SPECIAL REPORT

JAPAN SHOPS THE WORLD

LOOSE CASH TOTALS $94 BILLION

PATRICIA CHISHOLM August 28 1989
SPECIAL REPORT

JAPAN SHOPS THE WORLD

LOOSE CASH TOTALS $94 BILLION

PATRICIA CHISHOLM August 28 1989

JAPAN SHOPS THE WORLD

SPECIAL REPORT

LOOSE CASH TOTALS $94 BILLION

The signs of dazzling Japanese prosperity are almost everywhere. Flush with cash, Japanese corporations, pension funds and banks are on a worldwide acquisition spree, using surplus billions to acquire a record number of foreign companies in the United States and Canada. The Japanese are also preeminent bankers: the 10 largest financial institutions in the world are now Japanese, and they are using their prodigious wealth to finance huge takeovers. Even Japanese tourists leave a trail of affluence behind them. Their taste for diamonds, furs and other luxury goods has become legendary in the shopping meccas of the world:

Hong Kong, London and New York City. And Japanese buyers are helping to push prices for works of art to stunning heights. In 1987, the Yasuda Fire and Marine Insurance Co. of Toyko shocked collectors by paying $53 million for Vincent van Gogh’s Sunflowers—at that time, the highest price ever paid for a painting.

Said Michael Gregory, an economist for the Royal Bank of Canada in Toronto: “The Japanese just have more money than they know what to do with domestically— they have to put it somewhere.”

Pours: Japan’s knack for selling to the world, and the reluctance of its consumers to buy foreign-made, imported products at home, has left the country with an unusual problem: in 1988, the Japanese found themselves with $94 billion in surplus cash to spend as they pleased. The problem is more difficult than it sounds. Japan pours vast quantities of money back into its own industries. In 1988, it spent $588 billion on new capital investment, even more than the United States, which spent $576 billion. As a result, many plants and factories in laDan are now in danger of having more

capacity than they can productively use.

At the same time, the soaring yen makes domestic purchases expensive relative to foreign purchases—even by Japanese standards. It is not unusual for modest homes near the centre of Tokyo to sell for $2 million. And shares on Japan’s hyperactive stock market

continue to carry far higher prices, relative to earnings, than those on most other stock exchanges. In the search for new investment vehicles with a better return, they are turning to foreign markets, where prices—at least for the Japanese—seem relatively low.

Japan’s massive foreign spending began slowly in 1987, escalated sharply in 1988 and continues to accelerate this year. Last year, Japanese firms spent $15 billion investing in 130 U.S. firms, more than double the amount they spent in 1987. And in the first six months of this year, Japanese firms paid $4.2 billion for all or part of 86 U.S. firms, less than the rate for 1988. Spending by the Japanese also increased sharply in Canada. In 1988, direct Japanese investment in Canadian industries reached $594 million, up from $319 million the previous year. And in the first three months of 1989 they invested $116 million in Canada.

Frequently, gigantic purchases occur without the bank financing that is sometimes the hallmark—and the the downfall—of takeovers that originate in North America and Europe. Huge Japanese corporations often have so much cash on hand that they do not need to borrow for new equipment or acquisitions. Toyota Motor Corp., with revenues of $63.7 billion, held about $10 billion in cash last year, compared with General Motors Corp. revenues of $130 billion and cash reserves of $8 billion. That kind of liquidity makes the takeover game easier to play: large bank loans or other types of financing are either unnecessary or obtainable at low rates of interest.

And with the advice of North American financial experts, Japan has taken to the takeover trend with enthusiasm. American businessmen now routinely report that the Japanese are skilful and discerning buyers, a marked change from their early, awkward deals, which lacked American-style speed and aggressiveness. Although most Japanese takeover activity occurs in the United States, the Japanese are becoming increasingly interested in Canada. Last spring, shipbuilder Sumitomo Heavy Industries Ltd. purchased Canada’s largest laser manufacturer, Lumonics Inc. of Kanata, Ont. for $83.6 million.

Targets: Among favorite targets are hotels. Japanese now own at least 100 luxury hotels in the United States, including the Inter-Continental Hotels chain. Last November, the Okabe Company Ltd. of Tokyo bought 12 hotels owned by the Vancouver-based Coast Hotels chain, which recently acquired the Delta Bow Valley Inn in downtown Calgary. Several hotels in Banff, Alta., and Whistler, B.C., frequent destinations for Japanese tourists, have also come under Japanese ownership in recent years, including the Nancy Green Lodge in Whistler, formerly owned by Canadian skiing star Nancy Green-Raine. James Tiessen, project manager at the Japan External Trade Organization in Toronto, said that the popularity of the resort areas has influenced the decisions of Japanese investors. He added: “It is often cheaper for Japanese to travel overseas than to travel in Japan. So they can count on bringing their own people to these hotels.”

So far, the Japanese have met little resistance to their overseas expansion. Indeed, many sellers are eager to find Japanese buyers because so many of them are willing to pay high prices. As well, they have a reputation for keeping companies intact: they seldom fire management teams or break up a company for quick profits. But there are growing signs that some countries have become wary of Japanese expansion.

Last year, when a Japanese company tried to

buy one-third of a French winery with exclusive rights to sell Romanée-Conti, a famous Burgundy wine, the French government took steps to block the sale. A French agriculture official defended the move, calling the winery part of the “cultural patrimony of France,” just as a cathedral or painting is part of the country’s unique tradition.

Assets: In the United States, a new, more cautious attitude toward Japan has emerged because, some critics say, Japan is unlikely to open its markets to foreign imports. With Japan unwilling to permit foreigners to buy Japanese companies, while hindering the export of goods

into its domestic markets, other countries should be more protective of their own companies and markets, they say. More and more, that sentiment is beginning to be openly debated in the United States. American tycoon T. Boone Pickens Jr. recently noted that it is far more difficult for American companies to buy large pieces of Japanese firms than for the Japanese to buy American assets. The Japanese urge to acquire is unlikely to abate—but foreign determination to control the extent of that expansion may well follow suit.

PATRICIA CHISHOLM