Japan FinTech Observer #43

Welcome to the forty-third edition of the Japan FinTech Observer.

According to Teikoku Databank, the number of bankruptcies during the 2023 calendar year was 8,497, over 2,000 more than the previous year. For the second year in a row, the number of bankruptcies increased from the previous year, and approached the number in 2015 (8,517). This was the highest annual increase since the burst of the bubble economy.

At the same time, the Nikkei notes that Japan’s ranks of financially unsound “zombie” companies swelled about 30% on the year to an 11-year high of around 250,000 in fiscal 2022 as businesses kept afloat through the pandemic by government support now grapple with heavy debt loads. Just over 17% of businesses are unable to cover interest payments on their debt from their profits, thus being categorized as “zombies”. Letting these companies meet their fate would have a greater impact on providing opportunities to startups than any amount of subsidies would. Just let the market work its magic.

This week, the Bank of Japan’s Monetary Policy Meeting (MPM) takes place, with the BOJ’s outlook report due on Tuesday, January 23. Expect no change in the Bank’s bias.

The live edition of the Japan FinTech Observer, taking a deeper dive into select topics, will be hosted at its usual time on Tuesday, starting 5pm JST, on LinkedIn Live. Last week’s recording is available on the Tokyo FinTech YouTube channel.

Here is what we are going to cover this week:

• Venture Capital & Private Markets: Football star Keisuke Honda sets up $100 million Japan VC fund; Sakana AI have raised $30M in a seed funding round; Trinity Technology completed its Series B, including 18 financial institutions; Mitsui made a USD 50m investment in Quantinuum; Mizuho extends JPY 2bn loan to Elephantech; the Development Bank of Japan has partnered with Seiko Epson to buy into 3DEO; SBI Investment leads, and Nippon Express participates in Indian logistics startup WIZ’s Series B round; and SBI-invested German FinTech Pliant extends funding round
• Banking: The Philippines’ Tonik, about 10% owned by Mizuho through an investment in 2022, entered SME lending
• Payments: The Southern Japanese city of Kumamoto now allows tram passengers to pay with their faces using facial recognition technology from Saffe
• Capital Markets & Asset Management: MUFG has formulated an asset management business strategy, it wants to double AUM by FY2029; Nikko Asset Management aims for the same by 2032; and Mizuho wants to double its AUM within 10 years as well; Jefferies Financial Group and Sumitomo Mitsui Financial Group will expand their partnership to Europe; and the Tokyo Stock Exchange has published the first monthly edition of its highly anticipated status of disclosure on “Action to Implement Management that is Conscious of Cost of Capital and Stock Price”
• Digital Assets: Klaytn Foundation and Finschia Foundation have submitted a proposal to merge the two blockchains to create Asia’s Web3 technological and ecosystem powerhouse
• The Last Word: Nobody has a clue

Venture Capital & Private Markets

• Football star Keisuke Honda sets up $100 million Japan VC fund: former star soccer player Keisuke Honda, a rare Japanese athlete turned angel-investor, is in talks to raise JPY 15bn (USD 100m) for his first fund dedicated solely to startups in his country; the X&KSK fund plans to invest in around 30 Japanese startups; Honda said in an interview that it wants to identify at least one company whose valuation will eventually reach $10 billion
• Sakana AI have raised $30M in a seed funding round, led by Lux Capital, with strong backing from Khosla Ventures; Sakana AI is the first AI startup founded in Japan (or almost the first in any industry in Japan) backed by top Silicon Valley VCs at the seed stage; Sakana AI also have strong backing from the Japan tech ecosystem, with investments from NTT Group, KDDI Corporation CVC and Sony Group
• Trinity Technology, which provides the family trust “Oyatoko” and the senior living support service “Ohisapo,” has raised a total of JPY 1.81bn (JPY 1.11bn equity and JPY 0.7bn debt) in Series B funding through a third-party allocation of shares and loans from financial institutions; the funds were raised from 23 companies, including existing investors, 18 of which are financial institutions
• Mitsui made a USD 50m investment in Quantinuum, a leading global quantum computing company with a strong presence in Japan; this investment is part of Quantinuum’s USD 300m equity fundraise, and was completed alongside JPMorgan Chase & Co., Honeywell and Amgen; the investment will accelerate Quantinuum’s path toward developing the world’s first universal fault-tolerant quantum computers, while also extending the company’s leading quantum software offerings
• Mizuho extends JPY 2bn loan to Elephantech: under the SME Support Japan’s Debt Guarantee System, Elephantech received a guarantee rate equal to 50% of the loan amount, and subsequently entered into a loan agreement with Mizuho Bank for a total of two billion yen
• The Development Bank of Japan (DBJ) has partnered with Seiko Epson to buy into 3DEO, a U.S. company that develops and produces 3D metal printers, in the state-backed institution’s first direct investment in a foreign startup
• SBI Investment leads, and Nippon Express participates in Indian logistics startup WIZ’s Series B round; the company plans to grow its global operations in Southeast Asia, the Middle East, and the US with the new investment and further enhance its technology-driven solutions
• SBI-invested German FinTech extends funding round: Berlin-based Pliant, a company specialized in making the latest generation of corporate credit cards, has raised EUR 8m in a Series A extension round of funding, bringing the total Series A funding round to €33M; the new investment comes from Molten Ventures, joining existing Series A investors SBI Investment, Alstin Capital, and Motive Ventures
• Hyperithm has invested in Canza Finance, a Web3 neobank enabling decentralized cross-border payments for Africans
• In a move that might be followed by other startups, Funds, operator of the fixed income asset management service “Funds”, announces that as of December 2023, the reissuance of tax-qualified stock options has been completed based on the notice of interpretation of laws and regulations regarding tax-qualified stock options released in July 2023

Banking

• The Philippines’ Tonik, about 10% owned by Mizuho through an investment in 2022, entered SME lending as the first digital bank in the country to offer a secured loan product; Tonik’s “Big Loan” offers entrepreneurs up to PHP 5m with flexible, tailored repayment options, competitive interest rates, and a streamlined application process

Payments

• The Southern Japanese city of Kumamoto now allows tram passengers to pay with their faces using facial recognition technology from Saffe; the Kumamoto City Transportation Bureau commenced the face payment pilot on December 20, allowing passengers to register through the Quick Ride or Bankit mobile apps; the test will run until the end of March 2024

Capital Markets & Asset Management

• MUFG has formulated an asset management business strategy with the aim of contributing to making Japan a leading asset management center by creating a virtuous cycle of growth and asset income; a core pillar of the strategy is the doubling of assets under management (AUM) by the end of FY2029 to JPY 200trn, with half of the increase expected to be achieved through acquisitions; this follows our reporting last week of Nikko Asset Management Group also aiming to roughly double total assets under management to JPY 60trn by 2032, including inorganic growth
• Also, Reuters has Mizuho Financial Group in talks with overseas asset managers about deals as the major Japanese banking group looks to more than double its assets under management to $1 trillion within 10 years
• Jefferies Financial Group and Sumitomo Mitsui Financial Group have signed a memorandum of understanding to further expand their global strategic alliance to now include enhanced collaboration across Europe, the Middle East and Africa (“EMEA”) on future corporate and investment banking business opportunities

• The Tokyo Stock Exchange has published the first monthly edition of its highly anticipated status of disclosure on “Action to Implement Management that is Conscious of Cost of Capital and Stock Price”; the TSE states that as of December 31, 2023, 49% of Prime Market listed companies (815) and 18% of Standard Market listed companies (300) have disclosed information on their plans; that count, however, includes those companies that have measures “under consideration”; given that the listed companies had nine months to prepare, we would rather conservatively go with the 40% and 11.5% numbers, respectively, of those companies that have actually disclosed

Digital Assets

• Klaytn Foundation and Finschia Foundation have submitted a proposal to merge the two blockchains to create Asia’s Web3 technological and ecosystem powerhouse; if passed, the merger will see the unification of South Korea’s leading blockchain with Japan’s leading blockchain, to form a unified ecosystem comprising over 420 DApps and 250 million wallets integrated with Kakaotalk and LINE, two popular messaging platforms in Asia; the proposed new blockchain will be compatible with both EVM and CosmWasm, inheriting the strengths of both Klaytn and Finschia
• NTT DOCOMO has developed a new generative AI system that can automatically create non-player characters (NPCs) for metaverse environments using just text descriptions; the technology is believed to be the first of its kind that can generate fully-formed NPCs including appearances, behaviours, and roles in around 20 minutes without needing programming expertise

The Last Word: Nobody has a clue

Our thanks go to Harald Berlinicke for pointing out some interesting market commentary and context on Japanese stocks in the latest Bank of America research piece “The Flow Show: Rising Suns & Setting Suns”, published on January 18, 2024, and delivering the quote of the week:

• Nikkei at 34-year highs, China at 2008 GFC lows (Chart 2 — Nikkei was 7k at GFC low, now 36k)
• True bull in Japan when yen 💴 up, stocks up, but in ’24 it is prospect of deeper yen depreciation that fires up the bulls 🐂
• Leadership shifting from asset reflation plays i.e. banks to weak yen plays i.e. exporters
• Nikkei beneficiary of ABC “anywhere but China” liquidity
• Investors structurally underweight (Japan = 5.5% of ACWI vs. 44% in 1989 — Chart 3)

The research piece includes an interesting quote from an unnamed global investor on Japanese stocks: “Foreign brokers tell me Nikkei in ’24 will do what Nvidia did in ’23, while Japanese brokers tell me Nikkei will do what China did in ‘23”.

Basically, nobody has a clue where things are headed for Japanese stocks (the Chinese stock market fell by some 30% last year whereby Nvidia rose by some 170%). 🥹

If you would like to see more of our content, please head over to the Tokyo FinTech YouTube Channel or check out the eXponential Finance Podcast.

We have also created two LinkedIn groups, the “Japan Startup Observer” if your interest in Japan goes beyond FinTech, and the “FinTechs of India” to capture the developments on the subcontinent. We invite you to join both these groups.

Have an awesome week ahead.