Summary of findings

The macroeconomic environment in FY2022 for Japanese companies can be best described as a tale of two cities.

• On the one hand, Japan witnessed healthy GDP growth in the first half of the financial year, fuelled with optimism as Japanese companies benefited from a number of tailwinds including materialization of pent-up demand, strong government stimulus packages and ultra-easy monetary policy, both aiming at boosting the country's economy and supporting the minimum wage hike to spur domestic consumption. Additionally, the fall in the value of the Japanese Yen helped exporters, as Japanese-made goods became more competitive.
• The recovery, however, slowed towards the second half of the financial year attributed to multiple unexpected headwinds, including the conflict between Russia and Ukraine, pushing the cost of fuel and basic commodities for manufacturers in Japan which consequentially weighed on the manufacturer's profit and discouraged them from raising wages and capital investment; critically, weakness in the Japanese Yen also compounded the core inflation rate which hit household spending and consumer confidence in the domestic market - adding to the pain for a fragile economy; COVID restrictions in China, the largest trading partner for Japan, for the majority of the period FY 2022-2023, also impacted the demand for Japanese products and disrupted supply chain; global economic slowdown in the US and Europe and weak signs in China economy exacerbated these challenges further.
• Japanese economic situation is likely to remain unstable. Navigating the challenges and seizing potential opportunities to achieve business goals will require a strategic and disciplined approach in optimizing working capital management. Through insights derived from benchmarking and analysis of the drivers of working capital metrics, this Report aims to help treasury and finance professionals for Japanese companies track working capital trends and guide their initiatives for recovery and growth.
• Working capital optimization has also become more critical for Japanese companies following the Corporate Governance reform initiatives by the Tokyo Stock Exchange where management of the companies listed on Prime and Standard sections are urged to place greater emphasis on stock prices and capital efficiency by careful consideration of the cost of capital and return of equity, instead of just sales and profit levels on the income statement, to achieve sustainable growth and increase corporate value in the mid-to-longer term.

The gap between S&P 1500 and Nikkei 225 companies widened in 2023 for return on capital employed (ROCE) by 0.6%. Although the ROCE of Nikkei 225 companies had marginally improved to pre-pandemic levels, the gap to S&P 1500 companies worsened by 0.6%.

• On the balance sheet, Nikkei 225 companies’ Cash Conversion Cycle was slower by 27.9 days (0.1 day longer year on year); Nikkei 225 companies had 7.7% higher cash level (0.5% higher year on year) as a percentage of sales at 22.5%
• On the income statement, Nikkei 225 had higher Selling, General & Administration (SG&A) Cost although the gap in Earnings before Interest and Tax (EBIT) has improved by 0.4% from (4.4%) to (4.0%)

As companies look to recover from the pandemic, cash levels have decreased due to a shift in focus from cash preservation to cash deployment into growth activities. However, for Nikkei 225 companies, the cash index fell by 5.2 points, relatively modest as compared to an 8.5 point drop for their S&P 1500 counterparts.

This drop in cash levels comes as Japanese corporates saw record high capital expenditure, which stemmed from preparation for expected growth in demand post-pandemic. Nikkei 225 firms saw record levels of buybacks and dividend payouts for the year ending March 2023, resulting in lower cash levels. Additionally, high inflation and depreciation of the yen meant that companies needed to spend more on purchases of supplies.