Japan, the world’s third largest economy, is home to some of the most innovative companies on the planet. Yet the role of corporate treasury in Japanese companies remains largely siloed and operational. Treasury Today Asia finds out why this is the case and hears how the profession in the country might be approaching a new dawn.
Japan Inc. is thriving, driven by improved domestic growth, a broader uptick in the global economy and record earnings at overseas subsidiaries. This has seen the 200 companies listed on the SMBC Nikko Securities section of the Tokyo Stock Exchange report pre-tax profits of US$55bn between April and December last year – up more than 14% from the same period in 2016.
Increased profits are adding to the already significant cash war chest held by Japan Inc. Indeed, as of March 2017, Japanese companies, excluding banks and insurance companies, collectively held a record-high JPY189trn (approximately US$1.7trn) in cash and cash equivalents on their balance sheets. As of the end of the year, these same companies owned cash worth more than 140% of Japan’s GDP. This is more than three times higher than the 43% of US GDP equivalent held in cash by American companies.
Despite being built as a buffer against future economic crises, some commentators claim such a degree of cash hoarding is preventing Japan from reaching its economic potential. This is because corporates are not increasing wages, a move that would help boost domestic spending power and allow Japan to drive more sustainable economic development, rather than relying on exports.
Stagnant growth of treasury
Cash hoarding is also preventing corporate treasury departments in Japan from achieving their full potential. “The main job of corporate treasury in many Japanese companies is to obtain external funding for the business,” says Kaoru Ito, Director at Deloitte Tohmatsu Consulting. “The fact that many Japanese corporates have such high levels of cash reserves means that there is little need for external borrowing, however. Because of this, in the eyes of senior leadership, treasury is not a business-critical function within the organisation.”
With treasury in Japan not having the kick-start it has had in other parts of the world, the role remains largely operational, says Ito. “There are also few treasury subject matter experts in Japan as staff are often rotated in and out of the department every two to three years as part of a systematic job rotation programme. There are some exceptions to the rule, where treasury has broken down its operational silo and become more strategic, but these are rare.”
Era of global treasury
Corporate Japan is slowly waking up to the benefits a professional and strategic treasury department can offer. Ito notes that several high-profile financial incidents caused by overseas affiliate companies in recent years have made Japanese companies place a renewed focus on corporate governance and prudent treasury management.
Isao Kojima, Head of Transaction Services, Japan at J.P. Morgan, echoes this point, saying that corporate treasury in Japan has not become a strategic function in the way that it has in other parts of the world. However, he is gradually seeing more treasury departments step away from being process driven, involving themselves in the business and looking to mirror global best practice.
For Kojima, treasury best practice means global visibility, control and centralisation, something that few treasury departments in Japan have had before. “Japan Inc. is quite unique in how it has gone global,” he explains. “Typically, Japanese companies created subsidiaries in growth markets and let them run themselves – intervention only occurred if there were serious issues.”
Although this approach has been successful for many Japanese companies, it has not necessarily been the most efficient, at least from a treasury perspective. “Treasury in Japanese companies is managed at a country level or regional level, but there is very little global oversight bringing it all together,” says Kojima. “This prohibits best practice and often results in less than optimal cash management arrangement and increased costs.”
Japanese companies hold US$1.7trn in cash and cash equivalents on their balance sheets (March 2017).
The return of overseas talent and the current wave of Japanese corporates conducting overseas M&A is transforming the thinking inside Japan Inc., says Kojima. “Our clients are aware that their businesses are becoming significantly more complex and they want that global visibility to optimise and control how global cash and liquidity is managed, as well as drive costs out of the business. Those that are slightly more advanced are also looking at managing FX risk and global funding centrally as well.”
Due to these trends, Kojima is seeing more and more Japanese corporates set up global treasury centres in Japan. “Many Japanese corporates have wanted to do this for some time, but there were several challenges that prevented efficient liquidity structures being created, such as clearing cut-off times, for example.” Improvements in the clearing system and innovation from banks through follow-the-sun and against-the-sun sweeping structures have changed the game, says Kojima. “Banks are now able to offer the efficient liquidity structures that allow Japanese corporates to manage the world from their headquarters and thus we are seeing an increase in activity.”
Ups and downs: Japan’s post-war economic history
Japan has a reputation for incredible efficiency. Just look at its rail network. The latest data available from the Central Japan Railway Company, one of the country’s main railway operators, shows the average high-speed bullet train arrives at its final stop just 0.9 minutes late. Compare this to the UK, where research shows that about 57 trains are significantly late (30 minutes to two hours) every day. Or New York, where commuters collectively spend 35,000 hours each day waiting on delayed trains.
Efficiency isn’t just evident in Japan’s transportation system: it flows through the very core of Japanese culture. This has had a big role to play in the country’s post-war economic success that has made Japan one of largest and most advanced economies in the world – a success that has been called the ‘Japanese Economic Miracle’.
Many factors contributed to this economic miracle – not least the successful economic reforms adopted by the government post-war, pivoting the economy towards the production of raw materials and putting the country to work. Doing so rapidly converted Japan’s militarised economy to drive peaceful economic development, enabling some companies in the automotive and technology space to become world leaders.
Boosting this was ‘keiretsu’ – the formation of sets of companies with interlocking business relationships and shareholdings. This helped create harmony amongst corporate Japan, protecting companies from stock market fluctuations and takeover attempts thus enabling long-term planning in projects.
The forging of close ties with the United States also had a significant impact. The relationship saw Japan invited to participate in US-led free trade programmes. This gave companies the ability to thrive on the international stage with low tariffs, cheap access to oil and other raw materials needed for industrial development.
Because of these and other factors, Japanese industrial output reached pre-war levels by 1951 and exceeded them by 350% just ten years later. Economic growth was just as impressive, with Japan posting an average growth of 10% in the 1960s, 5% average growth in the 1970s and a 4% average in the 1980s.
In the 1990s the tide turned, however, as Japan went from growth to stagnation following the Japanese asset price bubble’s collapse in late 1991. Throughout this period, commonly referred to as the ‘lost decade’, GDP fell from US$5.33trn to US$4.36trn in nominal terms, real wages fell around 5% and Japan’s stock markets hovered near record lows. Excessive business and consumer saving, an ageing population and monetary policy are just a few of the factors that contributed to the lost decade.
The lost decade became ‘Ushinawareta Nijūnen’ (which translates to ‘lost decades’) as the economy continued to stagnate at the start of the 21st century. Since then, however, reforms implemented in 2012 by Prime Minister Shinzō Abe have turned the tide. Regarded as one of the biggest economic experiments the modern world has ever seen, Abenomics centres on three pillars: an increase in fiscal stimulus through government spending; an increase in monetary stimulus through unconventional central bank policy; and a reform programme aimed at making structural improvements to the Japanese economy.
Six years on, there has been much debate on the relative success (or not) of Abenomics. It certainly has not solved all issues; weak domestic consumption and huge debt levels remain. However, the economy is much stronger with aggressive monetary policy fending off the deflationary malaise of previous years. Indeed, Japan recorded seven straight quarters of economic expansion to the end of September 2017, its longest uninterrupted stretch of growth since 1994.
Best in class
Japanese automobile giant Nissan is a company that is leading the way when it comes to treasury sophistication. Its multicultural corporate ethos has seen it adopt global best practices, unlike many other Japanese companies. This includes senior management recognising the value of a strategic treasury department. As a result, Nissan has built a 60-person strong treasury team at its headquarters in Yokohama. This supports regional treasury teams in North America and Europe and drives the strategic direction of the treasury globally.
“It makes no sense for there not to be a global treasury team based here in Japan,” says Nissan’s Senior Vice President, Global Treasury and Global Sales Finance, Rakesh Kochhar. “The job of the global treasury is not just to raise money and make payments – you can do this anywhere. It is about providing senior management with strategic advice around M&A; it is about managing risks that span across the business; it is about working with sales and procurement to ensure that we are conscious about cash and making the right decisions. To do all of this you need to sit where the decision makers are.”
Thankfully, Japan offers all the ingredients required to make an excellent global treasury centre location: good talent, good systems and good banks, says Kochhar. In fact, having worked in other parts of the world, Kochhar is confident in saying that it is just as easy to run a global treasury from Japan as it is in any other liberal financial centre.
Indeed, there are instances where life as a treasurer in Japan is easier than in other key treasury centre locations. Kochhar highlights the regulation governing the asset-backed security (ABS) as one example. “This is an instrument we often use to raise funds. In Japan, I am able to complete a transaction in ten days,” he says. “In the US, it takes 30 days minimum because of various reporting that has to be done. This is just one example, but across various areas of finance I see Japan being an easier place to do business than the US.”
The need to be close to Nissan’s core banking partners also offers a compelling reason for the global treasury to be based in Japan. “We have a group of 18 banks globally, many of which are Japanese,” says Kochhar. “Whilst I have found that Japanese banks operate in much the same way as US or European banks, it is true that they place a greater emphasis on the relationship. Sitting in Japan, next door to their head offices, helps me craft these relationships and get the best price for funding.”
Banking on technology
Historically, Japanese banks – with their enormous balance sheets – have been famed more for their ability to lend to corporates around the world, and less for their transaction banking capabilities. This, however, is beginning to change as Japanese banks invest heavily in this part of their business to build up their transaction banking franchise around the world.
The country’s biggest lender, Bank of Tokyo-Mitsubishi UFJ (MUFG), has been especially determined, with transaction banking being made part of the bank’s overall medium-term growth strategy. This has seen the bank make high-profile hires around the world, including ex-J.P. Morgan banker Ken Stratton in Singapore; Yong Lee Boon in Hong Kong, who arrived from Standard Chartered; Michael Hogan, who joined from National Australia Bank and will lead the team in London; and experienced ex-Wells Fargo GTS specialist, Ranjana Clark in the US.
Japanese banks are also serious about technology, especially in the blockchain space. Last year, news emerged of a consortium of Japanese banks that are planning to use distributed ledger to make domestic and international payments. Later in the year, more news emerged stating that Japanese banks plan to introduce a digital currency ready for the 2020 Tokyo Olympics. ‘J Coin’ as it is known, is an electronic currency designed to pay for goods and transfer money using smartphones. It would be convertible into yen on a one-to-one basis, operating via a smartphone app and using QR codes to be scanned in stores.
More broadly speaking, digitisation is crucial if Japan is to achieve its economic ambitions in the coming years. “Japan’s declining birth rate and ageing population means that it is crucial that companies look to adopt new technologies, such as the Internet of Things (IoT), big data, artificial intelligence and robotics to create new growth industries,” says Masahiko Morio, Chief Manager, Economic Research Department at MUFG. “Technology can also help plug the gaps left by a shrinking workforce.”
To achieve this, Morio calls for the Japanese government to support innovation and industrial restructuring through growth strategies and regulatory reforms. “They should also consider establishing a regulatory sandbox and simplifying administrative procedures.”
A bright future?
Japan as a nation certainly has lots to look forward to over the coming years, as it hosts the Rugby World Cup in 2019 and the Summer Olympic Games in 2020. Beyond that, Nissan’s Kochhar predicts a bright future. “The economy has been doing well in recent years,” he says. “And it will continue to do well because it believes in innovation and harnessing new technology.” This is reflected in a revised forecast from the IMF, predicting that Japan’s economy will grow 1.2% this year, up 0.5% from its October estimate. This is largely due to the broad-based global recovery gathering steam.
Whilst global growth is benefiting Japan’s export-heavy economy, the world remains in an uneasy space and a reversal in economic trends could bring recession back to Japan. Domestic demand driven by consumer spending is highlighted as the key to creating more long-term sustained growth in Japan. However, at present, domestic consumption remains flat as wages in Japan have stagnated over the past five years, despite healthy corporate profits and a competitive labour market. Prime Minister Abe has urged businesses to up wages, but Japan Inc. is yet to respond with vigour.
Japan’s unbalanced demographics pose a further challenge. Indeed, Japan’s increasingly ageing population has the highest spending power in the country – but is reluctant to spend, stunting domestic consumption. The ageing population, combined with the record-low birth rate, may also bring labour challenges further down the line. To combat this, Japan is quietly opening up to increased immigration. Since 2013 the resident foreign workforce has in fact steadily risen, growing 40% since 2013 alone.
From a corporate treasury perspective, the influx of overseas talent can only be positive for the profession in Japan, says Kochhar. “Japan is a fantastic place to live and to work in treasury. Therefore, if the opportunity is there for treasury professionals from around the world to come to Japan to work, I would expect them to take it. In doing so, they will bring overseas expertise and raise the standards of corporate treasury across the country.”