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COUNTRY REPORT: JAPAN
Ben Poole reports on how Japanese
companies are extending their supply
chains throughout the region in an
effort to diversify their risk exposures,
and ponders Tokyo’s ambitions
as a global financial centre.

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COUNTRY REPORT: JAPAN
ver the past few years, Japan has
been increasingly focusing on its
trade flows with the rest of Asia.
In the past, Japan invested in Asia
by looking for cheap manufacturing
sites, primarily for the purpose of
exporting from these sites to markets in North America
and Europe to some extent. But now Japanese
companies are going out to Asia to sell their products
within the region. Japan is also importing from Asia.
“When Japan is concerned, the importance of trade
cannot be understated,” says Joseph Sum, head
of corporate trade product, Asia Pacific, at Bank of
America Merrill Lynch (BofAML). “Trade has always
been a vital component to the Japanese economy,
and its substantial role will not diminish.”
As a country with limited natural resources, Japan
has historically relied on imports of raw materials to
establish itself as a global leader in exports of high-end
consumer goods such as high-tech electronics and
automobiles. These industries continue to provide
significant national revenues, much of which is
linked to trade. However, with rising commodity
and manufacturing costs, it has become necessary
for Japanese companies to offshore manufacturing to
its Asian neighbours, while transforming itself into a
more knowledge-based, service-oriented economy.
“Under this new economic paradigm, managing a
stable supply chain and mitigating risks in trade with
emerging markets has become critically important
– and for Japanese corporations it has been no
different,” says BofAML’s Sum. “Specifically, with
the Japanese economy now intricately linked with
countries such as China, deploying tools to manage
risks with the associated trade flows is a primary
focus for Japanese companies.”
DRIVERS OF CHANGE
Natural disasters in the recent past have had a
profound effect on the way that Japanese companies
operate. 2011 saw two such catastrophic events –
severe flooding in Thailand and the magnitude 9
earthquake in Japan and subsequent aftershocks.
“The earthquake in Japan and the flooding in
Thailand have led Japanese manufacturers to diversify
the suppliers that they use and also the locations
where these suppliers are based,” says Yasukazu
Aiuchi, head of global transaction banking, Japan
at Deutsche Bank. “They are looking for where
there is the highest level of technology or the
cheapest cost of production, and are beginning
to diversify procurement.”
Japanese manufacturers that were selling in Asia
used to buy parts from Japanese suppliers that had
followed them around the continent, but over the past
18 months this has changed. Japanese manufacturers
have found themselves forced to go out and negotiate
for cheaper production sites and suppliers. As a result,
they have started
buying products
from local regional
companies
rather than
from Japanese
suppliers.
The focus
is now firmly on
establishing multiple
locations, multiple
suppliers, and the diversification
of procurement from local
companies. All of these tactics
are used by Japanese companies
to mitigate supply chain risk.
They have taken an innovative
approach in order to remain
competitive in Asia against cheaper
local suppliers. The motorcycle industry
provides a good example of this. Companies
in other Asian countries were attempting to copy
the production process of Japanese motorcycle
manufacturers at a fraction of the cost. Instead of
fighting against this, there are examples of Japanese
companies going in and offering to put equity into the
local company, with the aim of helping them improve
the quality of their production. Some are even willing
to put their official badge on the new machines.
“Some Japanese manufacturers are creating
opportunities with local companies in other Asian
countries, either through equity or partnership,”
says Deutsche Bank’s Aiuchi. “They are transferring
capital from Japan to develop superior products
using local companies. Japan is no longer a low-cost
producer, but its corporates are offering technology
and industry intelligence in other Asian countries.”
MITIGATING RISK
In addition to simply diversifying supplier base, there
are a number of financial instruments that Japanese
companies are turning to in order to mitigate risk in
their supply chain. One such tool is trade receivables
finance. This offers the opportunity to accelerate cash
conversion and to monetise receivables immediately
at a competitive rate, improving overall cashflow.
“Trade receivables finance with export credit
agency structures, such as those provided by Nippon
Export and Investment Insurance (Nexi), is another
trade solution that has implications for trade-based
corporations in Japan,” says BofAML’s Sum.
“Specifically the tailored financing solution element
with risk mitigation programmes, providing capital
access at attractive rates while minimising risk.”
Two other tools are key to driving Japan trade
– commitment to purchase (CTP) and document
purchase (DP) programmes. “CTP allows companies
to purchase and/or negotiate compliant documents
“DEPLOYING
TOOLS TO MANAGE
RISKS IS A PRIMARY
FOCUS FOR JAPANESE
COMPANIES.”
Joseph Sum, BofAML

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COUNTRY REPORT: JAPAN
under unconfirmed export letters of credit (LCs) on
a non-recourse basis,” explains BofAML’s Sum. “DP
discounts compliant documents under unconfirmed
export LCs on a non-recourse basis after the issuing
bank accepts the document – only for usance
transactions. Both programmes accelerate cashflow and
mitigate LC risk due to the non-recourse structure.”
JAPANESE INVESTMENT
In Asia, Hong Kong and Singapore are regional hubs
where Japanese companies look to set up treasury
centres. Beyond this, there are a number of countries
that are of interest to Japanese investors, including
China, India, Thailand, Vietnam, Malaysia and
Indonesia.
The one new trend that has been particularly visible
over the past nine months is a huge movement of
Japanese interest, on both a government and industrial
level, into Myanmar. Japan is one of the key players,
along with the US, to provide support to Myanmar and
invest in the country’s industrial development. “There
is a lot of interest from leaders of Japanese industry
in Myanmar,” says Deutsche Bank’s Aiuchi. “Some
news reports say that around 80 Japanese companies
have already set up some sort of presence in Myanmar,
while a couple of large Japanese banks have also just
recently opened representative offices in the country.”
The Japan International Cooperation Agency
(JICA) is playing a key role in arranging financing for
Myanmar. Through schemes such as buyer’s credit,
Myanmar is able to source products and engineering
skills from Japan using Japanese government money.
A huge industrial park in Myanmar has been mooted
that would be able to accommodate the operations
of up to 2,000 Japanese companies. In addition, the
Myanmar pro-democracy campaigner Aung San
Suu Kyi has recently been in Japan to meet with
the country’s business leaders.
Japanese industrial leaders are committed to
continue investing in Asia. This includes China, despite
whatever political tensions may exist between the
two countries. This outward investment is supported
by Nexi, which offers products and services to cover
Japanese companies operating abroad. These include
products such as overseas untied loan insurance,
buyer’s credit insurance, export bill insurance and
overseas investment insurance. Programmes such as
these also help Asian countries build infrastructure and
buy Japanese products by offering credit. “By investing
in different Asian countries, Japanese corporates are
helping these countries focus on their industry,” says
Deutsche Bank’s Aiuchi. “This will improve their
production capacity and capability, which will in
turn benefit Japanese businesses.”
Looking at Indonesia, Japanese investment is often
with local enterprises. Therefore they always have to
mention whether they are 100% owned. Nexi provides
loans to ensure that a joint venture is able to get credit
at a competitive rate. Large banks operating in the
region can also support this sort of activity, for example,
by purchasing credit in receivables from the company
so that their liquidity position is more comfortable.
Japanese investment
is moving a lot more
aggressively into India.
A current trend for
Japanese companies
when going abroad is
to go to the countries
where the population
is relatively large and
everything benefits from
a scale merit.
Another trend is the growth in
intra-Asian trade. The Japanese are
buying parts from countries such
as Indonesia and China. Japanese
companies are also investing in
multiple locations in Asia. They are
then exporting their products to, for
example, a Japanese electronics company
in China, a Japanese automotive company
in Thailand, and so on. There is growth in the
intra-Asian trade flow from Japan, and very often
manufacturing companies are setting up joint
ventures with local companies.
Returning to the point regarding mitigating supply
chain risk, Japanese companies are striving to have
a number of suppliers within Asia – using different
countries and different companies – so should there
be any issue they can quickly move the location of a
manufacturing site from one country to another or
switch a supplier. The old adage about not putting
all of your eggs in one basket rings very true here.
TOKYO’S POSITION
There is a question mark over whether Tokyo can
become a global financial centre, capable of competing
with New York and London. While there may be a
strong desire on the part of the Japanese government
for this to happen, key challenges remain.
“One of the challenges faced by Japan if Tokyo is
to become a true global financial centre is the
yen,” says Deutsche Bank’s Aiuchi. “The yen is an
international currency, but when you look at Japan’s
trade with foreign countries, the US dollar still
dominates. The euro follows, but in terms of volume,
it generally represents around 15% of the dollar
amount. When you combine these two currencies
they dominate around 90% of the trade flows into
and out of Japan. So if Japan wants to become a global
financial centre, it may need to find ways to make yen
more prevalent in cross-border trade.”
Yen is traded in every big market, but the actual
trade flow is not overly significant. There will also
need to be major social changes if Tokyo is to become
a global financial centre, including language skills,
the availability of labour, and a change of direction
in regulatory policy. Japan is known for having some
of the tightest financial regulation in the world,
which in itself is not a bad thing, but many players
find that operating in Japan is costly because regulation
prevents them from doing many things in the most
efficient way.
“SOME
JAPANESE
MANUFACTURERS
ARE CREATING
OPPORTUNITIES IN OTHER
ASIAN COUNTRIES.”
Yasukazu Aiuchi,
Deutsche Bank