State-backed insurer Nexi continues to provide vital support to Japanese exporters, and local Japanese banks are on hand to provide well-priced trade finance. Richard Meyer asks what opportunities remain for foreign players.
Japanese corporates have been returning to the government-backed Nippon Export and Investment Insurance (Nexi) to support its trading activities, as the financial crisis sapped private insurers’ capacity. In turn, the Japanese government has increased its level of support for Nexi.
“The Japanese government raised our underwriting limit after the crisis – especially for medium and long-term financing transactions,” says Fumihiko Kato, vice-chairman of Nexi. “And Nexi solidly recognises its significant role.”
“Since the outbreak of the financial crisis, some Japanese exporters who have selected private insurers have been coming back to Nexi,” he adds. “It seems uncertain at present whether the Japanese trade finance market has evolved to cover credit risk of buyers in terms of flexibility or accessibility.”
Meanwhile, corporations have started to appreciate the benefits of having a semi-sovereign credit as their counterparty. They had not only worried about the possible failure of private insurance companies, but also about their reliability. At the height of uncertainty, according to one market participant, prices doubled or tripled, and a number of European insurance companies cancelled buyer limits, leaving their customers exposed.
Whereas some in the market suggest the government should not have interfered through increasing its presence in the insurance market, others condemn the rapid and perhaps aggressive way the foreign insurers retreated from the market.
Certain Japanese players will often justify their current reluctance to use foreign providers and their insistence on maintaining close relations with business partners on the grounds that they need to protect themselves from “confusion in the marketplace”. Recent events give strength to these arguments and help the case for the government’s support of Nexi and for Nexi’s low prices. While some say Nexi is dangerously anti-commercial, others respond that perhaps the private insurers are too short-term in their thinking.
“The private insurers – most of which do business in trade finance markets in alliance with foreign trade insurance companies – are still not active due to an overwhelming reluctance to take on both country risk and the commercial risk of foreign buyers,” notes Nexi’s Kato.
The recent trends in the trade insurance market must be put into historical perspective. Japan has been experimenting for decades with liberalisation and, until recently, had been pursuing a course of open markets and the end of government intervention. But as the country continues to witness stagnating growth and deflation, it is beginning to lose patience with reform.
“At first, the country felt it did not need this kind of government financial institution. It wanted to scale down the size of the Japanese government,” says Shinichi Matsui, an attorney specialising in trade finance at Nagashima Ohno & Tsunematsu, referring to Nexi. “But the governmental financial institutions were not touched.”
Nexi was formed in 2000 as an independent institution to take over the cover that was provided by the old ministry of international trade and industry. The idea was to slowly reform this monopoly, allowing for competition and free pricing. It was a significant move, as government-backed trade insurance had long been a key element of Japan’s industrial policy, designed as much to promote exports as to simply protect companies from risks overseas. Dismantling that government-insurance infrastructure was a bold and politically controversial move, but for a while, all went as planned.
By 2005, the monopoly was officially ended and competitors, both domestic and foreign, were allowed to provide policies related to trade risks. However, reform was more form over substance. Nexi’s pricing was so low that the competition couldn’t gain much of a foothold in the market.
But opportunities do present themselves, and the private insurers currently claim approximately 10% of the market. Nexi is unable to undertake certain types of transactions or, if it does bid on them, must charge more than private insurers. This is especially true of triangle trade – deals that involve Japanese corporations exporting from one foreign country to another – such as manufacturing in China and shipping to Indonesia.
“In 2005, the export market was liberalised with other markets,” says Yoshihiro Suchi, department head, political risk department, AIU Insurance Company. “At the time we got a license and since then have been offering both trade credit and political risk coverage to trading firms and banks. I think our business is not as big at the moment compared to Nexi.”
“They have a tariff, a fixed price,” he adds. “Those prices are very competitive. We cannot match them.”
Trade finance offerings in Japan’s banking sector, like many other types of finance in the country, have long adhered to fairly traditional forms. Big banks with strong relationships with giant exporters, often cemented with stock or debt ownership, would sell trade finance solutions as part of a diverse package of banking products.
Trade finance in Japan is however made even more complicated by the existence of the general trading companies, the Sogo Shosha. These large corporations have no equivalent in the west. They are part logistics company, part banker, part investment banker, part broker and part consultant and are especially active in the trade finance market.
These trading houses provide so many services and products to their business partners, and have been doing so for so many years, that it is not easy to untangle them from their customers. Commercial decisions are often made with an eye to promoting or maintaining business in other parts of the trading house.
In normal times, these webs of conflicting interest are important. During a crisis, they are essential. While most international financial institutions are thinking about maintaining profit and ensuring solvency, the Japanese banks and trading houses are thinking about the health of their customer, in which often they own shares and do a great deal of business with.
To raise prices or deny financing may not only hurt their prospects for future business, but it may harm their investment. As such, when the bottom fell out of the market, the local Japanese banks tended to remain constant, in contrast, some suggest, to the recent behaviour of foreign global banks.
“During the crisis, the premium rose to high levels,” Shigekazu Hida, head of trade finance sales at Deutsche Bank in Tokyo, remarks. “But the local banks didn’t match this premium in charges to their customers. There was a gap in the financing costs between the local banks and the global banks in terms of trade finance. Consequently, there were a number of local corporates that shifted their business to the local banks.”
“Trade finance for local banks is about relationships,” he adds, “Their main business is lending. That is why they did not change the pricing for trade finance, as long as they can keep their overall banking relationship with the local corporates.”
Speaking to Japanese bankers, it seems that they don’t believe they did anything extraordinary for their customers. What they were doing was merely business as usual.
“As a top financial institution we have not had any serious concerns regarding our own liquidity,” says Hiromitsu Otsu, joint general manager of the global trade finance department, Sumitomo Mitsui Banking Corporation. “Among the Japanese banks, participation in the trade finance market seems relatively unchanged.”
Foreign banks’ reputation
The reputation of foreign banks has been damaged in Japan and the local banks seem to have retained the upper hand – at least for the time being. However, it is an overstatement to say that the country is closed to the outside world. Japanese companies may be gaining a renewed appreciation for the stability offered by their state-backed insurers and local banking networks, but Japanese companies need new and better solutions and a diverse range of products. They must also spread risk around. The dangers of excessive concentration and the pitfalls of being closed to developments elsewhere mean that the foreign institutions are far from being shut out.
None of Japan’s major institutions went bust during the recent crisis, but the country still has its problems. It is the most indebted OECD nation on a percentage of GDP basis and its economy has been in and out of recession for 20 years and remains generally stagnant. The government does not have the money to provide unlimited support via institutions like Nexi, and the country must be as efficient and innovative as possible. Japan desperately needs the balance sheets of international banks and their expertise.
It is also important to note that trade flows are now more complex than before. Previously, most exports seemed to go from Yokohama to the US and Canada. Writing insurance or creating products to cover this business was relatively easy. Now goods are going from Japan to China, India and Indonesia. They are being re-exported to other developing countries or to Eastern Europe. Components are being moved around on a near just-in-time basis between countries that 20 years ago were closed and highly unstable.
International banks are in good stead to step into the breach. They have operated for years out of Hong Kong and Singapore and work quite comfortably between developing markets in the region. Some have branch networks and local subsidiaries in these markets, giving them on-the-ground expertise and resources. In addition, they have been the leaders in creating new products, particularly in the area of supply chain finance, and are in a good position to offer cutting-edge solutions to the Japanese banks, which because of their conservative ways, have been slower to embrace innovation.
Some international banks recognise the possibilities in Japan and see it as a place where they can grow their business significantly. They want to go beyond providing solutions for trade outside Japan and between third countries for Japanese multinationals. They want to use the relationships built and the experience gained in providing these services to work their way into Japan and build up significant business there, cracking the market by utilising their global networks and intellectual capital.
The primacy of the big three banks in Japan – Mizuho Financial Group, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group – is not in question. They look set to dominate. Foreign banks are looking, however, to be major players in Japan, gaining mandates when they can add value to the mix.
One such bank is Standard Chartered. Having come off the crisis in good shape and with a strong base in the developing countries of great interest to Japanese manufacturers and exporters, the bank is well positioned to get work outside Japan and to leverage that into more business domestically. Indeed, the bank is gearing up now for such a push, having made a number of key hires to build relations on the ground.
“Japan for us is a very important centre,” says Neil Daswani, regional head, transaction banking for North Asia at Standard Chartered. “Given its export trade orientation, Japan is not only a recipient of a lot of inbound letters of credit and open account transactions, it also sees a lot of outbound transactions. Japan is a critical part of Standard Chartered’s network, not only for North Asia, but also for the wider Standard Chartered Bank Group.”
He adds, “Our approach now is what I like to call ‘outside in’. We are able to add value for Japanese clients by making introductions overseas, by helping them through the regulatory challenges as they set up shop, and by helping them when they put FDI into a market. We connect them with our branches. We also connect them with counterparties. We add value in almost a consultative way, leveraging our network.”
“We certainly realise that you have to put your balance sheet on the table to get entry into the large Japanese corporates,” he adds. “And we certainly have the risk appetite and the liquidity. But you also have to add value.
“So we add that value outside of the domestic market, and then over time loop back and gain a larger share of the domestic business in the process,” he concludes. “If you don’t have massive networks on the ground in some of these countries, you are not going to be able to offer that.
“Take the example of a Japanese exporter dealing with a middle market entity in Malaysia or India. If that entity banks with us, we can do the transaction from end to end. That makes the whole proposition more compelling in terms of turnaround, risk appetite and scale.”
Japanese bankers appreciate what the foreign banks are trying to do and acknowledge the strengths of their franchises. Masahiro Goda, head of trade finance for north and south Asia at Mizuho says that US banks offer unrivalled US dollar clearing, while Standard Chartered and HSBC have strong branch networks in the right countries. He says that Japanese corporations will indeed be attracted to these banks in their efforts to make trading operations more efficient.
“The global network of these banks can contribute to the shortening of the cash flow cycle,” he says. “If a company exports to a rural area in India, Standard Chartered has a branch network in India and in-house settlement and communications systems that are much better than those at other banks. This contributes to a shorter settlement period.”
But Goda does not think that small victories overseas will easily translate into business in Japan. He says that getting clients in the country is more than just a matter of offering good solutions. He believes that cutting a deal in Japan takes significant commitment, and he doesn’t think that the international banks are coming to the table with enough, at this point, to take sizeable market share.
“The Japanese market is a very unique market.” he asserts. “The non-Japanese banks have to give something special to the Japanese corporates.”
“The foreign banks have very sophisticated cash settlement systems and programmes,” he continues. “And the Japanese corporates appreciate that type of support. However, the lending side is rather weak and still foreign banks are hesitant to give Japanese corporates cheap financing even though the credit risk is not so high. I would say they are not so competitive yet.”
He adds that one of Mizuho’s current efforts is focused on non-Japanese multinationals outside Japan dealing with Japanese multinationals also outside Japan.