Insight & Analysis

Japanese corporate treasury returns home

Published: Feb 2018

Japanese corporates are beginning to consider Japan as a global treasury centre location. Treasury Insights finds out why and what this means for the treasury profession in Japan.

Japan is not often top of the agenda when discussing where best to build a corporate treasury centre in Asia. Even finding a Japanese company running a global or regional treasury centre from Japan is rare. Instead, companies have typically opted to run decentralised treasury structures or centralise in Europe or the US.

And yet Japan has many of the necessary components to make it a world-class treasury centre location. With an open economy, an excellent business infrastructure, a highly educated workforce, strong rule of law and a deep and liquid financial market, it makes for the perfect location.

Change is in the air according to Isao Kojima, Head of Treasury Services, Japan at J.P. Morgan. He notes, as several forces press Japanese corporates to rethink their global treasury structures and look to Japan to base a global treasury centre.

Unique development

The fact that Japan is home to so few treasury centres is largely due to the unique way that Japan Inc. has evolved in recent years.

Since the turn of the century, domestic economic conditions have led many Japanese companies to head overseas in search of growth. Indeed, since 2006, Japanese cross-border M&A activity increased significantly in absolute size and share of global M&A volume.

Significant deals include SoftBank’s US$36bn acquisition of Sprint and US$32bn acquisition of ARM; and Japan Tobacco’s US$19bn acquisition of Gallaher and US$8bn acquisition of R.J. Reynolds’ international tobacco business.

Whilst M&A activity in search of growth is not unique to corporate Japan, what is unique is how the Japanese parent company often leaves their new international affiliates to operate independently.

Although this strategy has been successful in terms of revenue, it also poses problems. Most notably, Japanese headquarters often have very little control and visibility over what is happening in their overseas entities. This is not in line with global best practice and is partly why several Japanese corporates have fallen victim to high-profile scandals that have occurred in their overseas entities in recent years.

These incidents have given Japan Inc. a wake-up call, leading many companies to move towards adopting global best practices around risk and treasury management. “This means achieving global visibility and control through centralisation,” says Kojima. “Something that few treasury departments in Japan have focused on much before.”

Established ecosystem

The development of the Japanese financial ecosystem, and the products and services offered by banks, is also helping fuel the development of global treasury structures in the country.

Kojima explains that Europe, and specifically London, has been the preferred location for Japanese companies to establish centralised treasury structures, such as a global cash pool. It made sense because companies were able to build follow-the-sun sweeping strategies, moving funds from Asia to Europe, and thereafter to the US, within a 24-hour cycle.

In Japan, time zones and clearing cut-off times mean that this did not work. “In recent years, banks in Japan have addressed this by allowing against-the-sun sweeping structures to be built – whereby the movement of funds is from Europe to Asia,” says Kojima. “The central bank has also extended the opening time of the clearing system and been more flexible in allowing certain payments to be processed later.”

In addition, political uncertainty and the dip in interest rates in Europe has also led Japanese companies to think about bringing more cash back home. “There is not much advantage, from a yield perspective, to pool and invest cash in Europe compared to Japan,” explains Kojima. “In fact, the gains achievable through greater efficiency and control are higher than any yield pick-up.”

The treasury technology landscape in Japan has also developed markedly in recent years. This is allowing teams to gain global visibility over cash and put in place controls to manage it efficiently around the world.

A long time coming

The build-up of global treasury centres in Japan can only be a good thing for the profession overall, says Kojima. Indeed, it would be fair to say that corporate treasury in Japan has been a step behind its other developed market peers when it comes to sophistication and the move from operational to strategic activity.

“Japanese companies are bringing over foreign talent, or recalling locals that have had overseas exposure to international best practice, to head up these global treasury centres,” says Kojima. “As a result, treasury is breaking down its operational walls and getting involved in the business and bringing in new ideas.”

One area where this is readily apparent is in the supply chain space, adds Kojima. “We are working with a number of corporations to drive improvements in the cash conversion cycle and free up previously trapped working capital.”

On the up

There is still some way to go before the sophistication of corporate treasury in Japan matches its peers in other markets such as Singapore and Hong Kong, but it is certainly on the way to doing so.

Kojima expects to be helping more clients establish treasury centres in Japan over the coming years. The innovation in Japan’s financial ecosystem also excites him, as this should ensure the country maintains its status as one of the world’s leading financial centres and help establish the country as a leading treasury centre destination.

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