If 2021 was the year of big cross-border deals aimed at making substantial changes to Japanese companies, 2022 was a year of scaling back on the size of deals and changing focus.

On the one hand, Japanese companies, similar to their counterparts elsewhere, are hesitant to make larger deals in the current uncertain macroeconomic environment. Among the big considerations, the high multiples that typically accompany transformative deals, combined with the significant depreciation of the Japanese yen, made potential acquirers hold out. But while deal value dropped in 2022, with the country seeing a 20% decline in deal value in the first nine months, M&A volume was at the same level as 2021.

This means that even as Japanese companies took a pause on transformative M&A, it was time for smaller deals, such as Nippon Steel’s cross-border deal for G Steel and G J Steel, two Thai steelmakers, for about $763 million. Nippon Steel’s move was part of its strategy to expand overseas amid a declining domestic market. A few transformative deals did take place in 2022, but all of them were domestic and much smaller in scale compared with 2021. For example, industrial and testing equipment company Shimadzu acquired Nissui Pharmaceutical to expand into the healthcare business.

As part of their transformative M&A focus in 2021, Japanese companies also divested some original businesses that no longer were considered strategic for their future to financial investors. But the smaller size of divestiture deals meant the total value of divestitures was lower. A few notable ones, however, did take place: Olympus sold Evident, its century-old microscopy business, to Bain Capital, and Hitachi divested Hitachi Transport Systems to KKR.

So, are Japanese companies experiencing a temporary pause or a fundamental shift in approach to M&A? Executives tell us it is the former, not the latter, and that it’s not a matter of if a deal will happen but when. Indeed, there are some underlying trends that indicate Japanese companies are likely to resume deals.

Many Japanese companies will need to clarify and articulate their growth strategies in the years ahead. And that will result in companies deciding to shed nonstrategic assets to streamline their business portfolios. At the same time, enterprise value multiples of public companies in Japan remain substantially lower than in the US and other markets, partly because of their lack of a well-defined growth strategy. That makes them attractive for acquirers.

Meanwhile, financial investors—the primary purchasers of carved-out assets—are well positioned to buy. We expect deal value by financial investors to remain steady, despite an overall decline in Japan’s M&A market. Why do we say that? Unlike other countries, Japan’s private equity market remains hot. Funds created for investing in Japan are growing, and many Asia funds are shifting focus from China to Japan. So, the amount of dry powder to be invested in the country will remain substantial. Another big factor: Interest rates are comparatively low in Japan, making it affordable to borrow for deals.

Yet while financial investors are poised to buy, it’s unclear when conditions will ripen for Japanese companies to resume their acquisitions. In the meantime, they can prepare by proactively looking for targets so that they can act fast when the time is right. Below are three critical moves:

• Consider this a perfect time to step back to articulate the company’s M&A strategy and to thoroughly review the company’s growth strategy. That means answering some basic questions, such as: Do I have the right business portfolio mix (growth engine and cash generator)? Do I have a clear business unit–level growth strategy? And how can M&A accelerate the growth?
• Prepare a list of potential assets that should be divested to improve the balance sheet. Number the noncore/nonperforming assets in order of divestiture priority.
• Screen targets, putting more emphasis on an asset’s attractiveness as opposed to its feasibility. Deal multiples will change, and the short-term performance of the company will vary. So, the asset will fluctuate in price. While it’s always wise not to pay too much of a premium too late, it’s also critical not to walk away from large deals too early, especially in this uncertain environment.

On the surface, it may appear as if Japanese companies are in a wait-and-see mode for M&A, but the best and most strategic dealmakers are thoughtfully making plans for their next move.