Published: August 01, 2009
Japan is typically considered an elusive place to do business, with a highly regulated, perhaps introspective market, and impenetrable traditions and business conventions. However, with Japanese multinationals dominating the electronics sector and increasingly the auto industry, the second largest GDP in the world (World Bank, 2008) and a programme of financial reform, are the old assumptions still valid?
According to World Bank criteria, Japan is already the 12th easiest country in the world to do business (World Bank, Doing Business 2009, figure 1) with many European countries trailing behind, such as Belgium (19) Germany (25) Netherlands (26) and France (31). However, within this statistic, there are some hidden challenges which have been particularly apparent during the current period of economic stress. Over the past year, commentators have focused on government support of banking institutions and decisions to lower interest rates as indications of a country’s ability to weather the crisis. In the case of Japan, which already had interest rates scraping zero, reducing rates further was not an option available to the central bank. Furthermore, companies based in, or operating in Japan, have additional challenges. Firing costs are relatively high, making it more difficult for these firms to flex their workforce in line with market demand for their goods and services. Cross-border trade is far more difficult than in many other countries, primarily due to the amount of bureaucracy required and the cost and amount of time taken to import and export goods. While the costs need to be considered relative to GDP, these issues pose additional challenges for a country so dependent on cross-border trade, particularly for key industries such as electronics and automotive, where margins are already narrow and demand has been shaken.
These challenges are in addition to a complex fiscal and regulatory environment, with less flexibility than in other OECD economies. However, despite the complexities and nuances in Japanese business culture, organisations are increasingly taking advantage of the opportunities that exist today for doing better business, and those that are evolving over time.
Companies – and banks – operating in Japan are seeking to become more competitive and adapt the way they do business. This applies to both multinational companies operating in Japan, and Japanese companies. As Ricky Kaura, Head of Treasury Services – Japan at J.P. Morgan explains,
“Over the past six to twelve months in particular, we have seen some significant changes amongst corporates in Japan. Companies are becoming more aggressive in reviewing and revising their treasury activities and the structures they have in place.”
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Looking first at multinational companies with operating units in Japan, Ricky Kaura notes,
“Many foreign multinationals have been very successful in creating a global infrastructure with a central view of risk and working capital, and have leveraged extensive investment in ERP and accounting technology by implementing shared service centres (SSCs). Very often, however, Japan has been excluded from these structures and Japanese business units have continued to operate independently.”
There are various reasons why regional structures, such as cash management structures and SSCs tend to contain the suffix ‘ex-Japan’, but these are primarily characterised by difference and complexity. For example, integrating Japanese entities into global payment platforms is difficult if these systems do not support Japanese character sets, which are required by the Japanese clearing systems. This inevitably leads to the use of proprietary technology to support Japanese domestic payments, which is rarely integrated into the global infrastructure. By remaining excluded from systems and processes across the rest of the region, legacy business processes tend to remain and there is less visibility across Japanese operating units.
With liquidity at a premium, however, foreign companies are increasingly seeking to incorporate all regions into their global liquidity management structure, leading to greater demands for more integration between specific systems used in Japan with global systems, and the extension of global systems into Japan. For example, companies such as SunGard now have a substantial presence in Japan and support regulatory, language and integration requirements both for multinational clients with a presence in Japan and the domestic and international needs of Japanese companies.
In addition, the needs of Japanese companies are increasingly converging with their foreign counterparts. As firms seek to become more competitive and create a global picture over cash and risk, rather than a ‘domestic’ and ‘international’ view, companies’ business processes, banking structure, technology and integration needs have developed significantly. Ricky Kaura discusses this:
“Many Japanese companies have operations in multiple jurisdictions, and they are now looking to implement consistent structures across their business to optimise cash and treasury management, such as cash pooling, and centralisation of working capital and liquidity management. A fair proportion of Japanese companies have been less aggressive in centralisation initiatives in the past, and many are of a sufficient scale to gain easy access to capital markets. Now that liquidity is more costly for companies globally, they want to make better use of their internal balance sheet. Inevitably, as the external cost of borrowing increases, internal hurdles to centralisation become easier to overcome.”
Another business driver for companies in Japan is the development of a derivatives market, which many firms see as an opportunity to create greater efficiency and consistency across the business.
As Ricky Kaura continues, looking at the trends amongst both Japanese and multinational firms,
“We are seeing a definite move towards increased interoperability. For example, an advanced AI based engine to translate Roman characters into Katakana is one approach to allow business processes and reporting in Japan to be integrated with the rest of the business, and to allow companies to use industry-standard systems and processes to support both their domestic and international financial activities. An integrated approach not only results in greater efficiencies, but it helps in managing risk management and broader issues (such as SOX) more effectively.”
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Changes to the finance industry in Japan are not restricted to the corporate sector, of course. Japanese banks are also seeking to become more relevant to an international audience and sophisticated in their outlook. This is, in part, being facilitated by a broad agenda for change in the financial markets in Japan, driven by the Bank of Japan and the FSA, under the banner of the Better Market Initiative.
The Better Market Initiative (fig 2) was announced by the FSA in 2007 and the Financial Instruments and Exchange Act was modified accordingly in June 2008. The aim of this programme was to sustain economic growth in a country with an ageing population, to provide investment opportunities for the JPY 1,500 trillion yen (about US$ 14 trillion) held in financial assets by Japan’s household sector, and to provide both domestic and foreign companies in Japan with access to capital. In doing so, it was also intended to expand Japan’s financial services industry to support economic growth further.
As an example, one of the initiatives which took effect in June 2009 was a change in the firewall restrictions, which will enable banks to operate more efficiently by enabling them to benefit from synergies across the business both operationally and in terms of client engagement. This should in turn improve the quality and convenience of customers’ experience as well as reducing costs and increasing efficiency of back-office operations. As Ricky Kaura says,
“As firewall restrictions evolve, banks will be able to provide solutions in a different way, which are more intuitive and promote greater integration on a global scale.”
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Another important element of the Better Market Initiative has been the introduction of a new generation real-time gross settlement system, the first phase of which was launched in October 2008 and is due for completion in 2011. While the existing BOJ-NET system was efficient, the new system recognises the greater complexity of international companies. Both low value, high volume payments, and high value payments are included, and BOJ-NET will accelerate settlement, increase security, and increase payment efficiency. As a result of the first phase, average settlement time reduced by one hour, and the aggregate liquidity requirement was reduced by 2 trillion yen. Furthermore, a new clearing system is acting as a catalyst for companies’ efforts at optimising cash and treasury management in Japan, as Ricky Kaura explains,
“The changes in payment clearing allows newer products to be offered, and is also triggering changes in behaviour amongst corporates in Japan. We are seeing a more aggressive stance by international corporates to link their Japanese operations into their global infrastructure.”
Change does not happen overnight, and it takes time for organisations and individuals to adapt and respond to new opportunities, but the central bank and regulators in Japan are undertaking reforms that will better align Japanese markets and institutions with their international counterparts and promote greater transparency. The Better Market Initiative does not mark the end of banks’ and regulators’ change objectives; for example, Bank of Japan proposals for further dovetailing with international accounting standards between 2013 – 2016 are currently open for public consultation. While many of the reforms would seem to affect banks, insurance companies and investment firms, they also create greater opportunities for ‘buy side’ market participants, particularly corporations. With economic pressures globally, the drivers for greater efficiencies and centralisation amongst corporate treasuries and finance departments have already become compelling, but each element of the reform programme helps to accelerate and support change within a business. Achieving cohesion in accounting standards, next-generation RTGS and greater opportunities for investment and hedging will all be important developments for corporates. Over time, these measures are likely to result in greater synergies between Japanese corporate treasuries and their foreign counterparts, and greater integration of Japanese operating units within the global business.
We would like to thank Ricky Kaura, Head of Treasury Services – Japan, J.P. Morgan for his kind assistance with this article.
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