Japan’s commitment to ESG principles remains steadfast, even as major economies diverge in their approaches. While the United States grapples with an ESG backlash marked by legal challenges and political resistance, Japan is doubling down on its green initiatives, notably through the issuance of Green Transformation (GX) bonds.

Japan has emerged as a leader in climate transition finance, becoming the first country to issue sovereign transition bonds in February 2024. These five-year Climate Transition JGBs raised 100 billion yen (about $680 million), with subsequent auctions planned for 2025, underscoring the government’s dedication to funding decarbonization projects. The Ministry of Finance highlighted that these bonds align with the Paris Agreement’s goals and are designed to support industries in hard-to-abate sectors.

“Japan is taking an evidence-based approach to ESG, focusing on science-based targets and transparency,” said Hiroshi Tanaka, an ESG analyst in Tokyo. “The GX bonds are a clear signal of our commitment to sustainable growth.”

While Japan accelerates its ESG efforts, the United States faces growing skepticism. Over the past few years, conservative lawmakers and political figures have pushed back against ESG investing, arguing that it puts social or political goals ahead of financial performance. States like Texas and Florida have enacted legislation to restrict the use of ESG criteria in state-managed investments. Lawsuits targeting ESG-related disclosures and investment practices have surged, fueled by concerns over fiduciary duty and political polarization. A recent report from Harvard Law School noted that litigation risks have become a significant deterrent for US companies pursuing ESG strategies.

“In the US, ESG has become a political football,” said Sarah Miller, a corporate governance expert. “The backlash reflects deeper ideological divides and fears of overregulation.”

In contrast, Japanese policymakers view ESG as a long-term economic imperative rather than a partisan issue. “For Japan, ESG is not just about compliance; it’s about creating value for future generations,” Tanaka said.

Japan’s approach aligns closely with that of the European Union, where ESG remains central to regulatory frameworks like the Corporate Sustainability Reporting Directive (CSRD). Both regions emphasize transparency and accountability in climate-related disclosures. However, the US has seen efforts to roll back ESG initiatives at both state and federal levels.

A recent Forbes article highlighted this divergence: “While Europe and Japan are embedding ESG into their economic systems, the US is witnessing a retrenchment driven by political opposition and legal challenges.”

Despite global headwinds, Japan appears undeterred in its ESG journey. The government plans to expand GX bond issuance and encourage private-sector participation in sustainable finance. Experts believe this proactive stance will position Japan as a global leader in climate transition efforts.

“Japan’s strategy is pragmatic yet ambitious,” said Tanaka. “It recognizes that achieving net-zero emissions requires both public and private investment.”

As the world navigates complex ESG dynamics, Japan’s commitment offers a stark contrast to the turbulence elsewhere, especially in the US. Whether this divergence will widen or converge remains an open question.

Jesper Koll, a board director of the Okinawa Institute for Science and Technology, wrote in his newsletter, “The Japan Optimist,” that new CEOs, unlike their predecessors, are embracing external innovation. Drawing parallels to the US—where 90% of startup exits are acquisitions—Koll suggests Japan’s corporate leadership is adopting a more aggressive approach to growth.

Despite a global decline in deal volumes, Japan’s M&A market remains resilient. Managing Director of M&A advisory firm Crimson Phoenix, Yuuichiro Nakajima, attributes this to Japanese firms’ dual strategy: pursuing high-margin growth abroad through acquisitions and restructuring domestically to improve return on equity. This approach, he tells Global Finance, positions Japanese corporations as both buyers and sellers in an evolving global marketplace. 

However, cultural and systemic challenges persist. As Matt Romaine and Mark Bivens of Shizen Capital, an angel investment firm, explained on the “Disrupting Japan” podcast, M&A has traditionally been viewed as a secondary exit strategy. Yet high-profile successes, such as PayPal’s $2.7 billion acquisition of Japanese Fintech company Paidy in 2021, are shifting perceptions. Paidy’s founders’ decision to reinvest their gains back into the ecosystem is fostering innovation and encouraging a healthier cycle of startup growth, Romaine and Bivens shared. 

Kunio Katsube of the Japan Investment Corporation stresses the importance of international collaboration. Japan’s startups raise far less capital than their US counterparts, and this hinders scalability. Encouraging VCs to enter Japan can bridge this gap, he argues.

With $3 trillion in corporate cash reserves, Japanese companies face mounting pressure to deploy capital effectively amid inflation and shareholder activism. Acquiring startups offers a strategic path to rejuvenate growth, attract talent and position Japan as a leader in fields like AI and sustainability. 

In January, SoftBank doubled down on its commitment to technology-driven innovation. The company joined forces with OpenAI, Oracle, and other major partners to launch Stargate, an ambitious $500 billion joint venture unveiled at the White House.

This move underscores Nippon Life’s ambition to bolster its global presence amid a shrinking domestic market due to Japan’s aging population and low-interest-rate environment.

Resolution Life, established in 2017, specializes in managing portfolios of life insurance policies and reinsurance. With assets under management of $85 billion and 4.3 million policies, it provides Nippon Life with a platform to penetrate the US, the world’s largest life insurance market.

This acquisition transforms Resolution Life from an equity affiliate into a subsidiary, aiming to cement Nippon Life’s foothold in North America.

The deal also aligns with Nippon Life’s mid-term business plan, which emphasizes global expansion and aims to double group core operating profit by 2035. Currently, only 4% of Nippon Life’s operating profit comes from international ventures. Post-acquisition, this share is projected to surge to 20 percent, diversifying revenue streams and reducing dependency on the domestic market.

In addition, the acquisition complements Nippon Life’s other recent investments, including a $3.8 billion stake in Houston-based Corebridge Financial. The integration of Resolution Life’s expertise with Nippon Life’s robust financial base is expected to unlock synergies in product offerings, operational efficiency and customer service.

Furthermore, the ongoing partnership with Blackstone will seek to bolster asset management strategies and enhance returns. The proposed acquisition underpins Nippon Life’s long-term strategy, and serves as a blueprint for leveraging international acquisitions to drive growth.

Japan has had restrictive policies on low-skilled foreign labor. However, recent changes signal a shift toward greater openness. As of October 31, 2023, the number of foreign workers in Japan reached a record high of 2,048,675, marking a 12.4% year-on-year increase, Nikkei Asia reported, quoting the Ministry of Health, Labor and Welfare (MHLW).

According to the MHLW, foreign workers by visa status in Japan shows 595,904 workers on visas related to professional or technical fields (24.2% increase), 412,501 technical internship trainees (20.2% increase), and 71,676 on “specified activities” visas (2.3% decrease). By industry, manufacturing accounts for the largest share at 27%, followed by the service industry at 15.7% and the wholesale and retail sector at 12.9%.

South Korea has taken a more proactive approach. The country has significantly expanded its Employment Permit System, increasing the annual cap for low-skilled foreign workers from 50,000 in 2021 to 165,000 in 2024. According to reports, this program now includes workers in restaurants, hospitality and aquaculture industries.

South Korea has also focused on specific sectors, such as opening a training center for the shipbuilding industry in Indonesia. The country offers higher wages for low-skilled foreign workers than Japan and Taiwan, making it an increasingly attractive destination.

Taiwan has adopted a more targeted approach to foreign labor recruitment, particularly in high-tech industries. The country has implemented policies to attract and retain foreign talent, such as the “Gold Card” program launched in 2018, which offers a combination of work and residency permits to highly skilled foreign professionals. Peter Sayn, the founder of TeamFirst, a platform focused on both recruitment and market entry, emphasizes the need for a more comprehensive approach in Japan: “What Japan really needs is a stronger focus on creating an environment that not only attracts but also keeps high-skilled foreign talent,” he says.         

But emerging players like Paris-based Mistral AI and Tokyo-based Sakana AI are gaining ground, says entrepreneur Ilya Kulyatin, who founded Tokyo AI, a community of over 1,000 AI professionals. Mistral’s focus on smaller, efficient models presents a challenge to OpenAI’s large, resource heavy GPT models, Kulyatin argues.

Japan is taking a similar approach to cultivate a strong AI push. Sakana AI is positioning itself as a key player by focusing on resource-efficient technologies. In February, it received a government grant to enhance its access to supercomputers and GPUs, which are used to train foundational models.

With $200 million in Series A funding and a strategic partnership with Nvidia, Sakana AI is demonstrating the growing importance of smaller AI models, particularly in resource-constrained environments like Japan that are considered GPU-poor. While it’s hard to compete with Foundation Models dominated by the US and European private labs such as Facebook FAIR or Google DeepMind, Sakana AI’s work on smaller models would suit applications on edge devices, for instance in industrial or military applications.

The Japanese effort faces significant headwinds, however. The venture capital environment in Tokyo remains conservative, often focusing on smaller exits rather than scaling startups to compete globally, Kulyatin notes. This cautious approach makes luring foreign investment challenging. Japan also lags in AI talent development, he adds, as local universities are unable to compete with institutions like Stanford or Carnegie Mellon universities. To close the talent gap and become more competitive, Japan looks to attract top-tier talent—not to mention investors—from abroad.

ACT made a previous offer for Seven & i in 2020. “ACT has been watching closely since Daniel Loeb’s Third Point Capital lobbied hard for restructuring and management changes in 2016,” Timothy Connor, CEO of Synnovate, a firm that helps brands grow in the Japanese market, said at the time. “With ValueAct agitating in 2020, ACT is trying to get into the game.”

American activist investors Third Point Capital and ValueAct have been pushing for years for structural changes and efforts to improve profitability at Seven & i.

ACT’s dramatic offer highlights the growing allure of Japan’s retail sector to foreign investors. Reuters says ACT’s offer makes Seven & i the largest buyout target ever by a foreign buyer. But the proposed deal also underscores the complexities of navigating the market. “Taking over Japanese operations and teams is much more difficult than it looks to outsiders,” says Connor, suggesting that ACT’s bid may be more of a strategic signal than a viable takeover.

For one thing, questions loom about the Canadian retailer’s ability to manage operations on such a vast scale. “From an operating perspective, can ACT, with no experience in the Japanese market, run the quintessential convenience store and maintain quality?” Connor asks.

Japan’s regulatory environment could present hurdles as well, despite recent efforts by the government to reduce barriers to entry. In 2023, the Ministry of Economy, Trade and Industry updated its guidelines on mergers & acquisitions, aiming to streamline foreign acquisitions.

The financial implications of the deal are also a concern. “What premium would ACT need to offer to get Seven & i’s shareholders to sell? The purchase becomes much more expensive, especially considering Seven & i’s debt,” Connor points out. “And how would ACT pay? The ability to operate in terms of cash becomes that much more imperative.”

The deal comes in the wake of Citadel CEO Ken Griffin’s bullish statements on Japan back in June 2023 and Citadel’s reopening of an office in Tokyo (the firm originally closed its Tokyo office in 2008 after Lehman Brothers shuttered).

At the time, Griffin, speaking to the NIKKEI, noted: “It’s actually a very exciting time to be involved in Japan because of this shift in Japanese companies being much more focused on generating success for their shareholders and growing their businesses globally.”

Established in 2021, Energy Grid is a provider of risk management solutions to Japanese businesses, helping them navigate price volatility in the energy sector, in particle the electricity market. 

Citadel’s commodities division led the deal. The large alternative investment team has experience mitigating commodity supply and demand risks, including volatility in natural gas and electricity.

“Energy Grid has cemented its reputation as a trusted partner to the Japanese power industry,” said Sebastian Barrack, head of commodities at Citadel, following news of the partnership.

“We will strengthen this partnership by integrating Citadel’s experience in customer-led transactions and risk management with Energy Grid’s local expertise,” Barrack added.

Yohei Jozaki, CEO of Energy Grid, said, “This strategic transaction with Citadel marks a pivotal moment for Energy Grid to build on our success and realize our vision of building a stable and efficient power market in Japan.”

Looking ahead, Jozaki expressed an intention to leverage Citadel’s reputation in finance and operations “to expand trading volumes and offer longer-term risk management opportunities to more market participants.”

Japan is the world’s fourth-largest importer of oil, much of it coming from the Middle East. Moreover, the country’s electricity sector was disrupted in 2011, following the 2011 Great East Japan Earthquake and Fukushima nuclear disaster, which saw electricity generation via nuclear drop from 25% to a fraction of supply today.

The BoJ had controlled the yield curve and maintained negative interest rates since 2016 in an effort to stimulate economic growth and combat deflation. The decision by Governor Kazuo Ueda to shift gears brought Japan its first rate hike in 17 years. The central bank will no longer hew to target yields for 10-year government bonds, allowing long-term interest rates to rise.

Some view Ueda’s move as a milestone marking Japan’s transition to a more normal economic environment. Others see it as merely a small step toward normalization, a sign of the BoJ’s confidence in overcoming deflation.

Internationally, the shift has renewed investor interest, making Japan a more attractive investment destination. Even before the announcement, Japan’s Nikkei 225 stock index, on the back of robust corporate earnings and a weaker yen, had surpassed 40,000 for the first time.

“We expect Japan to be one of the top-performing markets between 2023 and 2030,” Jefferies analysts opined. “The great shareholder return story in Japan has begun.”

Domestically, discussion focuses on the monetary policy shift’s impact on wages, inflation and consumer spending. While higher interest rates may lead to stronger wage growth, Japan insiders share concerns that inflation rates could outpace wage increases, impacting consumer purchasing power. Questions remain, too, about the BoJ’s future policy adjustments. Japan watchers are keen to read the central bank’s outlook report this month, which is expected to flesh out the reasons behind Ueda’s historic policy change.

When its Japan Climate Transition Bond Framework was first announced last November, a government statement said, “Through [green transformation, or GX] realization, Japan aims to achieve its international commitment, i.e., 46% reduction of GHG [greenhouse gas] emissions by FY 2030 compared to FY 2013, and carbon neutrality by 2050.”

Japan has committed to issuing some ¥20 trillion ($133 billion) of GX-enabling bonds over the next decade; some ¥800 billion each of five-year and 10-year bonds were to have been issued in February and another ¥1.4 trillion in FY 2025. 

Dai-Ichi Life Insurance Company Limited was an early buyer of the bonds. In a statement last month, Dai-Ichi said, “Through this investment, the company aims to provide financial support for initiatives aimed at realizing carbon neutrality and strengthening the country’s industrial competitiveness.”

As that suggests, backers expect GX-enabling bonds not only to spur economic growth but to finance emerging technologies such as semiconductors and next-generation batteries: important elements in achieving Japan’s emission reduction targets. They also align with the country’s commitment to mitigate risks associated with climate and geopolitics. Both risks have come to the fore in recent years; climate risks such as sea level rise, floods, and even tsunamis are a constant risk for the island nation. Geopolitically, energy-poor Japan has typically relied on the Middle East and Russia to supply its energy needs; 95% and 4% of its crude oil comes from the one and the other, respectively. And Japan is the world’s second-largest importer, after China, of liquid natural gas (LNG).