Year in review: Japan gets a serious pipeline

Japan is transforming into a destination for core infrastructure investments, driven by a pipeline powered by privatisations, renewables and private sector consolidation.

Japan may have been a pool of outbound investment capital for overseas infrastructure over the past few years, but in 2017, a pipeline of private infrastructure opportunities is finally emerging and taking shape in the world’s third-largest economy.

First in the renewables space, with the introduction of a feed-in tariff scheme in 2012, the development of the solar market has been supported by a strong inflow of domestic and international capital. It is followed by other areas such as wind, geothermal and biomass power generation which have recently experienced increasing activity.

Several dedicated renewables investment vehicles have been set up over the years, but there has been little room for infrastructure funds. However, the first Japan-focused diversified infrastructure fund was launched late this year.

In November, the Japanese industrial giant Mitsubishi Corporation launched a 50 billion-yen ($441 million; €372 million) core infrastructure fund – the first of its kind in Japan – targeting operating assets in the transport, energy and utility sectors.

Mitsubishi considered the idea of creating an infrastructure fund for more than 10 years, Shinichi Nao, chief executive and chief investment officer of Marunouchi Infrastructure, a newly established Mitsubishi entity to oversee the Japan-focused infrastructure fund, told Infrastructure Investor.

However, Nao said it was only in recent years that the Japanese infrastructure market started to present substantial investment opportunities for the private sector – a strong pipeline that has enabled the birth of the country’s first diversified infrastructure fund.

The catalyst for market momentum was the changed attitude of the Japanese government towards privatisations in 2011, with amendments to the country’s law on private finance initiatives. As concession-style PPPs became possible, Japan has been rolling out privatisations of airports and toll roads to ease its fiscal burden and deliver new infrastructure, as well as to introduce private sector expertise on operational optimisation.

So far, seven airports have been transferred to the private sector, while 10 hubs are in the process of being privatised by 2022. As one of the highest-profile deals in 2016, Japan’s Orix Corporation and France’s Vinci Airports won the operation rights for two international airports in Osaka – in a 45-year concession valued at 4.4 trillion yen.

A consortium led by Japan’s Maeda Corporation won the Aichi toll road privatisation in June last year, the first of its kind in the country which comprised five concessions to operate eight toll roads in Aichi prefecture, for around $1.34 billion.

Nao also noted that, in addition to privatisations and renewables, market reorganisation serves as another source of core infrastructure opportunity as local private companies seek to consolidate their businesses and would consider selling infrastructure assets that are not part of their core strategy.

In a broader sense, the optimism in Japan’s economy is also driven by the prospective global economic growth and a decade-high business sentiment in the country, said David Shirt, country head of Macquarie Group Japan. “There is no better place to be than in Tokyo right now,” he said.  

Japan’s robust tourism, with government estimates of inbound footfall of 40 million by 2020 and 60 million by 2030, is also encouraging substantial investments in infrastructure for a new phase of growth, according to Jason Suh, head of Macquarie Infrastructure and Real Assets in Japan.

Speaking on the investor side, Nao said: “Many Japanese investors have already gained exposure to overseas infrastructure assets. However, given their liabilities being yen-denominated and desire to allocate exposure to mature economies, it is natural to see huge demand for Japan-focused infrastructure products,” adding that the negative interest-rate environment and lack of yen-denominated yield-generating products also contributed to investors’ appetite.

Mitsubishi established its infrastructure fund management entity in March this year and raised 30 billion yen from domestic institutional investors for a first close in late November. Nao said it is now on track, or even ahead of schedule, to reach its fundraising target of 50 billion yen in the first half of next year.

Nao believes infrastructure funds could play a greater role in developing and maintaining Japan’s infrastructure and expects the infrastructure fund market will grow with increasing participation of domestic investors and international players.

Seems the Land of the Rising Sun has now become the Land of the Rising Optimism.