What sort of impact is the current state of the global economy having on Japan? How will the events in Japan and North Africa affect the country’s trade?
Like the majority of markets around the world, Japan was adversely impacted by the financial crisis, but had been showing encouraging signs of growth. However, the March 11 earthquake and tsunami will have an impact on trade, though the extent is not yet fully understood. From a trade finance perspective, we have seen some indications of disruptions to the supply chain. However, we are optimistic that these will be short-term and will not overly impact long-term growth of the trade finance sector. J.P. Morgan continues to stand by our clients and the people of Japan through this difficult time, and we are confident that the nation will recover.
More broadly, while the global economic recovery continues to take shape, some headwinds remain, including the situation in the Middle East and North Africa and sovereign debt concerns in Europe. Nevertheless, intra-regional trade flows are booming in Asia-Pacific, driven by regional giants such as China, India and Korea, with the Association of Southeast Asian Nations (Asean) also expected to play an important role in trade flow growth in the coming years.
How is the business environment in Japan changing, and what sort of impact is this having on trade finance domestically?
Continued economic volatility globally, increasing competition from Chinese and Korean companies and the internationalization of the renminbi are all creating a new business landscape in Japan. Japanese exporters are also moving parts of their operations to countries like China, India and Vietnam. Importers are likewise increasingly sourcing many of their goods and services from these markets.
Domestically, classical trade financing instruments remain popular solutions. However, as companies increasingly move into offshore markets, the trade finance sector is evolving towards hybrid models which establish a cohesive and integrated supply chain financing model able to operate on a cross-border basis. As a tool for working capital management for international players, supply chain financing is crucial. This move towards structured finance includes export credit agency (ECA) financing for large and long-term project base exports, as well as commodity financing which is more focused on goods and stock (upstream commodity) base financing.
Notably, Japan’s relationship with China is emerging as a key factor in the development of structured trade finance. The relatively lower labour costs in China make it an ideal manufacturing and production hub, but managing the supply chain therefore requires increasingly sophisticated solutions to deal with cross-border challenges. Within this context, the internationalisation of the renminbi and the international trade settlement programme have emerged as critical considerations for Japanese corporates.
How so?
Last year’s moves by the People’s Bank of China (PBoC) to make the renminbi international trade settlement programme more accessible for companies and financial institutions globally, combined with the gradual evolution of the renminbi into a more international currency, have sparked a fundamental shift in how Japanese companies operate, and in particular, Japanese multinational companies (MNCs) with manufacturing, production and service operations in China. Due to this heightened interest in the renminbi, Japanese corporates are increasingly settling their trades in the currency, necessitating the re-alignment of their treasury operations.
How do you see Japan’s trade relationship with China evolving during the next few years?
Japan’s trade relationship with China will continue to strengthen. China is already Japan’s largest trading partner, with approximately 22% of Japan’s imports coming from China and around 19% of Japan’s exports heading to the mainland. This is significantly higher than Japan’s second and third largest trade partners, the US and the European Union. This close relationship will present Japanese companies with tremendous opportunities. As China evolves into a global player and further integrates its regulatory and financial market infrastructures with the global community, Japanese corporates will enjoy a more efficient and effective financial supply chain process.
Japanese banks remain an integral part of Japanese trade finance. How are international banks such as J.P. Morgan structuring their business to ensure they capture opportunities?
Japanese banks have historically played an extremely important role in supporting Japanese companies and this will continue. Japanese banks are extremely sophisticated operators, have great people at the helm and have extensive branch networks. Rather than competing with domestic Japanese banks, we’re deepening our relationships on the ground to offer services that they can in turn offer to their clients.
However as Japanese companies look to grow their business offshore, it is natural that they would turn to a global service provider like J.P. Morgan. A bank’s ability to provide strategic advisory services, guidance on best practice and information on the latest regulatory changes within a specific market is key. It also comes down to a global network, a global suite of solutions that can cater to increasingly sophisticated clients and a strong balance sheet. Continued investment in trade finance platforms is also important, as is a bank’s ability to make a measurable and positive impact on a client’s bottom line.
What sort of developments in trade finance can we expect to see in the coming years in Japan?
With intra-regional trade flows increasing and Japanese companies expanding their reach into new markets, complex structured hybrid trade finance models will become increasingly important. This trend towards structured finance (for example a blend of commodity and classical instruments) is picking up pace, with Japanese corporations looking for more effective, efficient and safer methods of managing their cross border suppliers, supporting their working capital requirements by securing long-term contracts for natural resources, and adopting ECA structured trade financing as a way of meeting their large export obligations.
We are also entering a new era in terms of technology within the banking sector. We will eventually evolve into a system that integrates all the various elements of trade finance, and trade finance itself will continue to move towards a more complex structured platform.
This story was first published in the Trade Finance Yearbook supplement to the April 2011 issue of FinanceAsia magazine.
