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ANALYSIS-Western banks make push into Japanese dealmaking as fee pool hits record

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* Japan IB fee pool rose 51 pct to record $5.5 billion in 2017

* Foreign IB firms headcount in Japan seen up 10-15 pct in 2018

* Bankers see further spin-offs, M&A from Japan Inc

HONG KONG/SINGAPORE/TOKYO, Feb 2 (Reuters) - Western banks are bulking up in Japan, attracted by record investment banking fees and expectations of a rise in dealmaking as cashed-up companies in the world's third-largest economy step up their hunt for overseas targets.

Banks including Credit Suisse, Deutsche Bank and JPMorgan Chase are among those looking to improve their share of a market dominated by local banks and a handful of entrenched internationals, including Morgan Stanley Goldman Sachs, and Citigroup.

While Tokyo used to be bankers' first stop in Asia, its attractions have paled over the past decade compared with its great rival China, which accounts for the biggest share of the Asia Pacific investment banking fee pool.

But interest is picking up again in the wake of blockbuster deals including Toshiba's $18 billion sale of its chip business to Bain Capital last year, SoftBank's mooted $18 billion float of its telecoms business, and Fujifilm Holdings' planned $6.1 billion takeover of Xerox Corp.

Bankers and headhunters estimate foreign investment banking headcount will rise as much as 15 percent this year in Japan.

"People have been somewhat caught by surprise by the level of strategic activity from Japanese companies over the past couple of years," said Richard Gibb, Deutsche Bank's head of corporate finance in Asia Pacific.

Last year, Japanese investment banking fees - covering M&A, equity and debt markets deals, and loans - rose 51 percent to a record $5.5 billion, according to Thomson Reuters data.

"There will continue to be a restructuring of corporate Japan, and on the back of this there will likely be both substantial acquisitions and divestitures," said Gibb.

Fees from Japanese work constitute the second-largest pool of investment banking revenues in Asia. While the $2.5 billion earned from M&A and equity deals last year may look small compared with $5.3 billion paid by Chinese companies, bankers say Japan is still one of the most lucrative markets.

"Compared to domestic deals, fee levels for outbound deals have been relatively high and will likely expand along with deal size," said Koichiro Doi, head of Japan M&A at JPMorgan.

Fees for Japanese IPOs can reach 4 percent of the total raised versus at best an average of about 2 percent in Hong Kong. Japanese M&A deals can also offer fees of 2 percent - much higher than in China and Southeast Asia, according to bankers.

"A shrinking domestic market stemming from a declining population has created a sense of urgency to pursue outbound acquisitions to capture new markets, new products as well as access to innovation," Doi said.

TEA CEREMONIES

Japan's investment banking fee ranking is dominated by local houses such as Mizuho, Nomura and Mitsubishi UFJ Financial Group (MUFG), but they have been losing market share to foreign rivals.

MUFG operates a joint venture with Morgan Stanley, allowing it to combine its sizeable domestic lending book with the Wall Street bank's global reach.

MUFG's share of investment banking fee pool dropped from 13.5 percent in 2008 to 8 percent last year, while Nomura saw a decline of five percentage points to 11 percent last year, the Thomson Reuters data showed.

The share of top five foreign banks in the total investment banking fee league table, meanwhile, has rise from 17 percent in 2008 to 19 percent last year, led by Morgan Stanley, Goldman and Bank of America Merrill Lynch.

International banks are focusing on the rising number of cross-border deals and private equity transactions, both of which tend to offer more opportunity for foreign involvement.

"PE funds, particularly large global funds, have been quite active in the Japan market in recent years," said Koichi Ito, Credit Suisse's head of Japan investment banking and capital markets. "They are now increasingly focused on not only buying companies but also on exiting their investments through a sale or IPO."

Deutsche Bank recently hired a head of financial sponsors coverage in Japan and is looking to bring on board a new head for covering financial institutions - Japanese banks and insurers are particularly active overseas.

Tim Eustace, a headhunter at Next Step in Tokyo, said more senior hiring was going on.

"Some European banks are very interested in rebuilding their financial sponsor coverage area, and they would be looking to hire at the senior associate to junior director level."

Banks are also encouraged by signs that traditional Japanese companies are now more willing to break with "keiretsu" networks - where groups of businesses share close ties including banks and advisers.

In a rare move, Takeda Pharmaceutical's $5.2 billion acquisition of U.S.-based Ariad Pharmaceuticals did not involve any Japanese bank on the advisory side. The work instead went to Evercore Partners, JPMorgan, Goldman, and Lazard.

Foreign banks also prize the ability to build relationships with Japanese clients.

"It's not easy to break into a Japanese company if you are a foreign entity, but once you have done that - after attending quite a few tea ceremonies - they are very loyal and they reward quality advice, which is not common in this region," said the head of regional investment banking at an European bank.

(Reporting by Sumeet Chatterjee in Hong Kong, Anshuman Daga in Singapore and Thomas Wilson in Tokyo; Editing by Jennifer Hughes and Lincoln Feast)