Japan last week decided to reopen its borders to foreign visitors, following pressure for things to get back to normal and for business and tourism to return. Prior to its reopening, rigorous restrictions had been in place on overseas entries due to the Covid-19 pandemic.
The pressure for Japan to open came in large part from the dwindling yen. On September 27, 2021, one US dollar stood at ¥111. One year later, the same dollar was at ¥144.45, a stark 30% increase.
Japan likely spent a record ¥3.6 trillion ($25 billion) on September 22 in its first dollar-selling yen-buying intervention in 24 years, all to stem the currency's sharp weakening, according to estimates by Tokyo money market brokerage firms. The move seemed apparent given that the Bank of Japan had not followed other developed economies in carrying out interest rate hikes.
The currency dilemma has prompted Japanese asset owners to reconsider their overseas investments, sources told AsianInvestor. Overseas fixed income, for instance, quickly loses its marginal appeal over Japanese fixed income when hedging costs are added to the mix — although with interest rates rising overseas, diversification could still prove attractive despite the preference for a stronger yen.
Japanese asset owners have increased their allocation to overseas alternative investments in recent years, and the currency predicament will also play into this asset class. As has been the case for Korea, Japanese asset owners will face costly capital calls, especially when private market managers request funds for overseas investments in US dollars.
Depending on the investment structure of each deal, either the asset owners themselves or their gatekeepers and domestic asset managers could end up with a much more expensive investment than expected.
On the other hand, returns from already-made overseas investments will benefit from extraordinary gains from the current exchange rates, leveraging the inflation hedge factor that alternative investments possess. As such, trying to time markets and currency fluctuations might not be worth the headache for asset owners with long-term investment strategies.
FACE TO FACE
Reopening the border will have an immediate impact on the Japanese economy, and the expected surge in tourism will play a huge part in the revival. In 2019 alone, Japan reaped the benefits of this lucrative subgenre of foreign direct investment from nearly 32 million overseas visitors.
After a delayed and muted 2020 Olympics that fell victim to the pandemic, the country can hardly wait for tourists to once again shop in Tokyo, take selfies in Kyoto’s temples, and ski on Hokkaido’s slopes.
The investment industry is also set for tremendous gains from the reopening, and the “Asia ex-Japan” business designation that has been carved out specifically for the country will ensure that the Japanese market continues to enjoy its special status as a separate entity.
Japanese customs in business matters will prevail once more, from the requisite in-person meetings to the physical presence in Tokyo in order to be able to raise capital from Japanese asset owners.
This tradition-adhering culture has been challenged by a world under lockdown and severely limited by travel restrictions — subsequently impacting the ability of asset managers to present overseas investment solutions for Japanese asset owners who sought to diversify beyond Japan.
As one Tokyo-based asset manager involved with raising capital for overseas real assets told AsianInvestor: “Yes, we have seen growth in capital raising in Japan [by] a few percent, but it could have been much more if people could have travelled in and out of Japan, without risking denied entry or getting stuck overseas. The unrealised potential is obvious.”
Japan has held onto a rigorous Covid policy for as long as it could, but economic pressures as well as global developments have made this recent shift towards reopening all but inevitable.
With the country now much more accessible, Japanese asset owners will be able to enjoy more options in investment opportunities and asset managers. As one investment director at a Japanese corporate pension fund told AsianInvestor: “I have never been so challenged in my investment decisions as in 2022, so guidance will be well received.”