Investment banking: Japan flows have enormous upside potential: MUFG Bank

Japanese direct investment may have lagged behind expectations over the past decade, but changing geopolitics and a range of measures from New Delhi could change the script. The flows from Japan are likely to go to Realty Auto, Pharma and Digital, Shashank Joshi, Head – Global Corporate & Investment Banking, MUFG Bank India. Edited excerpts:

Which Japanese companies are likely to be interested in India?

India has been reportedly ranked as the top investment and business destination for Japanese companies in recent years. Digital, ESG-related technologies, automotive and pharmaceutical industries are key sectors. Real estate companies are also looking for opportunities to enter the market. The Japanese focus on “compact but comfortable” designs and floor plans for houses and apartments could work for our large subways. India’s renewable energy and ESG funding sectors offer tremendous opportunities for Japanese and global investors.

Why have Japanese investments not been realized as expected?

On the surface, it may appear that Japanese investment growth has been slower, but in reality this is partly the case in conventional sectors such as auto and related ancillary components. Of course, delays in marquee projects like Shinkansen (bullet train) don’t help either.

The Japanese government is promoting new supply chain activities from India for Japanese companies. India has been the biggest beneficiary of the Japan International Cooperation Agency (JICA) in recent years. It’s also worth noting that Japanese companies are taking a close look at the new economy such as startups or electric vehicles.

In traditional sectors, given the existing scale of their Indian operations, many Japanese companies are evaluating broader developments and capacity utilizations before increasing their exposure, but India is firmly on the radar. In the New Economy, the level of activity and engagement is higher, but not as visible to the public. So this is a place to watch.

What are you going to sell to Japan Inc. on behalf of India?

India has enormous market potential, high growth prospects and a favorable demographic development. The Indian government is also very focused on making doing business easier and has put in place various programs such as PLI to incentivize the relocation of the supply chain to India. Government action over the past four to five years is reflected in actual investment flows from Europe and the US. Japan flows have enormous upside potential. It’s a diversification story with a huge opportunity.

Many Indian banks are now looking into AT1 offshore sales. Are Japanese Investors Looking At Them?

Japanese investors tend to be high-quality investors with a lower allocation to high-yield issues. Given the nature of AT1 bonds, which are three to four notches downgraded from senior ratings, Japanese investor participation in AT1 issues by Indian banks has been largely nominal.

How do you see offshore bond issuance by Indian issuers?

India is the third largest jurisdiction in terms of issuance volume after China and South Korea with $ 20.94 billion already issued this calendar year. We expect issuance volume to hit an all-time high of $ 23 billion to $ 25 billion by the end of the year. Given the economic parameters in place, issuers wanted to leverage historically low credit spreads to reduce expensive debt, extend maturities, raise capital, and pre-fund their medium-sized borrowing plans.

Can India’s inclusion in the global pension index make a difference?

Overall, we see this as largely positive for lowering the cost of capital for government and corporate customers and structurally positive for India’s balance of payments and economic growth. This could be a very significant development for all asset classes – FX, debt, stocks given the numbers being talked about – expected one-time index inflows of $ 40 billion in 2022-23. The move could increase foreign ownership up to 9% by 2031.

Can GIFT City offer an alternative to China plus 1 strategy?

GIFT City has successfully attracted companies from the financial sector and created a dynamic financial services ecosystem. The belief that it is a sustainable place to do business needs to emerge and I believe GIFT City will see exponential growth over the next few years.

What will happen when the world’s central banks start reducing liquidity?

As in the early days of the pandemic, central banks are likely to become increasingly coordinated as they begin to run down liquidity. We assumed this would happen as central banks lean back towards inflation targets versus pro-growth policies in a scenario where recovery and growth indicators prove resilient.

Where does MUFG stand in India today?

We are a large corporate focused bank in India. We do business with top notch companies, MNCs and FIs in India. We are a strategic banking partner for our customers and don’t just limit ourselves to loans. We trade forex, derivatives, trade finance, debt capital markets as well as ECM and M&A using our global network and our alliance with Morgan Stanley.

Indian banks now seem reluctant to fund long-term projects. How do you look at her

While the jury has yet to make a decision on the impact on asset quality and borrowing costs, which are unlikely to manifest themselves until the next few quarters, Indian banks have weathered the current pandemic with higher provisions and capital buffers above the regulatory minimum and lower than expected Stress in their loan portfolios.

What role can Japan play in local manufacturing?

From a Japanese point of view, the manufacturing industry is one of the focus areas. However, the previous record here differs from the success, for example, in Thailand. Japanese automakers in Thailand have a strong ecosystem of tier two and three suppliers. But this model does not work in India because of the high level of competition.

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