Japan’s prime minister, Fumio Kishida, appeared before parliament in January to warn that the country is facing a grave crisis. Japan is at risk of breaking down, Kishida said, not as a result of war, natural disasters or pandemics, but because of its declining birth rate. “Japan is standing on the verge of whether we can continue to function as a society,” he lamented.
Japan’s population now stands at around 124 million – some four million lower than its peak in 2009. But a far more drastic drop is projected in the coming years, as the post-war ‘baby boomer’ generation passes away. By the mid-2050s, according to the United Nations, the population will fall below 100 million. By 2100, it could reach as low as 74 million.
The Japanese economy has been stuck in the doldrums since the 1990s, and, with a falling population, at first glance the country may not appear to be an attractive long-term market for global private equity firms. “The market’s shrinking, the people are getting older – that’s not a positive on the face of it,” says Scott Reynolds, a country executive for Japan at fund administrator Alter Domus.
However, there are several reasons for believing the ageing of Japanese society can produce positive outcomes for private equity investors.
One trend that can work to the advantage of private equity is that the founders of successful Japanese businesses often reach retirement age without having produced a successor to maintain the business within their family.
Analysis conducted by Teikoku Databank in 2020 found that the average age of company presidents in Japan was over 60 years old, and that two-thirds of businesses had no identified successor in place.
Family-owned businesses therefore make excellent acquisition targets for private equity firms in Japan. “Succession issues are so widespread that it is a significant investment theme for several PE houses,” says Michihiro Nishi, an M&A partner at law firm Clifford Chance.
“The business owners are often looking to sell after facing limited options due to a lack of suitable successors. From the PE house’s perspective, while they can obtain a profitable business at a discount, they will also modernise and improve the business.”
Serving the elderly
Another significant opportunity for private equity investors comes from the growing need for services for Japan’s geriatric generations. Japan has 36 million people aged over 65, of whom 12 million are over 80, according to government data.
Over 65s account for 29 percent of the total population in Japan – a considerably higher ratio than any other country in the world (apart from tiny Monaco). By comparison, around 20 percent of the population has reached 65 in most European countries, while in the US the figure is only around 17 percent.
Unsurprisingly, investors have increasingly looked to invest in businesses that serve the elderly, as well as fill gaps in the labour market.
“We are focusing on the healthcare sector and the human staffing services sector because both industries’ need is growing in the Japanese market,” says Hideaki Sakurai, co-founder and managing partner at Japan-based private equity firm J-STAR.
Sakurai notes that facilities such as nursing homes and hospices are playing a growing role in caring for the elderly. The government has sought to shift care from hospitals and towards hospice-type services, partly in an effort to contain healthcare costs.
Several large deals have been struck in the care sector over the past few years, with large global private equity firms keen to acquire assets. Notably, Bain Capital and Baring Private Equity Asia battled for control of Nichiigakkan in 2020 – a business providing nursing care services. Bain eventually secured the deal with a $1.2 billion offer.
Nevertheless, it is not necessarily straightforward for foreign firms to acquire Japanese care providers, particularly those operating outside major cities. “There are some disadvantages for foreign PE buyers,” says Nishi. “Nursing homes, day service centres, serviced residences, all require some local knowledge. They need to have connections and human contact at the local cities and towns – that would require some understanding of Japanese culture.”
Japan’s falling population inevitably creates staffing challenges throughout the economy. There are far more employees approaching retirement age than new workers entering the job market. In 2021, Japan had 7.3 million people aged 60-64, but just 5.6 million aged 15-19, UN data shows.
GPs themselves appear to be in a strong position to compete for entry-level professionals. “Actually, PE houses are becoming a more popular destination for the younger generation,” says Nishi. “It’s mostly been a highly profitable type of business. They have little difficulty attracting younger talent.”
Projected size of population in Japan in 2050, compared with 124m in 2022
Recruitment is likely to be much more of a problem within portfolio companies – after all, Japan has long been recognised as one of the world’s toughest hiring markets. A 2023 survey conducted by recruitment firm Robert Walters found that 57 percent of companies were very concerned about talent shortages.
Japan is taking tentative steps towards encouraging immigration as it attempts to tackle the problem. “The Japanese government has historically been reluctant to open those gates, but this is slowly changing,” says Reynolds. The Statistics Bureau of Japan reports that there were 2.7 million foreign residents in Japan as of October 2020 – a low number relative to most other developed markets, although the figure does represent an almost 44 percent increase since 2015.
Despite the demographic challenges, Japan’s private equity industry has continued to build momentum in recent years. For now, at least, it seems that the asset class is well-positioned to adapt to changing realities in the country.
Investors throughout the world will surely pay attention to how Japan learns to live with an ageing society. While Japan is further along the demographic path than any other large country, it is by no means unique in facing challenges with a low birth rate. China’s population has also started to fall, while the UN estimates a 50 percent probability that the world population will peak by 2100.