rather than being forced to do so by circumstances.

Q4. Activist investing has come to Japan but how has that played out in practice? Has it led to changes in the concept of shareholder value? Are there still serious cultural impediments or has it become more normalized?

There are now a whole host of activist investors in Japan, both foreign and home-grown. Some openly engage with their investee company management, publicising their communication. When this open approach fails to result in effective engagement, in some cases they end up “naming and shaming” those companies in an attempt to change the way in which they are run. Others are more discreet, preferring to engage in a quiet dialogue with a view to persuading management to engage. What is striking is that over the last few years, activists appear to have become accepted as “normal” players in the market. The “greenmailer” image of investors as hostile predators has faded away. While they are probably still received with some trepidation by company management, it is also acknowledged that many of the proposals that they put forward are reasonable, make sense and resonate with ordinary shareholders. I believe that there is much good that activist investors do to shake the tree that is corporate Japan.

In fact, corporate Japan has to contend with many other “activists”, be they of the environmental, human rights, Equality, Diversity and Inclusion (ED&I) or corporate kind. The more international the company, the greater the pressure from different types of activists around the world.

The rate of success of activist investors in bringing about change through shareholder proposals tabled at general meetings appears to be mixed. I was nominated in 2024 by a Hong Kong-based firm which had built up a substantial minority position in a Japanese industrial company to be an independent non-executive director, along with four other candidates. The activist had put forward a number of what appeared to me to be sensible proposals aimed at rejuvenating the board, changing the business mix to defend the company from the worst effects of declining prices of its products in the global market, etc. Despite controlling over 40% of the shares with a concert party, this activist was unable to pass any of its dozen or so proposals.

Q5. What are the M&A trends in Japan you have observed in recent years and where are you most optimistic in terms of sectors and industries? In terms of cross-border M&A, where are you seeing activity?

The domestic market for corporate control in Japan has been growing strongly for two decades or so now (save for setbacks caused by the global financial crisis and COVID) and the deals appeared to be getting bigger as well. Mergers, acquisitions, disposals and other forms of M&A have become part of a suite of management tools that are available to company boards. The nature of transactions has also shifted from being propelled by the need to secure successors or stave off bankruptcy, to being led by strategic intentions to refocus business portfolios or establish new platforms.

It follows that sectors which have been subject to the most change have played host to the greatest number of transactions, such as services, manufacturing, IT and retail/food services.

Some two thirds of M&A transactions undertaken by listed Japanese companies (as buyers/investors, sellers or joint venture partners) in 2023 were with domestic counterparts. The rest, about 70 deals (counting only those announced by listed companies in accordance with disclosure rules, so excluding smaller and/or private company deals) were cross-border in nature. Some 40% of them were inbound into Japan, i.e. involved Japanese sellers. The USA remained the biggest destination for/source of capital, which is no surprise given its size and importance to Japan. China was second and most of the deals there were of Japanese companies disposing of subsidiaries/affiliates, in an attempt to relocate away from the country. Naturally, other major Asian economies represent important markets for Japanese corporates, while firms from Germany, the UK, the Netherlands, Ireland, Italy, Switzerland and France represented most of the European entities engaging in Japan-related M&A.

Interest rates in Japan remain low in comparison with most other markets, keeping funds cheap and giving Japanese acquirors a competitive edge over overseas rivals. Japanese companies will continue to look for growth opportunities in major markets abroad across the sectors (though perhaps not in fossil fuel related industries). At the same time, as they continue with reshuffling business portfolios to focus on strategically core/financially profitable operations, Japanese companies’ sale of domestic and overseas subsidiaries which no longer fit their objectives will carry on at pace.

Q6. Japan is home to internationally recognized conglomerates with global footprints but has not traditionally been as successful in creating the next generation of “unicorns”. Japan has many small and medium-sized businesses who play important roles in innovation but there are concerns that the country lacks the ability to nurture, promote and finance new businesses. Do you agree with this and if so, why do you think this is the case?

Generally speaking, Japanese corporate culture has not been particularly conducive to a thriving start-up market. Failure is generally considered, well, a failure, and the resulting stigma can be hard to shake off. Japan is by no means exceptional in this respect, but “rehabilitation” seems harder in Japan than in many other advanced economies, especially in securing debt finance if you are known to have previously failed in getting a business off the ground. For a country that produced, during its recovery from the devastation of the Second World War, the likes of Sony, Honda, Kyocera, Casio and many other innovative and internationally competitive companies, this is a little surprising. The risk-aversion and rejection of failure probably stem, somewhat ironically, from Japan’s success in the 1950s and 60s, when even mediocre businesses managed to do well because of the booming economy. That mentality survived the subsequent plateauing and upheavals of the 1990s and beyond. Japanese companies became hoarders of cash and lending institutions maintained their conservative stance. The availability of risk capital remained limited.

Change has been slow in coming but the growth in the number of providers of private capital, especially equity, in the last 25 years or so has been encouraging, if in a measured way. There are now scores of private equity funds, both home-grown and foreign, that are actively providing capital for buy-outs and take-private deals. Companies in earlier stages of development are also finding it easier to secure seed, angel and venture capital funding. Decades of ultra-low interest rates have forced investors to take more risks. Successive governments’ push to change corporate and investor behaviour through the publication of the corporate governance code has made the market for corporate control much more liquid. There is more to be done to promote greater risk-taking and to destigmatise “failure” but the conditions for more unicorns to grow are becoming favourable by the day.

Q7. What are your thoughts on official government and societal attitudes towards immigration? It seems clear that views have changed over the past decade, perhaps due to generational differences, but how far can it go? Do you think Japan is ready to accept sufficient levels of immigration to address population decline and labour shortages? What actions are being taken to integrate immigrants into society?

I think that there is a consensus in Japan that something has to be done to arrest the decline in population size and, if that is not possible, to mitigate its adverse effects. There does not appear to be a general agreement on what to do and how. As at the beginning of November 2024, Japan’s population totalled 123.8 million. The number of foreign nationals in Japan at the end of June 2024 was 3.6 million, including travellers, amounting to 2.9% of the total. I found an old table comparing the proportion of foreigners in each OECD county’s population in 2018, which ranks Japan at 27th out of 30. (Luxembourg heads the ranking at 49%, followed by Switzerland at 24%, Germany at sixth with 13%, the UK at 12th with 9% and the US at 18th with 7%.) I think it is fair to say that in terms of statistics, Japan has the smallest number of non-nationals as a percentage of the total amongst the largest economies.

One can speculate as to why this is the case. Certainly, there is a persistent undercurrent of xenophobia (or ethnicity purism) in Japan, if not outright hostility towards those who look different. The anti-foreigner sentiment is expressed in the common perception that it is not possible for outsiders to understand the Japanese ways of doing things and that foreigners could never be as good as the natives. There is also the view that the Japanese language makes it hard for them to perform as well as expected. However, needs must be addressed, of course. For example, in sectors like nursing care, construction, delivery services, retail, agriculture and manufacturing, foreigners have been playing an important part in filling the gaps in supply of labour for many years. Despite this, the number of foreign-born people who have settled in Japan remains pitifully small.

Government policies to ease the pressure on labour shortages have included measures to increase the birth rate and to encourage more women to join the workforce, or to stay in it, or to return to it after childbirth. Sadly, these do not appear to have had a very pronounced effect, especially in terms of the number of babies.

Japan is keen on projecting its “soft power”, as described below. Perhaps a country’s attractiveness to foreign workforce is also part of that soft power. If that leads to a nation adding to its productive workforce and to the size of the consuming public, so much the better. By all means put in appropriate controls to ensure that the floodgate is not suddenly opened. However, the time for more orderly but substantial immigration must surely be upon Japan.

Q8. Beyond demographic and labour shortage issues, what are some other risks or concerns you have about the Japanese economy? Do geopolitics and US/China tensions worry you? How do you feel Japan should position itself between these two important trading partners?

While the USA undoubtedly is and should remain an ally to Japan, China presents a more mixed picture of economic partner and security/geopolitical risk. Its military assertiveness and ambitions rightly vex Japan. The adventurism of North Korea and Russia’s increasing bellicoseness adds to the tricky mix of multilateral tensions that the country faces. In that sense, I believe that it was astute for the Japanese government to appoint Hiroshi Suzuki as Ambassador to the Court of St. James’s. Ambassador Suzuki served as Shinzo Abe’s prime ministerial special advisor on diplomatic matters for eight years and in that capacity became acquainted with Donald Trump and his team. He may well play an important role in providing behind-the-scenes facilitation of dialogue between Downing Street (whose relationship with the US President-elect does not (yet) appear solid) and the White House. For both the UK and US, China represents the most significant trading and security challenge. If through the Ambassador Japan can be seen to contribute meaningfully to policy formation on China by its most prominent partners on either side of the Atlantic, it may at least indirectly position the country in an advantageous position.

The UK has just joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”), the predecessor framework from which the US withdrew under the previous Trump administration. China has formally applied to join CPTPP. If under Japanese leadership the US can be lured back into the CPTPP fold, that may also strengthen Japan’s hand in trade terms.

Q9. Japanese soft power and its public diplomacy have really helped shape a positive narrative for the country across the world. How do you look at soft power and is this an area of interest for cross-border business opportunities?

Soft power is the ability to coopt rather than coerce, according to Wikipedia. For a country whose constitution outlaws war as a means of settling international disputes involving the state, coercion or hard power has not really been in Japan’s toolbox since 1945. Japan has had to rely on soft power out of necessity rather than choice. The country’s emphasis on basing its diplomatic efforts on the United Nations and the forums that it provides may well be a reflection of this stance. For a few decades now the government has had to walk a tightrope as it found itself caught between the pacifist constitutional principle and the reality of aggressive moves by close neighbours, i.e. North Korea and China.

The demand for Japan’s soft power output as well as the push by its producers have led to a few notable M&A transactions. Some examples in which my firm acted as advisors include the sale of Right Stuf, a US anime/manga products and merchandise retail platform with a global reach, which was acquired in a controlled auction in 2022 by Crunchyroll, a Sony subsidiary, after a fierce bidding war with two other Japanese media and film conglomerates. When All3Media, the UK’s largest independent TV, film and digital production and distribution company, was put up for sale in 2023, a Japanese consortium entered the race to acquire it (without success). In early 2024, Kadokawa, a major publisher of manga and anime amongst other IP, announced the formation of a joint venture with Media Participations, a French peer, with a view to strengthening the two groups’ penetration of the Francophone markets in Europe and other regions. The recent acquisition of an additional share stake in Kadokawa by Sony indicates that consolidation amongst the biggest players in the media and digital entertainment industry in Japan is now taking place.

Q10. As someone who operates across the UK and Japan, please share some of your experiences and thoughts on the relationship between these two countries?

I first lived in the UK in the 1960s as a child, between the ages of four and eight. The next time I came to live in the country was 1985 and I have been here on and off for a total of another 26 years. My childhood memories are now faint, but even compared to what I remember from my days as an MBA student in London in the mid-1980s, the relationship between the two countries has improved beyond recognition. The governments of both state that the bilateral ties have never been better, and I see no reason to contradict them. One can write volumes about why this may be the case.

It is customary to cite the “similarities” between Japan and Britain to explain the bond; both are island nations, constitutional monarchies, in temperate climates, with powerful continental neighbours, etc., etc. While it may be tempting to use this factor to explain the state of affairs, I believe hard-nosed political calculations form the basis of the close inter-governmental ties. Being middle powers having to negotiate similar geo-political pressures, the two countries face many similar challenges and see eye-to-eye on those issues. It is clearly expedient for them to join forces and work together. The friendliness between the Imperial and Royal Families, whose support ratings are high amongst their respective nations, undoubtedly helps to strengthen the sense of closeness. These sentiments cascade down to corporate and societal levels, which obviously encourages business exchanges.

Q11. Football (soccer) is one of your long-standing interests. How did you get interested in football and how did this translate into your corporate governance roles with various international bodies?

Growing up in north London in the 1960s, it was quite natural for a state schoolboy to pick up football and, somehow, I became hooked, so the UK has a lot to answer for! I played regularly as a keen amateur until my mid-20s but then life intervened and it was not until I was in my early 40s before I returned to the pitch. I have been playing ever since (interrupted by injuries) and am currently the oldest member of the squad at London Japanese FC. Quite apart from that for decades I have been friends with the Honorary Patron of the Japan Football Association who got me involved in Japan’s bid (in 2009-2010) to host the World Cup in 2018 or 2022. After that I was put on the Finance Committee of the Asian Football Confederation and organised an investigation into the alleged malfeasance by its previous President. That experience led to being appointed to FIFA’s Audit & Compliance Committee as the Asia representative (2017-2021).

Q12. As someone with an inside view of the world of international football, what are some of your observations on corporate governance? To the extent you can share, where have things gone wrong and how do you believe these issues can and should be addressed?

I relished the opportunity to look into the engine room at FIFA, quite early on in the Infantino presidency. There are many good, talented people with a genuine passion for the game of football at FIFA. The organisation is as much a financial institution as a regulator, in the sense that one of its principal functions is to disburse funds (raised through hosting the different versions of the World Cup) to individual member associations and regions to assist with the development of the game. Money talks and inevitably considerations unrelated to growing football take hold in certain quarters. The job of the Audit & Compliance Committee was to identify and evaluate those risks and to alert FIFA management to them. I believe that my experience in corporate governance issues gained from my day job and non-executive directorships helped me in addressing these issues. I also learned a lot from being on the inside of an often-controversial organisation about how the relationships between influence, finance, patronage and motivation play out.

As I mentioned, most of the staff I came across at FIFA were good people, with their hearts in the right place. However, it seemed to me that the leadership was led more by political considerations which did not always align with what was good for improving the way that football was governed around the world. The World Cup, the quadrennial global tournament, is the biggest and still growing money spinner for FIFA, and for the host countries/continental federations. There is an internal dichotomy at FIFA between the commercial side, whose mandate is to maximise income from the sale of broadcasting and various marketing rights, and the governance side, whose job includes policing how the money is spent. There is ample scope for internal conflict and contradiction, and it seems that the commercial side often wins. Some form of separation between these two functions or a better system of checks and balances is required to make FIFA’s inner workings more transparent. A related question is who is FIFA really accountable to? Is it the sponsors, the rights holders, host nations or member associations at large? The endless speculations about, and controversies surrounding, the way certain decisions are made at the organisation have their roots in this ambiguity.

Q13. Please share any favourite books, blogs, podcasts or other resources that readers could use to improve their understanding of Japan, UK/Japanese relations, the Japanese economy/financial markets, football or any other related topics.  

There are almost too many sources of information and commentary on Japan, its economy, finance, business, politics, diplomacy, etc., and UK/Japanese relations. I think Bill Emmott, the former editor of The Economist (and Tokyo Bureau chief) and outgoing Chairman of The Japan Society (of London), is a well-informed and rounded commentator on these matters, whose writing reflects a deep understanding of the current issues and a keen analytical mind. I would recommend his books and articles. Japan House London (on Kensington High Street) is an excellent showcase of Japanese art, culture, gastronomy and craftsmanship spread over three floors and is well worth a visit. (Full disclosure: I am the non-executive chairman of its board.) As for Japanese football, the best way to track its progress on the world stage is to follow the work of the male and female professionals who play abroad, of whom there are in excess of 100, mostly in Europe. This is double the number of Japanese players playing outside the country in 2020 and reflects the realisation by overseas clubs of their quality and work ethic, as well as their relative cheapness in the international transfer market.

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