Japanese FDI in Australia reaches a record high, says new report

A new report from global law firm Herbert Smith Freehills and The Australian National University (ANU) shows that Japanese foreign direct investment in Australia reached a new record high in 2023, totalling A$133.8 billion and representing 12% of all FDI in Australia.

For its seventh annual Japan Australia Investment Report — titled Partners in Prosperity — Herbert Smith Freehills partnered with The Australia-Japan Research Centre at the Crawford School of Public Policy at ANU to provide an in-depth analysis of the Japan-Australia M&A transactions and partnerships that emerged throughout 2023.

The report captures the findings and insights collected from a thorough examination of the deal trends that defined 2023, and also identifies drivers for future investment, including predictions for the trajectory of the Japan-Australia relationship for 2024 and beyond.

“Economically and politically, Japan and Australia have never been closer,” explains Ian Williams, Senior Advisor at Herbert Smith Freehills and co-author of the report.

“Two-way trade between Australia and Japan was valued at A$143.3 billion in FY2023, a 24% increase compared to FY2022, which itself followed a 75% increase from FY2021. It is no surprise that Japan was Australia’s second-largest trading partner and second-largest export destination at A$115 billion.

“There has been a further deepening in the Japan-Australia relationship over the past 12 months, as ‘partners in prosperity’, during a period of growing international turbulence. Changes in the global geopolitical environment have brought the two countries closer together as indispensable economic partners, particularly in the mutual pursuit of the energy transition to net zero by 2050.”

A key investment trend covered in the report is Japan’s determination to be at the technological forefront of the energy transition. Inpex’s A$326 million acquisition of a 50% shareholding in Enel Green Power S.p.A’s Australian assets, which is a carbon hedge against Inpex’s LNG portfolio, is an example of this focus.

Williams adds, “Japan has been proactive in driving regional and broader collaborations on new energy technology. We expect that energy transition-related investment will be a major trend for the next 30 years, but coal, LNG and iron ore will remain critical to both economies and the energy transition in the short to medium term. There are numerous energy transition-related investment opportunities in the midstream and downstream sectors.”

The comprehensive report highlights that 2023 was a record year for Japanese M&A in Australia, with 53 transactions signed across the year, including a number of mega deals.

Prominent deals included Kirin’s A$1.9 billion takeover of ASX-Listed vitamins and supplements producer Blackmores, Mitsubishi UFJ Trust Bank’s A$1.2 billion takeover of ASX-listed Link Group, and LNG Japan’s US$880 million acquisition from Woodside Energy of a 10% interest in the Scarborough LNG Project.

Herbert Smith Freehills partner Damien Roberts, who advises Japanese clients on cross-border acquisitions, joint venture operations and energy projects in Australia and the Asia-Pacific region, said, “While global M&A decreased in 2023, we saw a record 53 transactions of inbound Japanese M&A in Australia— the highest number that we have seen since we started this report in 2017.

“2023 saw an acceleration of sector diversification in Japanese investment in Australia, a trend that has long shown signs of promise but was briefly interrupted by the Covid-19 pandemic. Investments occurred across a large number of sectors, with the top performing being real estate, consumer goods and mining. It is also clear that the energy transition and ESG factors are increasingly considered in M&A decision-making and strategy.

“Interestingly, we identified an increasing number of large Japanese corporations acquiring small to medium-sized Australian start-up enterprises. These acquisitions were designed to secure access to the unique technologies developed by these start-ups and scale up for global application.”

The report predicts that 2024 will be another record M&A year for transactions, with economic conditions proving conducive for further investment.

Roberts explains, “Inbound Japanese M&A in 2023 was driven by familiar fundamental macroeconomic and geopolitical factors — Australia is regarded as an attractive destination within a global investment portfolio as it is politically stable, a growing market and encouraging of Japanese investment. Especially in the current uncertain world, Australia is a lower-risk and higher-reward market for Japanese companies that are cash-rich but face a decreasing customer base.”

The report details Japan-Australia partnerships, which are supporting the growth and supply of resources across many industries from tech innovation to energy security.

Co-author Professor Shiro Armstrong, Director of the Australia-Japan Research Centre at ANU, explains, “Partnerships have continued to flourish as the “third paradigm” for Japanese investment into Australia. A total of 38 partnerships were announced in 2023, building on a total of over 150 partnerships announced since 2019.”

One area building momentum is R&D partnerships, which are increasing between Australian universities and Japanese corporates.

Professor Armstrong continues, “Australia’s education and research institutions are held in high regard by Japan. New research partnerships are being developed between Australian universities and Japanese companies, and commercialisation of this research has been significant.

“We expect this area of partnership to continue to grow strongly, as Australian universities seek overseas partners with the capital and know-how to commercialise R&D, and Japanese corporations, pushed by government initiatives, are moving beyond their traditional innovation sources and exploring technology which can “go global” or be used in third markets.

“It is an exciting time for the resilient Japan-Australia investment relationship. The depth and breadth of this complementary partnership is more evident than ever before with expanded government support, bilateral cooperation and business collaboration.” 

Herbert Smith Freehills

Herbert Smith Freehills is a leading global law firm bringing together the best people across our 24 offices in Japan, Australia and worldwide, to meet clients’ legal services needs globally. We are the largest law firm in Australia and are consistently ranked No.1 in M&A, both in number of deals advised and value of deals.

Our Australia Japan Practice is a unique team of experienced bilingual and bicultural lawyers, specialising in advising Japanese businesses on their investments and operations in Australia. Herbert Smith Freehills’ team has more experience advising Japanese businesses on Australian investments than any other law firm.

Australia-Japan Research Centre (AJRC)

The Australia-Japan Research Centre (AJRC) at the Crawford School of Public Policy at The Australian National University is the centre of research, teaching and policy engagement on the Japanese economy in Australia. AJRC also conducts research to better understand the Australia-Japan relationship and their place in the Asia Pacific economy. Established in 1980 with support from the governments and business communities in both Australian and Japan, our research encompasses trade, energy, finance, macroeconomics, as well as international economic relations.