Regional Focus

Japan turns towards a digital future

Published: Mar 2022

Japan is both a high-tech and low-tech country, and the recent pandemic exposed the worst of its inefficiencies. In response, in part driven by the government’s push for digitalisation, corporates and banks in Japan are transforming their processes.

It is the land of shinkansen high-speed bullet trains, automation, robots, and so many other innovations. Yet Japan is also burdened by a heavy reliance on cash, paper documents and the physical hanko seal to sign them.

In this respect, Japan is a mass of contradictions, which have been laid bare by the pandemic and pushed the country down a path of digitalisation.

“The Japanese factory floor is highly automated with industrial robots, but in the back office there is a huge efficiency gap. We have got robotic machines doing things, but at the same time Japan is a world leader in fax machines,” says Jim Weisser, Co-Founder and CEO of SignTime.

This is something that Jaime Moreno, CEO and Founder of Mormedi, a strategic design and innovation consultancy that has worked on a number of projects in Japan, has also observed. He comments how Covid affected different economies in different ways: “It showed what was working well and what was not working well.” In Japan, it exposed the manual and bureaucratic nature of many of its processes.

The public sector had become inefficient over years, with a reliance on paper and manual processes, and many outdated systems. With 1,700 local governments all with their own systems, the Covid crisis brought things to a head. “The central government realised it had a problem,” says Moreno. The Prime Minister Yoshihide Suga pushed for the country to digitalise and in September 2021 the government launched the Digital Agency, which was tasked with transforming the public sector.

One issue in Japan has been the need for official documents to be signed with a hanko, or ‘chop’, a stamp that has a unique carving for each user. In a previous interview with Treasury Today, Makoto Hasegawa, Head of Transaction Banking, Japan at BNP Paribas, explained how the official corporate hanko is kept in a safe at the office and needs two people to approve its use. “The company chop does not actually match the [current] world culture, where most people are now expected to work from home,” she said. This pushed the bank to find digital alternatives for its clients.

This is something that Weisser of SignTime has also been developing and his company digitises the contract process, signatures, and has an e-hanko solution. Weisser comments that in Japan it is not natural to sign something – even if you are receiving a parcel, for example. In that situation the individual would use a personal chop – which, unlike a company one isn’t officially registered – and is still natural to use this instead of a handwritten signature.

Although digital signatures have been accepted and used for a number of years, Weisser says in practice people have not used them that much. “If you go to the regulator, for example, with something that is digitally signed they will say ‘where’s the paper version’,” he says.

He still says this is a blue ocean market as there is very little market penetration. “What we find when we start talking to people and ask them if they have ever used one before, you will find they have seen it before but you rarely find someone who has signed a contract in this way,” says Weisser.

Beyond the legal and regulatory recognition of digital versions of signatures, it is still hard for people to adjust. “The practice [of using it] has been the harder part,” says Weisser. With a loan agreement, for example, people will still want a wet signature and a physical version, he adds.

With the pandemic, and the broader government drive toward digitalisation, however, things are likely to change. The banks are also part of this effort to help clients with the change in mindset.

It’s not that Japanese banks haven’t been innovative, however. In fact, the banking sector has been forward-thinking and introduced innovation that were not seen elsewhere in the world for decades afterwards. Michael Aragona, Head of Cash Product, Mizuho Americas, describes how Japan has experienced ‘Galapagos Syndrome’ – a term that draws on the evolutionary theory of Charles Darwin – because many technological advances have developed in isolation from the rest of the world.

As an example, Japan had a concept back in the 1980s that would now be described as a tool to enable in-house banking, says Aragona. Corporates had a terminal that connected to an automated system that pooled data and cash balances from banks and meant that treasurers could see all of their account balances on a single screen. However, this innovation only served the local market and it was dependent on the Japanese language. This kind of innovation wasn’t developed or employed outside of Japan for many years.

This Galapagos effect also applies to payments, which have caused corporate treasurers – and transaction bankers – problems when dealing with Japan’s domestic systems. “Corporate treasurers in the Americas or Europe have real trouble integrating Japan into their banking network – that is the biggest challenge,” Aragona tells Treasury Today Asia.

One issue is the language: “Everything is done in Katakana,” he explains. This has meant that some international corporates – and international banks – have left Japan out of their regional structures, such as regional treasury centres or shared service centres because the quirks of the local systems are too difficult to navigate, especially if they do not employ Japanese-English translators. And when translators are used, the translation has to be done accurately. The clearing for the instant payment network Zengin has to be automated, and if the translation is not perfect – for names and addresses, for example – the payment is rejected, comments Aragona.

Any payment that is done in English (or the Latin alphabet) is generally considered a cross-border payment – because of Japanese regulations – even if it is being done domestically. This means the charges are much higher relative to the fees for the domestic network. This causes something of a dilemma for corporates, and they must decide whether they want to invest in the translation or the services available that can bridge this gap.

Japanese banks are addressing these issues, notes Aragona, and it is possible for them to provide Katakana payment templates, which enable flexibility, get payments formatted in the right language, and also fulfil the local regulatory reporting requirements. There is also a role for fintechs to play in collaborating with banks in Japan to overcome the various hurdles of connecting to the local systems, says Aragona. “Navigating the domestic transfer market is tough, but with understanding and flexibility corporate treasurers can enjoy the benefits of both worlds,” he adds.

The language is not the only hurdle to transforming treasury solutions, however. Moreno comments that the design process itself can be hindered by the hierarchy of an organisation. There is a sense, he explains, that because something has been designed or come from someone else “no one thinks of improving it” almost out of respect for what has been done before. “It requires a change of mindset,” he comments. Japan does have the advantage, however, he says of being able to follow other countries that have been on a similar digital transformation journey. “It is much easier to learn from others who have done it best and do it quickest and apply it. There is already a proper benchmark for them to learn the best practices very quickly,” says Moreno.

Commenting on the current state of the country’s journey, David Samach, a Tokyo-based Partner at Deloitte Tohmatsu Consulting, comments that Japan’s digitisation is still very much in flight. “We are seeing great advancement and activity in areas such as cloud adoption, digital currencies, automation and artificial intelligence (AI). However, this is fragmented, and there is a tremendous amount of manual activity that persists,” he says, adding that this applies to both banks and corporate treasurers.

Samach continues: “Broadly speaking the local and regional banks are highly manual and in the early stages of moving towards digitisation. The megabanks are fragmented within themselves, but their payment and transaction banking offerings are based on legacy infrastructure and projects to modernise are just starting to mobilise presently.” These projects will take some time, he adds, because of the need to maintain stability in the systems – any failure would have direct financial implications. “The foreign banks also play a role in this space and we are seeing increasing competition and innovation from them in Japan,” says Samach.

On the corporate side, Samach comments there is more digitisation occurring in the larger multinationals and trading companies that have more complex cash management and liquidity needs, especially those who have or are implementing cloud-based ERP [enterprise resource planning] systems.

Samach comments that banks do have a lot of data already, but most have not started applying analytics and AI to their data sets for the benefit of their clients. “This will start to happen soon, and banks will be able to use predictive analytics to anticipate corporate flows of funds which could have real financial benefits considering liquidity and cash management, and anticipating future fund raising needs,” says Samach.

Another area that is set to improve for corporates and banks in Japan is in trade finance. This is – like many other aspects of treasury solutions – still being done manually. Kyoka Li, Director of Sales at Surecomp – a trade finance software and solutions company – explains that from speaking to banks and corporates in Japan, “It is clear to see that – thanks to the pandemic and increasing ESG [enviromental, social and governance] pressure to reduce the use of paper documents – Japan’s trade digitisation efforts are now ramping up.”

Li notes there has been a lot of investment from the mega banks in Japan in blockchain and in building networks to connect to their corporates and facilitate document sharing. “However, for the regional banks and their clients who are mostly small and medium enterprises, the extent of development is limited, and banks are still servicing their clients through physical paper, fax and email-based communication and processing,” says Li.

Things are changing, however, and Surecomp’s SVP of Strategy, Digitisation and Business Development, Enno-Burghard Weitzel, says, “Now is absolutely the time for Japanese corporates, big and small, to start demanding change from their banks. After all, in the consumer world, Japan like all the other G7 countries, is saturated by digital services and we have come to expect nothing less. So why should it be different in business, especially in the world of trade which is fundamental to the countries’ economic health and wellbeing,” Weitzel says. “If banks are forced to digitise their trade finance operations in order to provide a better customer service, the corporates are not only the drivers of change, but the beneficiaries of it and facilitators of growth,” he adds.

Corporate treasurers have the opportunity to be in the driving seat of the digitalisation of many of the treasury processes. With changes already afoot, perhaps it won’t be long before corporate treasuries are run like a high-speed shinkanen bullet train.

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