A new economic partner is stepping into the vacuum left in Africa by the US and Europe’s withdrawal of development assistance.
Japan.
The famously insular country has been noticeably more active in emerging markets. Last week at the ninth Tokyo International Conference on African Development, or TICAD, Japan’s development finance institution pledged to invest $7 billion for Africa’s renewable energy, healthcare and private sectors.
Japan’s private funds, banks and corporations have also been keeping a regular drumbeat of deals on the continent. Its largest bank, Mitsubishi UFJ Financial Group, is building a book of sustainable sovereign debt swaps after helping Côte d’Ivoire refinance €400 million ($436 million) of its debt late last year. The deal will free up €60 million for Côte d’Ivoire to invest in education and other development initiatives.
In the private sector, more than 60 Japanese investors are active in Africa’s venture capital scene, according to a recent report from British International Investment. Among latest deals: Sumitomo Mitsui Banking Corp., Japan’s second largest bank, last week announced its investment in impact fund manager Novastar Ventures’ third fund. The commitment, from SMBC’s $320 million Social Value Creation Investment Fund, will support African impact tech ventures working in financial inclusion, supply chains, agriculture and the green transition.
Driving Japan’s economic interest in the world’s fastest growing region is diminishing prospects for growth at home, says Noriko Shibao of Tokyo-based Uneri Capital, an impact incubator and advisory firm.
“Population decline limits domestic growth,” Shibao tells ImpactAlpha. Japan’s population has been shrinking for the past 15 years at least. It’s also aging: the average age in Japan is nearly 50 years old — the second highest in the world after Monaco.
Africa, by contrast, is young and growing. The average age on the continent is just 19 years old.
“There’s a clear motivation to look outward, especially to emerging markets where impactful opportunities exist,” says Shibao.
Strategic alignment
The regions are a good match. Africa needs infrastructure, energy and industrial growth. Japan complements those needs with expertise in technology and manufacturing. Africa, meanwhile, offers Japanese companies new distribution channels and growth opportunities, says Shibao.
The Japanese government also sees its increased engagement in Africa as a counter-weight to China’s influence amid shrinking aid budgets from the US and Europe. African countries have taken on more than $90 billion in debt from China in recent years.
“Converting high cost debt into concessional debt is really important to stabilize the African continent,” JICA’s Naoki Ando told the Financial Times.
At TICAD, the Japan International Cooperation Agency pledged $5.5 billion that will support development and lending to Africa’s private businesses over the next three years. The agreement includes a concessional line of credit to the African Development Bank.
Kenya last week secured a $169 million “Samurai” bond – a yen-denominated bond – from the Japanese government to support its energy and vehicle assembly sectors.
Japan is also channeling capital to the continent through less direct routes. One of JICA’s first investments through its new $1.5 billion Impact Investing for Development of Emerging Africa, or IDEA, initiative was a $40 million commitment to India-based Aavishkaar Group’s Global Supply Chain Support Fund. The fund invests in the Indian Ocean region, including East Africa and Asia.
Aavishakaar’s Ashish Patel tells ImpactAlpha the investment is part of Japan’s push to strengthen global supply chains it’s tied to in the region.
“Africa has less than 5% of the global trade market, but a substantial amount more to contribute,” he says. “They are pursuing [development of] the Indo Pacific triangle… investing in India and using India as a way of routing capital into Africa.”
Co-creating industry
There’s a push from Japan’s and Africa’s public spheres to foster more cooperation in private spheres, including the loosely framed “Japan Africa co-creation for industry” initiative for African startups and Japanese companies to partner on tech and industry development.
Japan’s venture capital firms have gotten a head start. Uneri Capital launched in 2020 to incubate social enterprises in Japan and advocate for startup-friendly public policy. It came to market in 2021 with a proof-of-concept fund for early-stage startups. This year it expanded its fund strategy to invest in companies working in emerging markets. One of the first deals it will disclose is an artificial intelligence-powered health startup focused on Africa.
“From an impact perspective, addressing challenges in emerging markets is both urgent and essential,” Shibao said. “Japanese technology is world-class, and we see an opportunity to combine these innovations with emerging market needs to accelerate problem-solving.”
Two Japanese early-stage VC firms, Uncovered Fund and Monex Ventures, this month launched a three billion-yen ($20 million) fund for African startups working in mobile payments and micro-lending, retail digitization, last-mile delivery, electric vehicles, and carbon market businesses.
Japan and Kenya-based Kepple Africa Ventures has since 2018 backed more than 100 African startups. Last year it closed a $60 million fund raised in partnership with Nigeria-based Verod Capital Management, securing backing from JICA, Sumitomo Mitsui Trust Bank, Toyota Tsusho Corporation, Tokyo-based investment firm SBI Holdings, and Japan’s ICT and Postal Services, a public-private investment fund.
The Japan Association of Corporate Executives runs an Africa-focused impact fund called & Capital that makes both direct and fund investments in fintech, healthcare, food and sustainability.
Corporate engagement
Japanese corporations, which are among the country’s most active tech investors, are shuttling critical early-stage capital to Africa’s local innovators. SMBC, via Novastar Ventures, is supporting clean energy access through the fund’s investment in waste-to-fuel company Sistema.Bio.
Toyota Tsusho Corp. has for more than six years supported early-stage African fintech and mobility startups via Mobility 54, an investment fund with manufacturing and distribution company CFAO Group. Its portfolio includes Kenyan public transport ticketing service BasiGo and cross-border logistics manager OnePort.
Japanese investment giant SoftBank in 2021 led a $400 million raise for the Nigerian digital financial services company and now-unicorn OPay.
“We’re seeing more LP commitments and partnerships with startups,” Shibao says.
Investors are still skeptical about political risks and opportunities to generate returns, notes Shibao. JICA and other state agencies like the Nippon Export and Investment Insurance are helping catalyze private investment with concessional financing, guarantees and political and currency risk insurance.
“If you are able to create fundamental value, returns can stabilize over time and ultimately become substantial,” Shibao says.
“I believe we’ll see more concrete projects move forward,” she adds. “The momentum is already evident.”
