Capital Confidence BarometerJuly 2017 | ey.com/ccb | 16th edition | Japan Highlights

Can complex geopolitical uncertainty and record M&A coexist?Despite policy uncertainties, companies are giving the green light to deals in the search for growth.

18 |  Capital Confidence Barometer

Japan highlightsM&A outlookDealmaking is set for a strong 2017. Concerns about an overheated market are countered by growing deal discipline.

Macroeconomic environmentConfidence high as executives anticipate the global economy improving and corporate earnings on an upward track.

Growth and portfolio strategyAs technology disrupts traditional models businesses are more regularly reassessing their portfolios in the search for growth.

65%cite a broad range of geopolitical or emerging policy concerns as greatest risks to growth

99%expect corporate earnings to either improve or remain stable

67%see the global economy improving

79%expect their pipeline to increase or remain stable in the next 12 months

37%expect to actively pursue acquisitions in the next 12 months

44%look at cross-border deals to secure market access and grow their customer base

76%plan to outsource routine operations or back-office functions in the next 12 months

69%have increased the frequency of their portfolio review process

52%cite portfolio analysis, Sector convergence, digital innovation as most prominent topics on their boardroom agenda

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Japanese economic confidence andstrong growth imperative outweighgeopolitical concerns and spurfurther M&A

Based on a survey of more than 2,300 executives across Japan and 42 othercountries, the Barometer finds that this strong appetite for deals perseveresagainst a backdrop of geopolitical or emerging policy concerns, which are seenas the greatest risk to economic growth for 69% of businesses.

Resurgent economic confidence and potential rewards ofM&A eclipse broader risksSigns of a global economic upturn are boosting renewed expectations forgrowth, but it is the improving confidence in the Japanese domestic economythat will really underpin growth and further fuel deal intentions. At the sametime, investor expectations have also increased. The net result is executivesrecognize that staying on the deal sidelines could mean they miss anopportunity to secure future proofing assets.

Investing globally in a time of rising nationalismJapanese fears of increasing protectionism in 2016 still exist and havemorphed into uncertainty about policy that could impact global trade. However,despite trade barrier speculation, cross-border M&A has already been ahallmark of dealmaking in 2017, with a resurgence of deals between the UnitedStates (U.S.) and Western Europe. Further, Japanese executives remain morepositive than their global peers that the political situations in the US and UnitedKingdom (UK) will create more M&A opportunities. For many companies, cross-border deals are a necessity — successful companies will find ways to navigatechallenges such as rising nationalism, and executives are evaluating M&A across a wide range of geographies to secure market access and grow the cus-tomer base.

Portfolio optimization comes to the fore amid rapidlychanging marketExecutives are also being proactive in reassessing and reorganizing theirgeographic footprint to be able to quickly pivot in response to any majortrade policy changes. They are looking at options given the recent politicaldevelopments and may need to be able to shift operations quickly to protectglobalized operations and supply chains.

Disruption drives dealsFor many executives today, the only constraints are the ones they create. Theyare imagining a future and are using buying and selling strategies to help realizethis vision. Companies are playing on their own terms and utilizing more regularand rigorous portfolio reviews to be strategically nimble and opportunistic.Executives are not being distracted by policy speculation that may or may nothave an impact in two years when they need to stay focused on the tech start-up that could disrupt their business in two months. M&A is both a protectionagainst that disruption and an opportunity to disrupt the competition.

Vincent SmithEY Japan LeaderTransaction Advisory Services

20 |  Capital Confidence Barometer

M&A outlook

Growth in Japanese pipelines supports confidence in local and global deal activity

Considering the next 12 months, how do you expect your pipeline to change?Q:

Top five investment destinations

1 Japan

2 China

3 United States

4 India

5 Italy

Typically Japanese respondents are more positive about the global economy than local. However, in this CCB we see as an equally positive outlook for both

Executives plan to complete more deals while replenishing their pipelines to enable a range of options, and improving valuations will encourage deal flow.

58+35+29+21+39+60+21+26+11 Percent

Increase

5835

29

No change

2139

60

Decrease

2126

11

Apr 17 Oct 16 Apr 16

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Macroeconomic environment

Growth and portfolio strategy

Japanese views of strong global economy matched by equally bullish domestic outlook

Typically Japanese respondents are more positive about the global economy than local. However, in this CCB we see as an equally positive outlook for both.

Having a strong export sector, Japanese companies should benefit from an improving global economy. But, it is an improving situation at home that will really underpin confidence and growth.

The local economy shows the potential for improvement and planned infrastructure spending in the next 2-3 years will contribute to this improvement

However overall confidence can also be tied to strong sentiment regarding likely improvements in local corporate earnings, credit availability and market stability.

Percent

Improving

69

25

4

Stable

29

46

26

Declining

2

29

70

Apr 17 Oct 16 Apr 16

What is your perspective on the state of the local economy today?Q:

PercentPortfolio analysis, including strategic divestment (spin-off/IPO) 19

Sector convergence/increased competition from companies in other sectors 17

Impact of digital technology on your business model, e.g., new sales channels/markets, IoT, cybersecurity 16

Identifying opportunities for growth, including M&A, joint ventures and alliances 13

Impact of increased economic and political instability 10

Shareholder activism, including returning cash to shareholders 9

Increasing regulatory or governmental intervention 8

Changes in tax policy/rates 8

Which of the following will be most prominent on your boardroom thinking during the next six months? (Select up to three)Q:

• As the global economic outlook improves, companies and executives are clearly focused on growth strategies, but the rise of digital disruption to products and business models is the constant central consideration.

• Japanese executives have indicated they will be more focussed on the state of their own portfolios with a possible pick up in strategic divestments to follow.

• Sector convergence and a focus on customer will also occupy Japanese boardroom thinking in the year ahead.

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top actionsthat help define M&A success in today’s deal economy

1 Learn to live with uncertaintyGeopolitical and policy uncertainty is a permanent feature of a globalized economy, but technology-enabled disruption poses a greater challenge to many business models. 7 Disregard

boundariesCross-border deals are a necessity — successful companies will find ways to navigate challenges such as rising nationalism.

6 Follow the customerM&A can offer a fast track to the innovation needed to maintain pace with the warp-speed, customer-centric change reshaping today’s business landscape.

5 Your pipeline is your lifelineCompetition for quality assets is high, and assessing a number of M&A options is critical to create multiple opportunities in such a fast-moving market.

2 The only constraints are the ones you createNew products and services are being created at a pace not seen before — being bold could be key to success as today’s deals will likely be tomorrow’s game-changers.

8 Walk through wallsThe traditional walls that once defined sector territories have dissolved — executives need to seize opportunities amid shifting industry models.

3 Reimagine the parameters of your businessDo what you do best — adapt your operating model to succeed in tomorrow’s market.

9 Measure what matters mostPast performance is not necessarily an indicator of future success — new ways of focusing and filtering data can provide insights into future customer trends.

4 Play on your termsBe in total control of your own destiny — rigorous and regular portfolio reviews will enable you to be strategically nimble and opportunistic.

10 Integrate with intentAlways consider your overarching strategy during integration, and enhance potential value by targeting both top-line customer experience and bottom-line cost efficiencies.

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7 Disregard boundariesCross-border deals are a necessity — successful companies will find ways to navigate challenges such as rising nationalism.

6 Follow the customerM&A can offer a fast track to the innovation needed to maintain pace with the warp-speed, customer-centric change reshaping today’s business landscape.

5 Your pipeline is your lifelineCompetition for quality assets is high, and assessing a number of M&A options is critical to create multiple opportunities in such a fast-moving market.

8 Walk through wallsThe traditional walls that once defined sector territories have dissolved — executives need to seize opportunities amid shifting industry models.

9 Measure what matters mostPast performance is not necessarily an indicator of future success — new ways of focusing and filtering data can provide insights into future customer trends.

10 Integrate with intentAlways consider your overarching strategy during integration, and enhance potential value by targeting both top-line customer experience and bottom-line cost efficiencies.

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ED 1804This material has been prepared for general informational purposes only and is notintended to be relied upon as accounting, tax or other professional advice. Pleaserefer to your advisors for specific advice.

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About the surveyThe Global Capital Confidence Barometer gaugescorporate confidence in the economic outlook andidentifies boardroom trends and practices in theway companies manage their Capital Agendas — EYframework for strategically managing capital. It isa regular survey of senior executives from largecompanies around the world, conducted by EuromoneyInstitutional Investor Thought Leadership (EIITL). Ourpanel comprises select global EY clients and contactsand regular EIITL contributors.

• In March and April, we surveyed a panel of more than2,300 executives in 43 countries; 58% were CEOs,CFOs and other C-level executives.

• Respondents represented 14 sectors, includingfinancial services, consumer products andretail, technology, life sciences, automotive andtransportation, oil and gas, power and utilities,mining and metals, diversified industrial products,and construction and real estate.

• Surveyed companies’ annual global revenues wereas follows: less than US$500m (21%); US$500m–US$999.9m (23%); US$1b–US$2.9b (17%); US$3b–US$4.9b (10%); and greater than US$5b (29%).

• Global company ownership was as follows: publiclylisted (62%), privately owned (32%), family-owned(3%) and government-/state-owned (3%).

Global contactsGlobalSteve KrouskosEY Global Vice Chair Transaction Advisory Services EY Global Limited steve.krouskos@uk.ey.com +44 20 7980 0346 Follow me on Twitter: @SteveKrouskos

Julie HoodEY Deputy Global Vice Chair Transaction Advisory Services EY Global Limited julie.hood@uk.ey.com +44 20 7980 0327 Follow me on Twitter: @JulieHood

Barry PerkinsEY Global Lead Analyst Transaction Advisory Services EY Global Services bperkins@uk.ey.com +44 20 7951 4528

AmericasWilliam CaseyEY Americas Vice Chair Transaction Advisory Services william.casey@ey.com +1 212 773 0058

Asia-PacificHarsha BasnayakeEY Asia-Pacific Leader Transaction Advisory Services harsha.basnayake@sg.ey.com +65 6309 6741

Europe, Middle East, India and Africa (EMEIA)Andrea GuerzoniEY EMEIA Leader Transaction Advisory Services andrea.guerzoni@it.ey.com +39 028 066 3707

Japan contactsFor a conversation about your capital strategy, please contact:

Vincent SmithEY Japan Leader Transaction Advisory Services vince.smith@jp.ey.com +81 3 4582 6400

Peter WespEY Japan Deputy Leader Transaction Advisory Services peter.wesp@jp.ey.com +81 3 4582 6465

Satoshi YamadaCapital Transformation Leader Transaction Advisory Services satoshi.yamada@jp.ey.com +81 3 5401 6414