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

Japan, in the wake of the relative recovery from the disasters of 2011, remains an attractive destination for international investors and, even more, a hot spot for international firms given the increasing amount of outbound activity in the market, as pointed out below. Nevertheless, there has been a noticeable downsizing of a number of corporate teams at the international law firms, specifically of the local bengoshi lawyers....

Japan, in the wake of the relative recovery from the disasters of 2011, remains an attractive destination for international investors and, even more, a hot spot for international firms given the increasing amount of outbound activity in the market, as pointed out below.

Nevertheless, there has been a noticeable downsizing of a number of corporate teams at the international law firms, specifically of the local bengoshi lawyers. A partner sums it up: "Most international firms took their expats out of Tokyo around the Lehman crisis. Then, after the quake, they realised they couldn't compete with local firms with their bengoshi." This in turn led to a reduction in local teams at international firms. The same partner continues. "Now the market is up again, especially in outbound work and they are completely unprepared." The effect has also been compounded by a number of relocations of partners from Tokyo to other Asian offices, often Hong Kong.

The impact of these decisions could lead to a consolidation of the legal market in the country, especially as far as the foreign firms are concerned. While the large international firms in the market no doubt have the resources to react to any pick-up in transactional activity, it is in the provision of local law advice where they will have to consider their strategy in most detail. The overall impact on the market may take some time to appraise.

In the broader market, currency fluctuations and government instability are pointed to as major factors. The first element in particular, specifically the rapid appreciation of the yen against key global currencies, while feeding activity in other areas, such as the outbound acquisition market, has all but arrested the entrance of foreign investors in Japanese capital markets. While foreign companies may not be investing to the previous levels, some clients are nonetheless asking law firms advise on disclosure and taxation issues and help to set up new structures.

CONTEXT AND TRENDS Japan's banking sector was not affected by the subprime crisis that wrought havoc in many other developed economies. Nonetheless, problems in the global economy have made foreign clients disappear from the Japanese market even though the domestic market didn't collapse....

CONTEXT AND TRENDS

Japan's banking sector was not affected by the subprime crisis that wrought havoc in many other developed economies. Nonetheless, problems in the global economy have made foreign clients disappear from the Japanese market even though the domestic market didn't collapse.

In particular, lending has remained slow since the Lehman crash, although domestic banks have been active in transactions throughout the Asia Pacific. Syndicated loans have been another area of activity both on the cross-border and domestic level, together with a few LBOs. As a general trend, market conditions are making financing more and more structured.

An outcome of the crisis has also been the debt restructuring work for Western banks in default that had financed projects with Japanese clients.

The strength of the yen, ultimately, is allowing companies and financial institutions to acquire assets abroad at a discount, even though the majority of deals have been focused in the energy sector so far.

MAJOR LATERAL HIRES

Tatsuo Tezuka
From: Nishimura & Asahi
To: Atsumi & Sakai

CONTEXT AND TRENDS Traditional capital markets work had been languishing in Japan even before the earthquake and tsunami events of March 2011. As a consequence, some of the international firms have been cutting back on their bengoshi teams....

CONTEXT AND TRENDS

Traditional capital markets work had been languishing in Japan even before the earthquake and tsunami events of March 2011. As a consequence, some of the international firms have been cutting back on their bengoshi teams. This has meant that, with a few exceptions, the local law firms - primarily the 'Big Four' firms (Anderson Mori & Tomotsune, Mori Hamada & Matsumoto, Nagashima Ohno & Tsunematsu, and Nishimura & Asahi) have won back primacy on local law advisory roles.

While generally quiet, the market has seen some equity activity in terms of IPOs for Japanese Real Estate Investment Trusts (REITs). The debt issuers, on the contrary, continue to be active with a number of medium-to-large scale samurai bonds. This is mostly due to the extremely low rates on government bonds that make investors keen on other types of instruments.

On the outbound side, Japanese issuers are still doing dollar-denominated bond offerings overseas, but the new trend is that Rmb-denominated bonds are attracting more and more attention, with firms like Nishimura & Asahi and Linklaters specialising in this type of work.

Investors are also hopeful for deregulation to revive the markets but experts view it as unlikely at this time. The fact remains that practitioners in the market are worried about the stagnation of stock market valuations together with a general lack of visible signs of a comeback due to a number of internal and external factors.

MAJOR LATERAL HIRES

Norifusa Hashimoto
From: Allen & Overy
To: White & Case

CONTEXT AND TRENDS With classic securitisation low-key at the moment, structured finance teams have mostly been working on SPVs, in addition to a somewhat more steady work on Cayman securities. However, practitioners admit that there is hesitation on structured products, with clients still generally worried about excessive risks....

CONTEXT AND TRENDS

With classic securitisation low-key at the moment, structured finance teams have mostly been working on SPVs, in addition to a somewhat more steady work on Cayman securities. However, practitioners admit that there is hesitation on structured products, with clients still generally worried about excessive risks.

Domestically, there has been a minor uptick in Japanese structured bond issuance, but the prevalent work seems to have been related to non-performing assets and loans, to try and have them turn a profit.

In the securities market, with the backing of government institutions, there has also been issuance of some mortgage-backed securities.

Practitioners also note that with the crackdown on derivatives trading, collateral is now needed for all kinds of transactions, slowing transactions to a crawl.

This is exacerbated by the government's opposition to deregulation, which some believe would act as a stimulus for the market. However the troubles in the Japanese financial system, especially after the local institutions had thought they were safe from the global financial crisis, have revealed its shaky foundations and increased concerns about the future of the structured finance market.

MAJOR LATERAL HIRES

Aaron Comerford
From: Allen & Overy
To: Clifford Chance

Yasuyuki Takayama
From: Nagashima Ohno & Tsunematsu
To: Clifford Chance

CONTEXT AND TRENDS Considering the state of the economy in Japan some of the general trends in the market are remarkably contradictory. The corporate M&A world is no exception....

CONTEXT AND TRENDS

Considering the state of the economy in Japan some of the general trends in the market are remarkably contradictory. The corporate M&A world is no exception. "We are amazed by deal flow in both volume and variety," says one partner, referring to the pipeline of outbound M&A activity, which by overwhelming consensus is "the flavour of the year".

Inbound activity, on the contrary, is still slow, with the more interesting transactions being those of Chinese companies acquiring Japanese contemporaries for their technologies and know-how. On the domestic front, consolidation is also happening for electronics and other manufacturers.

In regard to the increase in outbound activity, another player says: "Since the earthquake, we have seen an incredible determination by Japanese clients to make investments overseas. We have been insanely busy to keep up with these transactions."

Japanese companies spurred on by the need to increase sales, diversify overseas and crucially by the strength of the yen, are targeting a variety of sectors in Asia and beyond, with tech companies being possibly the most common targets, followed by manufacturing and possibly textile trading. Europe is a good hunting ground for businesses that have intellectual property.

On this point, it is interesting that the domestic press has repeatedly pointed out that Japanese companies seem to be over-paying for assets abroad, but given that domestic growth is not an option in a mature market like Japan, this premium pricing is unlikely to arrest the trend. It should also be noted that many Japanese companies have announced that they will go on buying sprees to increase their sales, possibly affecting their own purchasing prices.

But while some are making hay, other practitioners give a word of caution against excessive optimism about outbound investment. While the market has certainly been surprisingly active, a change in the valuation of the yen may equally rapidly act as a brake to the Japanese companies' ambition. In addition external factors, like the events of last year in Thailand has affected the market given that many Japanese manufacturers have in the last decade moved their operations to other Asian emerging economies. The flooding and political unrest in Bangkok have taken a toll on Japanese activities there. Automotive Honda's plant in Thailand was an example: it had a number of vehicles ready for sale destroyed in the floods. Other factories have been submerged or damaged badly in the riots.

MAJOR LATERAL HIRES

Hideo Norikoshi
From: Linklaters
To: Baker & McKenzie GJBJ

Jiro Toyokawa
From: Linklaters
To: Baker & McKenzie GJBJ

CONTEXT AND TRENDS The recent earthquake and tsunami have had a major impact on the energy sector in Japan and consequently, on the activity of project and infrastructure practices. The shutdown of nuclear facilities and the temporary reverting to coal power has meant a rush - "the race for resources" as one player put it - for all available energy supplies....

CONTEXT AND TRENDS

The recent earthquake and tsunami have had a major impact on the energy sector in Japan and consequently, on the activity of project and infrastructure practices. The shutdown of nuclear facilities and the temporary reverting to coal power has meant a rush - "the race for resources" as one player put it - for all available energy supplies. In the long term, there seems to be an inclination towards Liquefied Natural Gas (LNG) for a new generation of power plants. This is an attempt to avoid having to go back to the old and inefficient oil power plants.

With nuclear power out of the picture, coal considered "too dirty" for the current environmental standards and wind and solar sources lacking the required generational power, LNG seems to be the favourite choice.

Within this framework the Japan Bank for International Cooperation is obviously the major player in terms of project financing, together with the "up and comer" Development Bank of Japan (DBJ).

Private banks too, which have always been very active clients for law firms, are now even more important as they are willing and ready to lend in the proliferating large scale projects.

Energy is not the end of it, however, with mining being a second area of strong significance for outbound activity in a number of jurisdictions.

Indonesia is also attracting the attention of Japanese investors. As the country changes policies to try and keep value onshore instead of exclusively focusing on low-margin exports, for example with steel mill projects. Obviously these new investments are encouraging major infrastructures projects in which the Japanese banks are keen to get involved.

Australia is another country of interest for both mining and the oil/gas sectors. The market presents potential for new projects because former mining and energy ventures took advantage of existing infrastructure while the new ones are in remote areas that need railways and ports. This development results in a massive surge in overall costs: the Australian banks, which used to be able to cover all the financing needs now find that impossible, which is where Japanese banks see an opportunity.