Regional Focus


Published: Jan 2013

Once the dream economy of the East and heralded in the 1970s and 1980s much as China is now, Japan remains the world’s third largest economy. It has a nominal GDP of $5.87 trillion, despite having one of the biggest national debts in the world and enduring the Lost Decade of the 1990s.

Japan has suffered from falling prices for two decades and this autumn experienced its fourth recession since 2000. Yet this protracted deep deflation in Japan paradoxically provided a model for the rest of the world. When the financial crisis hit, the G7 nations quickly implemented a near-zero interest rate policy, effectively imitating Japan’s policy.

However, there is a real danger inherent in this policy. Analysts are now warning of the ‘Japanification’ of the world economy – ie the threat of an extended period of stagnation or negative GDP growth.

The flagging Japanese economy proved to be the deciding factor in the recent elections on 16th December 2012. After a three-year absence, the Liberal Democratic Party of Japan (LDP) was re-elected based on a pledge to revive the Japanese economy. Almost immediately afterwards, the central bank – Bank of Japan (BOJ) – extended its asset purchase programme, aimed at keeping borrowing costs down, by Japanese yen (JPY) ¥10 trillion ($119 billion).

The Japanese government is expected to raise its economic growth forecast for the next fiscal year to above 2% on hopes that its planned fiscal stimulus package will boost growth. It is also keeping up pressure on the BOJ to step up its monetary stimulus, even after it loosened policy in December for the third time in four months.

Prime Minister Shinzo Abe said he would consider changing the law governing the central bank unless it boosts its inflation target. The BOJ has already signalled it may set a higher target at its 21st-22nd January meeting, despite market participants expressing disbelief that it has the means to achieve it.

Rebooting the economy

According to International Monetary Fund (IMF) data, net government debt is estimated to be 135% of GDP in 2012 and on current projections government debt will reach 164% of GDP in 2016. The overwhelming majority (95%) of the debt on issue is held domestically.

Many market analysts have predicted the imminent demise of Japanese economic power, fuelled by its unorthodox government bond scheme. In a recent paper, UCSD Professor Takeo Hoshi and University of Tokyo Professor Takatoshi Ito ask an interesting question: how long can Japanese bond prices defy gravity? They argue that the key feature that has kept this process going has been that 95% of the Japanese government debt is domestically owned. “Japanese residents put their savings into banks and insurance companies, who along with pension funds lend to the government at very low rates. But as more Japanese retire from the workforce, that is likely to change dramatically,” according to Hoshi and Ito.

As the number of people investing from within the country grows smaller, domestic banks are called upon to subsidise the deficit. Hoshi and Ito report that Japanese banks collectively hold about ¥142 trillion of central and local government bonds as of the end of March 2010. This is about 32% of total bank loans.

While the top banks are losing their places at the top of the global rankings to their Chinese rivals, overall, Japan’s banks are holding their own, according to The Banker’s 2012 survey of global banks.

Top four Japanese banks

  1. Mitsubishi UFJ Financial Group.
  2. Mizuho Financial Group.
  3. Sumitomo Mitsui Financial Group.
  4. Norinchukin Bank.


According to Asian Development Bank’s (ADB) ASEAN+3 Bond Market Guide, Japan offers a wide range of financial tools to meet a range of issuer and investor requirements. Aside from traditional instruments such as loans, corporate bonds, and commercial papers, securitised products are also available in Japan’s credit market. The Financial Services Agency (FSA) supervises the capital market of Japan.

After the global financial crisis in 2008, despite showing downward trend in the second half of 2008, the corporate bond market has shown relatively steady recovery towards 2009 and 2010. The 11th March 2011 earthquake and tsunami hit the market, and the performance of the first half of 2011 showed a slowdown.

The country’s stagnant economic growth is characterised by a lack of natural resources, an export market that remains well below its import market and, at times, a tempestuous trade relationship with other Asian countries. Over the past 20 months, the economy has maintained a stable footing, allowing economists to turn to the more long-term worries for Japan’s continuing success.

With interest on government debt rising and exports to Europe and China down, the latter dramatically due to the disputed Senkaku/Diaoyu Islands, questions for future prosperity will revolve around the newly-elected government’s ability to increase foreign confidence in Japan and to begin to devise solutions for the ongoing debt situation.


Japan is a member of the Asia Pacific Economic Co-operation (APEC), the World Trade Organisation (WTO) and an ASEAN partner. The country has free trade agreements (FTAs) in operation with:

  • Mexico.
  • Singapore.
  • Malaysia.
  • The Philippines.
  • Indonesia.
  • Thailand.
  • Brunei.
  • Chile.
  • Switzerland.
  • Vietnam.

FTAs with India and Australia, which are under discussion, would further strengthen the country’s trade capabilities.

The diplomatic ruptures with China have dealt a blow for those who wish to see Japan’s trading potential strengthened. Total exports fell 6.5% in October from a year earlier, sharper than a 4.9% fall forecasted by economists, leading to a fourth straight monthly trade deficit.

In addition, the Ministry of Economy Trade and Industry reported that industrial production fell 1.7% in November 2012 from the previous month. Compared with the same month a year earlier, it was down 5.8%.

Following on from the natural disaster of 2011 there were hopes in Japan that focus might shift positively to more inspired ways of preserving the country’s future prosperity and endurance. One such way that potential benefits to a change in outlook are being observed is in the approach to energy. Nuclear power accounted for almost one-third of Japan’s energy supply before the reactors were shut. The radiation worries and resulting backlash against nuclear energy has meant that Japanese companies are hungrily buying from Malaysia, Australia, and the US, as well as across Africa. Japan is already the world’s largest importer of natural gas.

The large changes to global trade following from 2008’s crisis have by no means stabilised. As the Eurozone crisis continues, the region’s banks, under rising political pressure to shore up capital at home in markets that are barely growing, are cutting lending to emerging markets.

Many French banks, including BNP Paribas, Société Générale (SocGen) and Crédit Agricole, have retrenched due to a lack of US dollar reserves, which is the currency for the majority of global trade financing. They are choosing not to play in a region now dominated by US banks, such as J.P. Morgan, Citi and Bank of America Merrill Lynch, large international banks including Standard Chartered and HSBC, and domestic Japanese banks. The latter are being bolstered by domestic corporates expanding into other areas of Asia, eager to gain traction in the quick-evolving and growing economies of previously minor Asian economic powers.

Although initially a shift of the locality of those financing trade may have provoked fears that there would be a reduced pool for Asian companies to borrow from when exporting, it seems it is a straightforward locality change in where the money is coming from. In this shift it has thus far been the Japanese banks that appear, up to now, to be coming up on top. Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group have a 16.6% and 9.6% market share respectively, massive increases on their representations in 2011 additionally meaning that Mitsubishi UFJ is now the top market shareholder.

As intraregional trade flow increases and Japanese companies expand their reach into new markets, complex structured hybrid trade finance models are becoming increasingly important.


Domestic retail banking operates in a country in which the majority of payments are still made in cash. Although viewed by much of the world as a technological superpower, the reality is that in terms of day-to-day functionality plastic cards, although gaining in popularity, are still not used at the same level as other developed countries. Large retail companies, therefore, will be balancing books that are dominated by cash payments.

Direct debit is the most common payment method for all regular consumer to business payments, ie utility and rental payments, etc. Cheques, on the other hand, are uncommon and mostly used by corporates. Companies pay employees mainly through direct credit into their bank accounts. Electronic payments (e-payments), made real-time via Zengin System, are steadily gaining in popularity due to the widespread use of electronic devices and smart phones.

As intraregional trade flow increases and Japanese companies expand their reach into new markets, complex structured hybrid trade finance models are becoming increasingly important.

Systems managing inter-bank payments in Japan are divided into private sector clearing networks, domestic funds transfer system and the foreign exchange (FX) JPY clearing system. Alongside these run ATMs, which have a high importance as e-payment mechanisms in Japan, according to the Japanese Bankers Association.

There are four major payment systems for clearing and settling inter-bank payments in Japan – three clearing systems in the private sector and a funds transfer system operated by the central bank. In 2009, the securities settlement systems were reformed and wide-ranging progress has been made.

Postal accounts and postal giro services, provided by the government-run Post Office, are also popular. Similar to the rest of Asia, the pick up of electronic transfer systems has been widespread in the Japanese banking system.

Foreign exchange controls

Foreign Exchange and Foreign Trade Law (April 1998) gave companies in Japan greater flexibility in managing foreign currency, trade settlement, and subsidiary funding. There are five key law revisions:

  1. Cross-border capital flow liberalisation.
  2. Free market for foreign currency exchange.
  3. Overseas accounts.
  4. Multi-lateral netting.
  5. Allow domestic trade in foreign currency.

Japan resident entities are responsible for all regulatory reporting.

Export and import controls are imposed following the UN sanction.

Export and Import of certain products are prohibited or require specific licences.

Source: NCL Report

Cash management

Companies operating in Japan have the choice of a variety of short-term funding alternatives, with a range of short-term investment instruments. Most Japanese companies tend to rely on cash concentration as a means of managing individual company and group liquidity.

Zero balancing is the most widely used liquidity management technique. Notional pooling, which is available in Japan, is infrequently used by companies because the tax implications surrounding the technique in Japan are unclear and can make the whole process overly complicated.

Discussion of FX in any part of Asia is dominated by talk of the rise of the renminbi (RMB) as an international currency. Japan is no different, and exposure to the RMB and developments around its use as a trade currency will only grow increasingly pertinent.

As SunGard highlights in a November 2012 survey report, FX risk exposure, credit and interest rate risk remain top priorities for Japanese corporates. ‘As a company’s global exposure increases, FX volatility can have a greater impact on profits, product pricing, and performance,’ according to the SunGard report.

Attracting top talent

Japan has attracted a number of international companies over the decades; it is a wealthy country with a strong and loyal consumer population.

It is often said, however, that it is one of the hardest of the developed countries for global brands to break into and to do so requires a deep commitment to the Japanese operations. Multinationals are confronted by challenges including opaque regulation, comprehension challenges and market impenetrability. This is not a country that companies can do a ‘smash and grab raid’, but requires a long-term approach which, when done correctly, can reap vast rewards.

One problem that multinationals must solve is how to attract, retain and get the most out of the local labour pool. The successful integration of domestic management into international teams adds layers of complexity. As Japanese companies looking abroad for growth must learn to rely further on in-country management, so must multinational companies do so in Japan.

An Economist Intelligence Unit (EIU) survey from November 2011 polled the opinions of multinationals operating in Japan and the problems that they face. Just over half (54%) of the non-Japanese corporate respondents were satisfied with recent hires in specialised and managerial positions in Japan, while 20% reported being unsatisfied or highly unsatisfied with their recent intake in Japan. This reflects the complexity of recruiting local talent in a country where the established Japanese company will have greater authority in securing talent.

Most elite Japanese graduates will be drawn to the big Japanese names, with joining a foreign company still being thought of as a risk. Just as Japanese consumers are wary of foreign brands which appear and disappear within a short timeframe, so too are their workers when looking for a job. Aside from this prudence on the part of Japanese talent, Japanese workers are also concerned about the day-to-day practicalities involved with working for a foreign company.

The shrinking working age population is also an issue to bear in mind – Japan’s elderly population, aged 65 or older, is forecast to increase to 38% of the population by 2055.

Japan has attracted a number of international companies over the decades; it is a wealthy country with a strong and loyal consumer population.

The simplest, yet most persistent problem for multinationals operating in Japan remains that of language skills and capabilities. The majority of the Japanese workforce have a low level of English capabilities and are not aggressive in honing and quickly acquiring these skills.

Other persistent problems with Japanese employees are symptomatic of the cultural differences – there is not much encouragement in Japan for individuality either in general society, at school or work. Loyalty and a communality of approach are stressed as positive attributes, but also could have the effect of inhibiting creativity and leadership in business.

Alongside this cultural clash, however, runs the excellence in technical skills, attention to detail – and loyalty. If foreign multinationals can employ creative leaders to work alongside the Japanese workforce and encourage a change in approach that is aligned with the company’s global aims, as well as support foreign language education, then they will reap the rewards. Japan is a country rich in potential and possibilities for multinationals that can tailor their approach for a unique, yet richly rewarding, opportunity.

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