Improvement in working capital for Japan but significant potential remains

$146.7 billion - Estimated working capital that can be released across the Nikkei 225 companies

ROCE gap between S&P 1500 and Nikkei 225 has increased by 1.2% ROCE

CCC ROCE gap between S&P 1500 and Nikkei 225 has increased by 1.2 days

Difference between Nikkei 225 and S&P 1500 - 27.8 in year 2022 increased from 26.6 in year 2020

Cash gap in cash has increased by 1.6%

Difference between Nikkei 225 and S&P 1500 – 7.2% in year 2022 increased from 7.2% in year 2020

EBIT gap in EBIT has increased by 0.6%

Difference between S&P 1500 and Nikkei 225 – 4.4% in year 202 increased from 3.8% in year 2020

13.1 points - decline in WC Index

157.7 days - Difference between leaders and laggards

2.2 points - Increase in cash index

61% of companies in the Nikkei 225 saw an improvement in CCC of which:

• 74% showed shortening of DSO
• 67% showed shortening of DIO

Overall, 7.8 days fall in CCC and 5 days improvement in DSO

Working capital levels at Nikkei 225 companies have improved drastically due to an increase in global demand from government and central banks’ fiscal and monetary policies.

The return on capital employed (ROCE) gap between Japanese corporates and global counterparts increased from 3.3 percent in 2021 to 4.5 percent in 2022.

Treasurers should focus on working capital and liquidity management needs to ensure their businesses can endure future uncertainties and invest towards growth.

Japanese corporates witnessed an improvement in overall CCC by 7.8 days due to global demand pick-up.

DSO declined by 5 days driven by a recovery in demand and faster collections as companies could bargain for better terms for their customers.

After the rise in DPO in FY2020, DPO levels in FY2021 saw a decline of 3.8 days.

DIO levels exhibited a drop by 6.5 days for Nikkei 225 companies, driven by higher-than-expected consumer demand coupled with supply chain disruptions. The CCC gap between Nikkei 225 and S&P 1500 companies has largely remained flat, with a slight improvement of 1.2 days on an average basis.

ROCE for an average S&P 1500 company has grown significantly higher.

The difference between earnings before interest and taxes (EBIT) margins of an average S&P 1500 and a Nikkei 225 company has increased in 2022 to 4.4% from 3.8% in 2020.

While the working capital/sales levels gap has marginally narrowed by 0.5% in 2022, it is still significantly higher for an average Nikkei 225 company at 22.5% as compared to just 16.2% for an average S&P 1500 company. While cash/sales levels at S&P 1500 companies dropped by 1.2%, cash levels increased for Nikkei 225 companies by 0.4%, widening the gap substantially to 7.2% as of 2022.

Cash Conversion Cycle across five key industries increased over the span of six years, while Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO) and Days Payable Outstanding (DPO) levels were mixed overall.

Auto & auto parts:

• DPO declined by 5.9 days, more than compensating for the decline in DSO
• DIO levels fell down by only 1 day despite high demand

Chemicals:

• DIO declined by 11.2 days due to strong demand. DSO levels fell by 8.1 points, closer to pre-pandemic levels

Pharmaceuticals:

• The pharmaceutical industry experienced overall improvement in working capital levels

Technology hardware:

• DPO saw a sharp decline by 15.6 days that offset a substantial decline of 10.4 days. The technology hardware industry faced a decline in DIO levels of only 2.1 days

Industrial machinery:

• Japan, being one of the global leaders in manufacturing machinery, saw inventory levels for the industry decline by 15.6 days while DSO improved by 9.3 days

ESG Agenda

Oil & Gas - Diversifying into clean energy

Materials - Focus on CCS and Recycling

Automotive - Expanding Hydrogen Fuel-Cell & EV Production

Supply Chain Diversification

Automotive - Nearshore + Vertical Integration

Apparel and Accessories - Nearshore production; Predictive data driven supply chain management

Technology Hardware - Stock buffers of critical supplies

Tech driven business models

Automotive - Focus on Connected Cars and in car services

Apparel and Accessories - Incorporating Augmented Reality and V-Commerce

Technology Hardware - Expanding with ecosystem of connected devices

Direct to customer

Apparel and Accessories - Expanding reach directly to customers

Quick Service Restaurants - Integrated loyalty programs

Automotive - Online vehicle purchasing