Japan's Economic Promise: How London Law Firms Can Capitalise
The Japanese economy is rebounding from decades of deflation, and the broad Topix index of Japanese stocks has hit a fresh 33-year high on an exceptional rally driven by six straight weeks of buying by foreign institutions. According to large funds, such as Elliott and Citadel, and investors like Warren Buffet, a confluence of factors has made Japan more interesting than it has been for some time. These include the general promise of accelerating governance reform, chipmakers returning to Japan, geopolitical factors, and an anti-China consensus by the US. However, there are concerns about whether this growth can be sustained, given that China is still by far Japan’s biggest trading partner. China’s declining economy has hurt its trading partners by reducing demand for oil, food, consumer goods and other imports, decreasing foreign investment, increasing inflation, and disrupting global supply chains. Additionally, Japan’s population is shrinking faster than anyone expected, and its companies are geared to global growth at a time when many economists fear a global recession.
What this Means for British Law Firms
Strengths
Funds venturing into Japan, and law firms traditionally partnered with these funds, can move towards expanding their operations in Japan. Large funds, such as Elliott and Citadel, have stated at the start of the year that they are either opening offices in Tokyo or expanding their coverage of Japan at home.
M&A: Reshaping global supply chains to build at a distance from China could unleash a wave of foreign acquisitions of Japanese manufacturers and facilities.
Weaknesses
Japan's population is shrinking faster than anyone expected with the median age being 59 and births plunging to a new record low last year, according to official estimates, dropping below 800,000 for the first time - a watershed moment that came eight years earlier than the government had expected. This has led its companies to focus more on global growth; this is expected to lead to a decline in demand for legal services.
Consequently, some firms, including GI&T Law Office and Simpson Thacher & Bartlett LLP, are shifting their focus to other areas of law that are in higher demand, such as Healthcare and elder law such as wills, succession, assets, care, benefits, healthcare, guardianship and abuse prevention.
With a decrease in revenue and demand for legal services, some commercial law firms are decreasing their hiring of new lawyers and staff.
Due to this, the work generated can easily be handled by competitive international law firms, leading to a decline in demand for legal services by Japanese firms. Consequently increasing the competition between national and international firms in the region.
Opportunities
The expansion of law firms in Japan could lead to increased demand for legal services in the UK, as these firms seek legal advice on cross-border transactions, disputes, taxes, real estate and employment.
The reshaping of global supply chains to build away from China amidst growing anti-China consensus by the US could lead to increased demand for legal services in the UK, as companies seek legal advice on foreign acquisitions of Japanese manufacturers and facilities.
Threats
The decline in demand for legal services in Japan due to the shrinking population of commercial law firms means the existing firms are competing for a smaller pool of clients. This leads to increased competition among firms. Moreover, a global recession is expected to lead to a decline in demand for legal services in the UK, as law firms with operations in Japan may struggle to generate revenue.
The IMF reports that the ongoing geopolitical tensions between the US and China could lead to a 2% decline in global output, which is expected to have a significant impact on Japan's investment and could lead to a decline in demand for legal services in Japan and the UK, as companies may be hesitant to engage in cross-border transactions due to the uncertain political climate.
Which practice areas at commercial law firms are likely to be involved?
Corporate Law: Law firms will advise clients on cross-border transactions, foreign acquisitions of Japanese manufacturers and facilities, and other matters related to the reshaping of global supply chains, such as Freshfields advising Nippon Express Holdings, Inc. on the acquisition of Cargo-Partner and Hogan Lovells on IDB’s Investment on US$ 10 million Tia Stores supply chain funding.
Various firms such as Baker McKenzie and Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates are developing strong insights into the supply chain as a sector.
Due Diligence and Compliance: Global law firms in Japan have been benefiting from Japanese conglomerates' increased need for due diligence on overseas investments and compliance issues
Employment Law: Law firms will advise clients on employment matters related to the expansion of their operations in Japan, such as compliance with Japanese labour laws.
Intellectual Property Law: Law firms will advise clients on intellectual property matters related to the expansion of their operations in Japan, such as compliance with Japanese patent and trademark laws.
Litigation and Dispute Resolution: Law firms will advise clients on litigation, and dispute resolution matters related to cross-border transactions and other matters.
Banking and Finance: Recently, Morrison Foerster represented SoftBank in its £24.3 billion ($31.4 billion) acquisition of UK-based semiconductor and software design company ARM Holdings, which was the largest ever cross-border acquisition by a Japanese company. They also represented SoftBank in its $5 billion investment in Xiaoju Kuaizhi Inc. (Didi), China’s leading ride-hailing and mobile transportation platform, and in connection with further $3.6 billion primary and $1 billion secondary purchases of Didi shares
Conclusion
The rebounding Japanese economy and the confluence of factors that have made Japan an attractive choice for foreign investments and a misstep for those sceptical of this growth present both opportunities and challenges for foreign investments and, consequently, law firms in the UK. There are two ways this could play out. The expansion of law firms in Japan could lead to increased demand for legal services in the UK. On the other hand, the decline in demand for legal services in Japan, due to the shrinking population and global recession, could also lead to a decline in demand for UK firms based in Japan. Law firms in the UK will need to focus on practice areas such as corporate law, banking and finance, employment law, intellectual property law, and litigation and dispute resolution to take advantage of the opportunities presented by the expansion of their operations in Japan.
These are the discussions surrounding how law firms in the UK can navigate the post-pandemic economy and capitalise on emerging opportunities in the Japanese market.
By Rishit Singh, London Headlines