Corporate culture in Japan is known as an enigma in the international business world. The existence of ‘tied’ relationships between banks and corporates and also language barriers have meant that treasury management best practice, particularly with regard to regional outsourcing, has not been embraced as quickly as in other Asian markets. There are signs things are changing, as William Cain reports
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Japan was for some time the first port of call for corporates looking to expand their businesses in Asia-Pacific.
Strong post-war economic growth established it as the world’s second-largest economy until early 2011, when it was overtaken by China. While Japan remains Asia’s wealthiest economy, its influence as a corporate hub and treasury and cash management centre has waned somewhat. Its economy has been at stall speed for almost two decades and now corporates are more actively courting Asia’s emerging middle class population.
The business hubs of Singapore and Hong Kong have become more popular destinations for corporates to set up their Asian headquarters given their location at the heart of emerging Asia and also the significant tax incentives on offer for setting up treasury centres there.
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By GlobalDataDespite now playing second fiddle to China in the world GDP rankings, Japan still has the largest number of multinational corporations of any Asian country through the strength of its automotive and electrical industries. According to HSBC’s 2011 Asia-Pacific Cash, Supply Chain and Treasury Management Report, it had 71 companies among the Fortune 500 list in 2010, down from 83 in 2005. The total number of Asian corporates on the list numbers 83, with 54 in the Greater China Region, 10 in South Korea, eight in Australia, eight in India and one in Singapore, Malaysia and Thailand.
Japan’s large stable of corporates is also expanding in emerging Asia, leading some to set up treasury centres in the region. However, there are a number of challenges, specific to the Japanese market, which are holding back the centralisation of treasury management services.
Treasury management in Japan
Japanese corporate culture is unique and does not lend itself easily to generalisation. It is as distinct from other Asian countries as it is from the US or Europe. This theme is picked up in research conducted by Kiyono Hasaka, vice president for regional sales at HSBC Global Payments and Cash Management.
In some cases, Japanese corporate culture makes it difficult for the country’s companies to implement treasury management and payments best practice. Hasaka contrasts Chinese and Korean corporates’ preference for rationalisation, which leads to a tendency towards centralisation of treasury services, and Japanese corporates, which are far more relationship driven, and tend to be more averse to changing their existing, more decentralised treasury structures despite the potential cost savings.
One potential reason for this is the relationship Japanese corporates have with their banks. There is a history of ‘tied banking’ in Japan, a custom which some blamed for the country’s financial crisis through the 1990s and 2000s. The relationship between certain corporates and banks became so close that bankrupt organisations were able to continue in business, even receiving new loans, rather than being wound up or restructured.
Much of this ‘cronyism’ has been now been swept away through reforms of the banking sector and corporate governance but there still remain some unusually strong relationships between banks and corporates. For example, there are still instances of cross shareholdings between corporates and banks and even the presence of senior bank staff on a corporate’s board. These tied relationships make it more difficult or more unlikely that corporates will outsource their treasury and payment functions, for example, and/or move them overseas to other treasury centres in Singapore or Hong Kong.
Hasaka, in his report, titled Out of Japan: Supporting Overseas Expansion with a Regional Treasury Centre, also says few Japanese corporates use the English language in their domestic workplace, which tends to isolate them from industry best practice. This means that in some cases the benefits of establishing regional treasury centres are not well communicated or understood.
The irony is that the current strength of the Japanese yen (especially against the US dollar) now makes it a highly convenient and inexpensive time for Japanese corporations to acquire businesses overseas and globalise the companies, he adds in the report.
The two most important reasons for considering a regional (Asia-Pacific) treasury management strategy, in contrast to a domestically led or decentralised strategies, are automation and standardisation, according to Hasaka’s report.
The ability to mix and match services now provides a stronger case for this process. Previously, according to the report, corporates typically connected directly to SWIFT for their connectivity and standardisation requirements. Now they are able to take a much more flexible approach. Banks, enterprise resource planning vendors (SAP, Oracle etc) and SWIFT are increasingly creating partnerships which enable corporates to connect to SWIFT via outsourced service bureaux and middleware products, allow corporate ERP systems to achieve connectivity with banks in months (as compared with a total overhaul of the corporate’s system, which could take years) and drive more automated payment processes.
These types of systems also allow corporates to maintain multiple banking relationships if they would rather spread their cash management payments across a number of banking partners.
Standardisation is also an important concern for Japanese corporates when dealing with regulated currencies and markets in Asia, according to the report.
Unlike Europe and North America, Asia is a highly complex region in terms of geography, languages, regulations and tax regimes, says Hasaka’s report. With comprehensive cash and treasury management capabilities and extensive international footprints, global banks are in a better position to advise corporates with complex liquidity positions and requirements, formulating solutions suited to their needs that are also delivered via standardised internal processes.
There are signs Japanese businesses are starting to warm to the opportunities for regional/global treasury management. Hasaka’s report says there are around 2,000 Japanese corporates registered to operate in Singapore and 600 which are members of the Japanese Chamber of Commerce and Industry in Singapore.
Some of these have signed up for Finance and Treasury Centre status as part of the a tax incentive scheme introduced in 2004. It provides a number of tax incentives for businesses to set up treasury centres in Singapore enabling subsidiaries to reduce their funding costs in the region.
Main payment systems
There are four primary clearing systems in Japan which are relevant to corporate payments. They cater for large value interbank transactions, foreign exchange payments, retail payments and cheque and bill payments.
BOJ-NET (Bank of Japan Net Funds Transfer System) is the central bank system used for large scale transactions, often performed by banks or corporates to manage their long or short term investment requirements. The system is used to settle payments for a range of securities including Japanese Government Bonds and derivatives transactions. The average daily value of these transactions were JPY108.6tr in October 2009 with an average of 49,100 transactions per day. Of the JPY108.6tr, JPY38tr were interbank transfers and JPY42.9m related to Japanese Government Bonds.
The clearing mechanism is being improved in two phases, the first of which is now complete. Phase one related to introducing liquidity saving features, a process which was completed in 2008. Mitigating liquidity requirements has become an important focus globally in payment systems because of the elevated cost of funds for banks in the years following the financial crisis in Europe and the US. The project in Japan appears to have been successful, quickly leading to a reduction of the liquidity required for settlement. In its 2009 annual report, shortly after implementing Phase One, the BOJ said 15 percent of the daily value of collateral sitting in queuing and offsetting accounts at the central bank were being offset against incoming payments, which represents a saving of around JPY2tr in collateral requirements for banks using the system.
The BOJ also noted that a number of participants were continuing to set aside the same amount of liquidity as prior to the Phase 1 implementation, indicating greater savings could be achieved,
Phase 2 of the process involves shifting large value payments in private sector deferred net settlement systems onto the BOJ-NET platform using its real-time gross settlement capabilities, which is due to completed soon.
Japan also has a number of systems operated by private sector organisations.
The FXYCS (Foreign Exchange Yen Clearing System) and CLS (Continuous Linked Settlement) systems are both used to settle foreign exchange transactions. FXYCS, operated by the Tokyo Bankers Association, processes yen payments resulting from foreign exchange transactions, according to the Bank of Japan’s website.
CLS is a platform operated by New York-based CLS Group for cross-border foreign exchange transactions for major currencies. CLS Group was set up in 1997 by a number of foreign exchange trading banks and with the support of a number of central banks and the Bank for International Settlements. It is designed to mitigate the counterparty risk created when settlement occurs across different time-zones by settling transactions at a time when the relevant country-specific real-time gross settlement systems overlap.
The Zengin Data Telecommunication System is a deferred net settlement (DNS) retail payments network which is administered by the Tokyo Bankers Association. Its payment functions include online bank transfers, salary transfers and other credit transactions, according to the Zengin website.
The system has been in operation since 1973 and has been upgraded six times since then, most recently in November 2011. The update, creating the Sixth Generation Zengin System, ties in with the BOJ’s Phase 2 aims to modify its BOJ Net platform because large transactions (those over JPY100m) routed through Zengin will now be redirected into the BOJ Net RTGS platform.
This enables these larger transactions to be settled in an RTGS and the smaller ones in DNS environment, creating a hybrid structure which it is hoped will provide improved flexibility and stability in the Japanese payments system
Other improvements as part of the Zengin upgrade include an increase in its transaction capability, which has increased from 18m to 20m transactions per day. It now also enables XML format conversion on an optional basis. Around 1.3bn transactions were routed through Zengin in 2010, an average of 5.6m per day. Transaction value was around JPY2,608tr, an average of JPY10tr per day.
The final payments system in Japan relates to its Bill and Cheque Clearing systems. The BOJ’s 2009 reports says, consistent with experience elsewhere across the world, that there is a long-term shift away from these payment formats in favour of credit transfers provided in the Zengin System.
