Executives from Japanese companies expect slow economic recovery extending until 2021, but M&A activity intentions remain strong in the long-term

• 96% of executives from Japanese companies expect COVID-19 to have a severe impact on the global economy
• Half of executives from Japanese companies expect a longer period of slower economic recovery extending into 2021
• Japanese executives are proactively reconfiguring supply chains, with 74% taking steps to change
• M&A activity intentions remain strong as executives look beyond the crisis

Business leaders in Asia-Pacific including Japan are focusing on navigating the immediate impact of COVID-19 on supply chains, revenue and profitability, while reconfiguring capital allocation and M&A plans for the post-crisis world, according to the 22nd Edition of the EY Global Capital Confidence Barometer (CCB22).

The vast majority (96%) of Japanese companies executives respondents to CCB22, a survey  of more than 900 Asia-Pacific C-Suite executives (from more than 2,900 global respondents including 113 from Japan), which was conducted from February 4 through March 26th, 2020, expect COVID-19 to have a severe impact on the global economy in the form of supply chain disruption, as well as declining consumption. Asia-Pacific respondents are more pessimistic than global respondents (73%), however they are relatively less concerned about their local economy at this point of the survey period -- although still over half (58%) of Asia-Pacific respondents and 70% of Japanese respondents said COVID-19 will severely impact the local economy.  

Nevertheless, every sector is experiencing the direct or indirect impact of COVID-19, with almost all both global and Asia-Pacific respondents reporting that COVID-19 will cause a decline in profitability. Half of Japanese companies’ executives’ respondents expect a longer period of slower economic recovery extending into 2021.  

Companies economic expectations have changed significantly from a year ago, when 93% of executives from Japanese companies’ respondents were positive about economic growth. The sentiment has seriously plunged to 23% in early February, and further worsened to 13% when the EY survey closed in March. There was a clear shift in business sentiment in both global and local economy.

Vincent Smith, Representative Director, Chairman – Ernst & Young Strategy and Transactions Co., ltd. says:

“While executives are necessarily dealing with the immediate impact of the crisis, they still need to reassess their outlook for growth and consider the future ‘new normal’ for businesses. As countries in Asia-Pacific, led by China, East Asia and Southeast Asia, are gradually moving towards stabilization, we are expecting to see large scale transformation by companies in many sectors, as companies adopt agility, flexibility and resilience into their business strategies.  This is also likely to apply to Japan, albeit Japan is at an earlier stage in dealing with the impact of COVID-19; having only recently declared a national state of emergency.”

Executives are reviewing their operating models in response to the crisis. The increasing shutdown of activity in many parts of the world has exposed vulnerabilities in many companies’ supply chains, and the majority of Asia-Pacific companies (67%) including Japanese companies (74%) are taking steps to change their current set up.

At the same time, governments around the world are proactively offering stimulus packages for their countries, to weather the impact of COVID-19. In Asia-Pacific including Japan, governments are providing public welfare and business support to strengthen local economies. Packages have been announced to protect jobs, to provide cash aid and tax reliefs to support households and small to medium enterprises. 

Preparing for what comes next

Despite boardrooms focusing on an unprecedented global health emergency, executives are also planning their future beyond the crisis. 74% of Japanese companies are already taking steps to change supply chains, and address digital transformation (28%), speed of automation (50%), and management of workforce (50%). 

Many Japanese companies (76%) already had major transformation initiatives underway, triggered as a result of pressure on revenue and profitability goals, according to CCB respondents. Pre-crisis, transformation was high on the corporate agenda. Pressure on revenue targets has been a key reason for major transformation, and as the economy has matured in Japan, pressure to meet profitability goals and reshape the business portfolio, especially for major conglomerates has been high. Together with the current COVID-19 environment, the urge for transformation, and reshaping of business portfolios will be stronger than ever.

Koichi KT Tamura, Senior Partner and Head of Japan Markets, Ernst & Young Strategy and Transactions Co., ltd. says:

 “Japanese companies have been focused on adapting their business models in response to global trade tensions, and this is now further accelerated by the COVID-19 crisis. One senior Japanese executive noted that “due to COVID-19, the company had to realign procurement, manufacturing, distribution and retail to cope with the disruption including but not limited to a shut down in parts of Asia. Immediately after addressing the crisis in Asia, the trade routes and supply chains and distribution networks in Europe and Americas also had to be dealt with. It is an unprecedented crisis we have never experienced before, and it will permanently change our global trade routes and supply chains.”

Smith says: Companies are not expecting COVID-19 as a one-off event. As most of Japanese executives expect regular disruption would be “new normal” business strategy centered around sustainability will be the top priority. In many ways the unwelcome and unexpected emergence of COVID-19 will further cement transformational strategies in the boardroom.”

Post-crisis recovery points through M&A

With the majority of companies assuming a recovery in the medium-term, 57% of Japan respondents will actively pursue M&A in the next 12-24 months. 80% of Japan respondents are expecting to see an increasing competition for assets in the next 12-24 months, and they expect a majority (67%) of the competition will come from private capital, including Private Equity, with funds available for investment at an all-time high.

Smith says: “While the crisis is having a severe impact on M&A in the short term, there’s evidence from EY clients that M&A will remain the priority transformation strategy in the mid-to-long term. From discussions with clients, there are no significant change in their current transformation strategies involving M&A, although the timing may be delayed.   Further, whilst timing will be impacted, EY clients expect the COVID-19 crisis will generate opportunities to create value through M&A.”

About the survey
The Global Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom practices in the way companies manage their Capital Agendas — EY framework for strategically managing capital. From February 4th until March 26th, Thought Leadership Consulting surveyed on behalf of the global EY organization a panel of more than 2,900 executives in 46 countries; 72% were CEOs, CFOs and other C-suit-level executives.

• Respondents represented 14 sectors, including Financial Services, Consumer Products and Retail, Technology, Life Sciences, Automotive and Transportation, Oil & Gas, Power & Utilities, Mining and Metals, Advanced Manufacturing, and Real Estate, Hospitality and Construction.
• Surveyed companies’ annual global revenues were as follows: less than US$500m (25%), US$500m–US$999.9m (26%), US$1b–US$2.9b (16%), US$3b–US$4.9b (11%) and greater than US$5b (22%).
• Global company ownership was as follows: publicly listed (51%), privately owned (22%), publicly listed – family controls over 35% of the voting rights (15%), private - family controls over 50% of the voting rights (5%) and private equity portfolio company (7%).

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