| TOKYO, April 26
TOKYO, April 26 As part of Japan's economic
revival plan, the new government has added $3.2 billion to the
spending power of state-linked funds investing in Japanese
companies, effectively acting as venture capitalists much to the
chagrin of private equity firms.
Critics argue the government largesse - the state funds
spending power has now gone up to some $34 billion - will crowd
out private equity in a country that desperately needs
risk-taking investors to revitalise a corporate sector
struggling to maintain its global competitive edge.
"What's happening now is that state-backed funds are
investing in companies, which private funds are also willing to
invest in," said Tomonori Ito, professor at graduate school of
international corporate strategy at Hitotsubashi University.
Last year, U.S. private equity firm KKR & Co was
edged out from taking control of struggling chipmaker Renesas
Electronics Corp by a group led by the state's
Innovation Network Corporation of Japan (INCJ).
Adding credence to the concerns, Thomson Reuters data shows
that private equity investment in Japan of $94.85 million so far
this year is just one-sixth of the year-earlier amount and is at
the lowest level since 2006.
If the investment continued at the same pace for the rest of
2013, the year's total would be just over $300 million, the
lowest by far in at least a decade. Last year's total was $3.2
Scarcity of risk-taking investors has long been seen as a
weakness in Japan that explains why it has failed to produce a
Japanese Google or Facebook and the likes of electronics giant
Sony Corp are being overtaken by nimbler rivals such as
Apple Inc and Samsung Electronics.
Still, the government faces a dilemma. While it wants more
venture capitalists, few have come knocking on Japan's door. So
successive governments have felt compelled to fill the gap with
Since sweeping to power in December, Prime Minister Shinzo
Abe has pumped more money than ever into existing state-linked
funds while setting up new ones. Government-owned lender,
Development Bank of Japan, has created a 150 billion yen fund
and a 60-billion-yen "Cool Japan Fund" is under consideration to
invest in the clothing and animation sectors.
The risk in using public funds to invest in companies is
that they are less demanding than private equity, critics say.
They may be reluctant to make hard business decisions and so
could delay corporate restructuring, helping troubled firms stay
afloat at the expense of healthier rivals and ultimately
delaying the economic revival policymakers desire.
"I agree that risk money is not widely available in Japan,
so someone needs to inject cash into Japanese companies," said
Shusaku Minoda, head of Japan Private Equity Association and
chairman of KKR Japan, the Japanese entity of KKR. "But if
whoever forms a fund to do it, it should be disciplined as
private funds are."
The association urged the government last month to set up a
monitoring system on the returns on government funds and to
limit the amount they invest and the period of their investment.
Without such discipline, these funds will be no more than
another channel for fiscal pump-priming, critics say.
"These are projects that have sprung up because fiscal
discipline was relaxed, under the mantra of economic stimulus,"
said Hideaki Tanaka, professor at Meiji University's graduate
school of governance studies.
The Japanese public, who are ultimately on the hook if state
investments go bad, get little or no information on performance
targets, returns or how companies are selected.
In one example, the INCJ spent 200 billion yen to form Japan
Display, the world's No.1 maker of small and medium-sized LCD
panels, out of struggling units of Sony, Toshiba Corp
and Hitachi Ltd.
Launched last year, the company is 70-percent owned by the
state and unlisted, so the public has no way of judging how the
investment is paying off.
INCJ, which under Abe received an injection of 124 billion
yen to boost its capital to 280 billion yen, has provided no
information about its performance.
An INCJ spokesman said it was "generally difficult to
answer" queries about the profit outlook for companies in its
portfolio, criteria on which investment decisions are based,
growth targets, capital costs and governance.
A notable exception to the information void was the 2010
bailout and last year's flotation of Japan Airlines Co
by Enterprise Turnaround Initiative Corporation of Japan, which
last month was renamed the Regional Economy Vitalization
Corporation of Japan.
The entity cashed in 313 billion yen on the airline's
turnaround. In most cases though, there is no clarity whether
the state is making or losing money.
Possible risks to Japanese taxpayers were on full display
last year when Elpida Memory Inc, a maker of DRAM chips, failed
only three years after it was saved with a 30 billion yen
investment from the DBJ and 110 billion yen in loans from DBJ
and other banks.
Yukio Noguchi, honorary professor at Hitotsubashi
University, who specialises in Japan's economy and finance, said
it was not clear what purpose multiple state funds served
besides creating jobs for retiring officials.
"If the government keeps creating these funds, then there is
no hope," he said.
(Editing by Tomasz Janowski and Neil Fullick)