Yen slide raises questions on M&A hopes When UK ad agency Aegis was taken over by Dentsu this summer, the Japanese ad giant noted that the strong yen was "not unfavourable" for the deal. The confirmation this week of SoftBank's $20bn takeover plans for Sprint Nextel has further highlighted the steady domination of global M&A markets by Japanese companies, which have taken advantage of the strong yen to push outbound deals to record highs this year. Many Japanese companies have strong balance sheets, significant cash positions and access to cash at almost no cost. Taken together with a strong yen, Japanese companies are in a perfect position to make acquisitions around the world," says Frank Aquila, a partner and M&A specialist at Sullivan & Cromwell. Outbound M&A from Japan has hit a record annual high and, at $101bn, is already 84 per cent higher than the total value of deals in 2011, figures from Dealogic show. However, with signs that the yen has started to weaken in recent weeks, many are now questioning how this will affect future deals. Tokyo is anxious to weaken its currency. Government officials warned the US and other nations at the International Monetary Fund summit last week that the strength of the yen was a serious concern. That has led to speculation that the Bank of Japan could take further action, with a meeting on October 30 seen as an important moment. "There is a broad consensus that the political pressure for a weaker yen on the [Ministry of Finance] and the BoJ has never been greater," wrote Jens Nordvig, strategist at Nomura, in a note to clients. The yen has already fallen nearly 3 per cent to about Y79 against the dollar - a large move for the currency pair - since the Federal Reserve announced a fresh round of monetary easing in mid-September. The euro is more than 4 per cent stronger against the yen over the same period, while the UK pound has risen nearly 3 per cent. While Japanese politicians have done the lion's share of the work in weakening the yen, M&A deals have helped. Currency traders say the SoftBank deal put downward pressure on the yen as markets priced in the expected yen selling by the Japanese company to snap up its US target. Currency valuations can play a big part in deciding whether M&A is viable. Some bankers say the weakening in the yen against the euro earlier this year, together with uncertainty around the future of the single currency, put off acquirers in certain cases. However, while knee-jerk responses among currency traders are common, M&A deals often involve fewer currency transactions than might be supposed. Often, at least part of a large multinational deal is funded using overseas currencies already owned by the buyer. Meanwhile, an emergency scheme set up by the Japanese government last year to help address the strength of the yen may actually be reducing selling pressure on the currency, according to Junya Tanase, a currency strategist at JPMorgan in Tokyo, as companies turn to the fund for existing dollar reserves rather than selling yen themselves. The yen is largely weakening due to wider macroeconomic factors. The Japanese currency is a haven for investors, strengthening when global tensions rise. Analysts believe the European Central Bank's promise to prop up European bond markets if needed, which has eased fears over the debt crisis and risk of eurozone break-up, has led to yen selling. Indeed, there are signs that foreign investors are pulling funds out of the yen. Weekly data from Japan's MoF released on Thursday show that Japanese money market funds suffered the highest net outflows from foreigners since April, in a sign that global investors are looking for more lucrative investments elsewhere. Some argue that a weaker yen, far from slowing down Japan's wave of overseas acquisitions, could actually hasten it, as companies rush to do more deals to lock in the strength of the currency. Whether strong or weak, the yen's value is unlikely to affect a longer-term structural shift in Japan that is propelling companies to seek out lower labour costs and better growth prospects in overseas deals. Mr Nordvig argues that overseas deals are attractive to Japanese companies as long as the dollar is below Y90 against the yen, a level that has not breached since the summer of 2010. "The yen is super rich and it will take some time before a weak yen stops M&A flows," says Hans Redeker, head of foreign exchange strategy at Morgan Stanley. Still, analysts are predicting a period of relative weakness for the Japanese currency. Strategists believe the yen will weaken to Y82 against the dollar next year, up from its current level of Y79, and Y87 in 2014, according to an average of forecasters on Bloomberg. That may not stop the march of Japanese corporations overseas, but it means the currency advantage for deals will fade. Additional reporting by Ben McLannahan in Tokyo BoJ in spotlight Investors will be watching the Bank of Japan's meeting on October 30 closely for signs that Tokyo could seek to weaken the yen further, writes Alice Ross. Many believe the central bank could add to its bond-buying programme after it announced an increase in the scheme in September, following the US Federal Reserve's move to do a third round of "quantitative easing." Other options that could be on the table include extending the duration of existing bond-buying and even foreign asset purchases. A full-scale intervention in the currency markets has not been attempted since October 31 last year and is deemed unlikely.