Why Foreign Investors Are Seeing Opportunity in Japan

Senkaku: Japan’s Economic Reformation and the Rise of Private Capital

Key Concepts:

• Senkaku (根本改革): Japanese term for fundamental reform, specifically referring to the ongoing changes in Japanese business and investment practices.
• CapEx (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment.
• Private Credit/Private Markets: Investment-grade, long-dated capital provided by non-bank financial institutions, offering an alternative to traditional bank debt and public equity markets.
• Household Financial Assets: The total value of financial assets owned by households, including cash, deposits, stocks, and bonds.
• Corporate Bond Market: A market where companies issue debt securities (bonds) to raise capital.

I. The Stagnant Economy and the Need for Reform

For the past three decades, Japan has experienced economic stagnation, falling from the world’s second-largest economy to fourth. This has spurred a period of “Senkaku” – fundamental reform – aimed at boosting productivity through increased investment. A key issue identified is the massive accumulation of cash reserves within Japanese corporations and households. Historically, Japanese companies have prioritized safety and sustainability, leading to a preference for holding cash on balance sheets. Despite having the lowest interest rates globally, Japan boasts the highest ratio of cash held by its corporations. The total retail asset value in cash is a staggering ¥2,000 trillion. In 2022, approximately 55% of household financial assets were held in cash and deposits, significantly higher than in the U.S. or Europe; this figure has slightly decreased to around 50% by 2024, with equity market holdings increasing to 14%.

II. The Potential for an “Industrial Renaissance”

Hiromi Yamaguchi, head of the Tokyo and Osaka Stock Exchange, notes that Japanese companies are increasingly willing to utilize their cash reserves to drive change. There is a strong receptiveness to new technologies, particularly Artificial Intelligence (A.I.), though careful consideration is being given to strategic implementation. Several major trends are creating significant capital expenditure (CapEx) needs, including the energy transition, supply chain restructuring, and demographic shifts. The growing demand for CapEx is driving a corresponding need for new financing options.

III. The Limitations of Traditional Financing and the Emergence of Private Capital

The Japanese financial market is primarily structured around bank debt and equity. However, the equity market, while the second largest globally, is relatively small – roughly the size of NVIDIA. Crucially, Japan lacks a well-developed corporate bond market. This creates a gap in the availability of long-dated, investment-grade financing. Marc Rowan, CEO of Apollo Global Advisors, argues that private markets offer a crucial “third way” to finance Japan’s investment needs. He highlights that corporate CFOs are recognizing the benefits of diversifying their financing options beyond traditional bank loans and public equity.

IV. Apollo’s Role and the Private Credit Opportunity

Apollo is positioning itself to fill this financing gap. The public credit market in Japan is small, only ¥60 trillion outstanding, with a significant portion of financing already provided by banks (effectively private credit). Apollo aims to provide longer-dated and more flexible capital than banks can offer, complementing rather than replacing the existing banking system. Apollo doesn’t compete with banks in areas like advisory services, hedging, or M&A. Instead, it focuses on providing a specific type of capital – investment-grade, long-dated – that is currently in short supply. The company has already engaged in deals with major Japanese corporations like Sony and SoftBank (SBC), and in the buy-now-pay-later sector.

V. Overcoming Resistance and Building Trust

While there isn’t outright resistance to private market alternatives, Apollo acknowledges the need for education. The company often works through existing banking relationships to introduce its services to Japanese corporates, particularly when financing overseas ventures. Apollo has invested heavily in building a strong local team, led by experienced figures like Tanaka Song and Song, to establish credibility and navigate the Japanese financial landscape.

VI. Potential Risks and Future Outlook

Rowan acknowledges potential downside risks, noting a shift from a predictable economic environment to one with increased uncertainty. He estimates that only 70-75% of future outcomes are likely to fall within “normal” parameters, compared to 95% historically. These risks include geopolitical instability, government deficits, and fluctuating interest rates. However, he remains optimistic about Apollo’s position, citing its diversified toolkit encompassing retirement services, reinsurance, capital provision to industry, and buyout capabilities.

VII. Shifting Wealth Dynamics and Increased Demand for Yield

The growing demand for better returns from household wealth, driven by 3% inflation, is expected to further fuel the growth of private market alternatives. Japanese investors are seeking safe yields and defensive equity, products that have traditionally been available institutionally but are now becoming accessible to individual investors.

Notable Quotes:

• Hiromi Yamaguchi: “Japanese companies are quite receptive for new development of technologies like A.I.”
• Marc Rowan: “You want to be with your banks… equity. Very, very expensive… Everything else comes to the private market.”
• Marc Rowan: “We provide a piece of capital that is in very short supply in Japan, investment grade, long dated to finance what they need.”

Conclusion:

Japan is undergoing a significant economic reformation (“Senkaku”) driven by the need to unlock vast cash reserves and stimulate investment. While traditional financing methods are proving insufficient, private capital markets, particularly firms like Apollo Global Advisors, are emerging as a viable alternative. This shift requires education and building trust, but the potential for an “industrial renaissance” fueled by long-dated, investment-grade capital is substantial. Despite acknowledging increased global risks, Apollo remains optimistic about its future in Japan, positioning itself to capitalize on the evolving financial landscape and meet the growing demand for alternative investment solutions.