CFO Insights | Japan 2016 Q4

The CFO Program | Japan

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Contents

Japan Economic Outlook: Two arrows too many P 3

Accounting News P 7

Tax News P 11

Front-office Finance: How CFOs Can Create Value Through Business Partnering P 13

The Working Styles of CFOs and Their CEOs: CFO Signals P 16

Why Many CFOs Are Retiring Early and Implications for Succession Planning P 19

Brexit: A Textbook Lesson on Disruption P 21

The CFO Program | Japan

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Japan: Two arrows too many

The Bank of Japan seems to have run

out of moves to strengthen the

economy through monetary policy.

Quantitative easing and negative

interest rates have had little effect.

Now the bank is targeting the long end

of the yield curve by keeping 10-year

bond yields close to zero.

Remember that time from childhood when you ran out of

tricks to sneak another muffin from the kitchen? Well, it

appears that the Bank of Japan (BOJ) is sharing a similar fate.

As it announced its new policy stance on September 21, one

could not help but wonder if the central bank had indeed

emptied its ammunition. Be it quantitative easing or negative

interest rates, the BOJ for a long time now has been at the

forefront of using unorthodox monetary policy to counter

deflation and prop up the economy. So, as it declares that its

1 Bank of Japan, New framework for strengthening monetary easing: Quantitative and qualitative monetary easing with yield control, September 21, 2016,.

next target is the long end of the yield curve, it is worth

thinking whether the BOJ has been trying too hard for too

long.

“Be it quantitative easing or negative

interest rates, the BOJ for a long time

now has been at the forefront of using

unorthodox monetary policy to

counter deflation and prop up the

economy.”

Flipping as they flop? In addition to its annual asset purchase program—commonly

referred to as quantitative easing (QE)—and negative interest

rates, the BOJ has now decided to target the long end of the

yield curve. In short, the BOJ wants to keep 10-year bond

yields close to zero1. The move is not surprising given fears of

a prolonged period of below-zero long-term interest rates,

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which have dented banks’ margins—interest earnings on

bank loans (or assets) are dependent on long-term interest

rates—and the earnings of pensioners who depend on long-

term fixed-income assets.

Not surprisingly, the latest BOJ move has lifted bank stocks,

which have been under pressure since the advent of negative

interest rates. After the BOJ’s decision, the Topix Banks Index

went up 7.0 percent by end of day on September 21, the

highest single-day gain for the index since February. Prior to

September 21, the index had lost 27.1 percent this year,

much worse than the 12.7 percent decline in the overall Topix

Index (figure 1) 2.

Figure 1. Bank stocks have been hit this year due to

negative interest rates

Source: Bloomberg

The BOJ, in its monetary policy meeting, also tried to reassert

its commitment to fight deflation. The central bank stated that,

if required, it would let inflation overshoot its 2.0 percent

2 Bloomberg, September 2016. 3 Leika Kihara, “BOJ’s Kuroda says no plan to adopt negative interest rates now,” Reuters, January 21, 2016, http://www.reuters.com/article/us-japan-

economy-boj-idUSKCN0UZ0AN; Kevin Buckland and Chikako Mogi, “Kuroda emulates Draghi on negative interest rates as yield drop curbs yen,”

Bloomberg, January 29, 2016, http://www.bloomberg.com/news/articles/2016-01-29/kuroda-emulates-draghi-on-negative-rates-as-yield-drop-curbs-yen. 4 Chris Anstey, “Negative rates may do more harm than good, expert says,” Bloomberg, September 13, 2016,

http://www.bloomberg.com/news/articles/2016-09-13/negative-rates-may-hurt-more-than-help-taylor-rule-creator-says.

5 Lucas Papademos, The contribution of monetary policy to economic growth, European Central Bank, June 12, 2003,

https://www.ecb.europa.eu/press/key/date/2003/html/sp030612_3.en.html; Jerry L. Jordan, What monetary policy can and cannot do, Federal Reserve

Bank of Cleveland, May 15, 1992, https://fraser.stlouisfed.org/docs/historical/frbclev/econcomm/econcomm_19920515.pdf; Marc Labonte, Monetary

policy and the Federal Reserve: Current policy and conditions, Congressional Research Service, January 28, 2016,

https://www.fas.org/sgp/crs/misc/RL30354.pdf. 6 Akrur Barua and Rumki Majumdar, “Impact of negative interest rates: Living in the unknown,” Global Economic Outlook, Q2 2016, Deloitte University

Press, April 29, 2016, http://dupress.deloitte.com/dup-us-en/economy/global-economic-outlook/2016/q2-impact-of-negative-interest-rates-controlling-

inflation.html.

target. It’s not clear, however, what new measures it will use

in future. But, if one is to go by Governor Haruhiko Kuroda’s

actions—aggressive QE and then negative interest rates—

then something similar to using perpetual bonds to fund

government spending cannot yet be ruled out.3.

Not much succor from

negative interest rates so far The BOJ’s latest gambit comes amid concerns about a

number of advanced nations’ overdependence on monetary

policy.4 The central bank, in particular, may be trying too hard,

when economic theory suggests that monetary policy alone

cannot bring in medium- to long-term growth.5 The data also

raise questions regarding the efficacy of continued

unorthodox policy. The BOJ’s policy of negative interest rates,

for example, has not had much impact of late compared with

the initial phase of aggressive QE since Kuroda took over in

2013.6 For starters, the country continues to grapple with

deflationary pressures. Core inflation—all items except fresh

food as defined by the BOJ—has been flitting in and around

negative territory since July 2015 and for much of 2016. In fact,

core inflation in July (-0.5 percent) was the lowest in more than

three years. The aggravation of deflationary pressures hints

at the lack of impact of unorthodox monetary policy,

especially negative interest rates, this year (figure 2).

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Figure 2. Deflationary pressures are once again asserting

themselves

Source: Haver Analytics

“The aggravation of deflationary

pressures hints at the lack of impact of

unorthodox monetary policy,

especially negative interest rates, this

year.”

If the BOJ had thought that a barrage of cheap money will

force demand up sharply through credit offtake, then so far it

has been proved wrong. Growth in loans outstanding from

domestic banks, for example, was 2.4 percent year over year

in Q2, down from 2.8 percent in Q1 and 3.4 percent a year

before. A deeper analysis of the distribution of loans by

sector—manufacturing, nonmanufacturing, and individual—

also highlights a similar story. 7 That the steady binge of

unorthodox monetary policies, including negative interest

rates, has not done much is also evident from diverging

trends in the growth of broad (M3) and narrow money (M1)

this year (figure 3).

7 Haver Analytics, September 2016. 8 Ibid. 9 Ibid.

Figure 3. Narrow money (M1) growth has far outpaced broad

money (M3) growth

Source: Haver Analytics

Slow credit growth despite easy credit conditions is primarily

the result of households and businesses remaining

circumspect about borrowing and spending more. In an aging

society, consumers are still grappling with slow earnings

growth, a deflationary environment, and uncertain economic

prospects. Monthly real and nominal household expenditure

growth (year over year), for example, has been negative for

much of the year.8 And in Q2, real household consumption

growth slowed to 0.6 percent (seasonally adjusted annual

rate, or SAAR) from 2.8 percent in Q1.

In the midst of volatile and weak consumer spending, it would

be wrong to assume that businesses will invest more.

Corporates are opting to hold on to cash rather than spend.

Real private nonresidential investment, for example,

contracted in both Q1 and Q2 (SAAR) despite healthy

corporate profits.9 Japanese businesses are also grappling

with declining exports; real exports fell 5.8 percent in Q2.

Surely, a strengthening Japanese yen has not helped. While

the initial bout of QE helped weaken the currency and boost

exports as the BOJ had hoped, the bout of yen weakening has

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run its course. In 2013 and 2014, the yen fell 16.4 percent and

12.9 percent, respectively, against the US dollar. But last year,

it remained almost unchanged. And despite aggressive QE

and negative interest rates this year, the currency is up 16.9

percent against the greenback (figure 4).

Figure 4. The yen has strengthened 16.9 percent against the

US dollar this year

Source: Haver Analytics

The yen’s strength has also dented the BOJ’s fight against

deflation. Due to the yen’s gains, import prices in yen have

dropped by anywhere from 17.9 to 23.3 percent year over

year in the first eight months of this year. This, in turn, has put

downward pressure on consumer prices.

Negative interest rates have also impacted money market

liquidity. In February—a month after the introduction of

negative interest rates—the average amount outstanding in

money markets (uncollateralized) during the month fell 39.5

percent, with market participants caught unaware.

Unfortunately, the scenario has only worsened since then

(figure 5).

10 Bruce Einhorn, “Helicopters circle over Bank of Japan with Kuroda running out of options,” Bloomberg, September 21, 2016,

http://www.bloomberg.com/news/articles/2016-09-20/helicopters-gather-over-bank-of-japan-with-kuroda-running-out-of-options. 11 Akrur Barua, “Japan: Will households oblige by spending more?” Global Economic Outlook, Q3 2016, Deloitte University Press, July 22, 2016,

http://dupress.deloitte.com/dup-us-en/economy/global-economic-outlook/2016/q3-japan.html.

Figure 5. Money market liquidity has been hit due to negative

interest rates

Source: Haver Analytics

The continued purchase of Japanese government bonds by

the BOJ also raises concerns about the stability of

government debt (more than 250 percent of GDP) and the

BOJ’s balance sheet. The latter now owns about 38.0 percent

of the total Japanese government bonds, and this will go up

given the ongoing QE.10 With the government postponing its

fiscal targets, questions about the sustainability of debt

naturally arise. That can change, however, if a sizable portion

of the debt that the BOJ owns is changed to a zero-coupon

perpetual bond.11 Of course, such a move will not be without

controversy, as it will amount to some form of monetization

of government debt.

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No third arrow even now

To restore growth in the face of the fading impact of monetary

policy, Prime Minster Shinzo Abe announced a fiscal stimulus

measure of 28 trillion yen in July. So will the fiscal magic work

where the monetary one has not? Not likely, if medium- to

long-term growth is the issue. While the stimulus has come at

the right time—when economic growth is faltering—the new

fiscal package falls short on a number of issues:

Like previous measures, the immediate spending

component is smaller than the announced package.12

Only 13.5 trillion yen is dedicated to new measures, with

new spending of 7.5 trillion yen likely this year and the

next. The remaining 6.0 trillion yen will be in the form of

loans.13

A large chunk of the announced stimulus will be used

for infrastructure (such as ports and Maglev trains),

while some of it will be directed toward disaster relief.

Spending on these projects would have happened in

some form or the other even without the stimulus.

The fiscal package misses out on productivity-enhancing

investments. Productivity has been stagnant in Japan, a

major worry given the country’s aging population and

labor force.

What has been absent throughout has been Abe’s third

arrow: structural reforms. For example, there has been no

major move so far to deregulate the labor market and make

key services sectors more competitive. There is also no big

measure to reform corporate governance, essential for

enhancing economic competitiveness. And, although Abe

announced a 3.0 percent hike in minimum wages, there is no

frontal push yet to force businesses to raise wages—key to

higher consumer spending. Most importantly, subtle efforts

to raise female participation in the labor force—critical for

potential GDP growth—have not made much headway. With

so much still to do, it’s not surprising that repeated fiscal

stimulus and monetary easing are not making much of an

impact. If the yen’s movement is anything to go by, the BOJ’s

move on September 21 definitely falls short. After declining

initially, as the BOJ would have hoped, the currency climbed

up again later to end the day just 0.1 percent lower against

the US dollar. It’s imperative then that Abe release his third

arrow to regain momentum. Mere promises won’t suffice.

“What has been absent throughout

has been Abe’s third arrow: structural

reforms. For example, there has been

no major move so far to deregulate

the labor market and make key

services sectors more competitive. “

Acknowledgments

The author would like to thank Nobuhiro Hemmi, partner

and head of Global Business Intelligence at Deloitte

Tohmatsu Consulting, Japan, for his contributions. Hemmi is

also a member of the Deloitte Global Economist Council.

12 Maiko Takahashi and Isabel Reynolds, “Japan fiscal plan gives $45 billion spending boost this year,” Bloomberg, August 1, 2016,

http://www.bloomberg.com/news/articles/2016-08-01/japan-set-to-give-details-of-28-trillion-yen-stimulus-package. 13 Robin Harding, “Japan’s fiscal stimulus: Will it work?” Financial Times, August 2, 2016, https://www.ft.com/content/d4ea5848-5896-11e6-8d05-

4eaa66292c32.

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Accounting News

IFRSs No new standards or interpretations were issued by the

International Accounting Standards Board (IASB) during this

Quarter. However, the following amendments to existing

standards came out from the IASB:

Amendments to IFRS 4

The IASB has published 'Applying IFRS 9 Financial Instruments

with IFRS 4 Insurance Contracts’. The amendments are

intended to address concerns about the different effective

dates of IFRS 9 and the forthcoming new insurance contracts

standard (expected to be issued within the next six months).

The amendments to IFRS 4 provide two options for entities

that issue insurance contracts within the scope of IFRS 4:

An option that permits entities to reclassify, from profit

or loss to other comprehensive income, some of the

income or expenses arising from designated financial

assets; this is the so-called overlay approach;

An optional temporary exemption from applying IFRS 9

for entities whose predominant activity is connected

with issuance of insurance contracts within the scope of

IFRS 4; this is the so-called deferral approach.

The application of both approaches is optional and an entity

is permitted to stop applying them before the new insurance

contracts standard is applied.

An entity applies the overlay approach retrospectively to

qualifying financial assets when it first applies IFRS 9.

An entity applies the deferral approach for annual periods

beginning on or after 1 January 2018. Predominance is initially

assessed at the reporting entity level at the annual reporting

date that immediately precedes 1 April 2016. Subsequent

reassessment is also required upon certain change in the

entity’s activities. The deferral can only be made use of for the

three years following 1 January 2018.

Further information, see IASB press release (http://www.ifrs.

org/Alerts/PressRelease/Pages/IASB-issues-amendments-to-

insurance-contracts-standard.aspx), our IFRS in Focus

newsletter (http://www.iasplus.com/en/publications/global/

ifrs-in-focus/2016/ifrs-4-amendments) on the amendments

and our IAS Plus project page (http://www.iasplus.com/en/

projects/completed/fi/ifrs-9-insurance-effective) on issues

around the different effective dates of IFRS 9 and the new

insurance contracts standard.

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New Revenue Standards

Please see IFRS & U.S.GAAP – New Revenue Standards below.

U.S. GAAP

The FASB has issued several Accounting Standards Updates,

including:

ASU No. 2016-15 – Statement of Cash

Flows (Topic 230): Classification of

Certain Cash Receipts and Cash

Payments (a consensus of the

Emerging Issues Task Force)

ASU No. 2016-15 provides updated guidance to reduce

diversity in practice as to how certain cash receipts and cash

payments are presented and classified in the statement of

cash flows under Topic 230, such as:

debt prepayment or debt extinguishment costs;

settlement of zero-coupon debt Instruments or other

similar debt Instruments;

contingent consideration paid after a business

combination;

proceeds from the settlement of insurance claims;

proceeds from the settlement of corporate-owned life

insurance policies, including bank-owned life insurance

policies;

distributions received from equity method investees;

and

beneficial Interests in securitization transactions

The guidance in ASU No. 2016-15 is effective for public

business entities for fiscal years beginning after December 15,

2017. Early adoption is permitted.

The guidance in ASU No. 2016-15 should be applied using a

retrospective transition method to each period presented.

For more information, see our related Heads Up newsletter

(http://www.iasplus.com/en-us/publications/us/heads-

up/2016/issue-23) as well as the ASU on the FASB’s Web site

(http://www.fasb.org/cs/ContentServer?c=Document_C&pag

ename=FASB%2FDocument_C%2FDocumentPage&cid=117

6168389912).

IFRS & U.S. GAAP – New

Revenue Standards

IASB and FASB have been jointly trying to address

implementation issues identified since the issuance of new

converged revenue standards in 2014. However, the direction

of their travel has showed difficulty to get to the identical

solution for issues identified.

Clarifying Amendments

The IASB published final clarifications of IFRS 15 Revenue

from Contracts with Customers in April 2016.

The amendments address certain topics identified

subsequent to the issuance of the IFRS15 including transition

relief. In all its decisions, the IASB considered the need to

balance helping entities with implementing IFRS 15 and not

disrupting the implementation process.

The FASB issued in March 2016 ASU 2016-08 Revenue from

Contracts with Customers (Topic 606): Principal versus Agent

Considerations (Reporting Revenue Gross versus Net) in

response to concerns identified by stakeholders.

Similarly, in April 2016, the FASB issued ASU 2016-10

Identifying Performance Obligations and Licensing which

amends certain aspects of the Board’s new revenue standard.

Furthermore, the FASB published in May 2016, ASU 2016-012

Narrow-Scope Improvements and Practical Expedients

amending the guidance related to collectability, non - cash

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consideration, and completed contracts at transition, and the

addition of new practical expedients.

Since these clarifying proposals/amendments from both

Boards are not identical, a careful analysis is needed in

understand similarities and differences.

Refer to the previous CFO Insights | 2016 Q3 (http://www2.

deloitte.com/jp/en/pages/finance/articles/cfop/cfo-insight.

html), our IAS Plus project page (http://www.iasplus.com/

en/standards/ifrs/ifrs15) as well as US GAAP Plus project page

(http://www.iasplus.com/en-us/standards/fasb/revenue/

asc606) for further information.

Transition Resource Group (TRG)

activities

The TRG is responsible for soliciting, analysing, and discussing

issues arising from implementation of the new revenue

standards in order to assist the IASB and the FASB to

determine what, if any, action will be needed to address those

issues. Clarifying amendments discussed above reflect past

discussions by the joint TRG.

In January 2016 the IASB announced that it would not attend

future TRG meetings. Nonetheless, the FASB scheduled three

TRG meetings in 2016, being the following meeting in

November 2016.

Although the revenue TRG is now FASB only, IFRS reporting

companies, in particular, FPIs registered with the SEC, are

advised to monitor activities in line with the SEC Staff

suggestions.

Japanese GAAP and other

local developments

ASBJ’s Mid-Term Operation Plan

In August, the ASBJ issued the Mid-Term Operation Plan (the

“Plan”). The Plan is designed to present the key policies that

will guide the accounting standards development activities of

the ASBJ for the next three years. The appendix to the Plan

document identifies significant new accounting standards

issued by the IASB, namely IFRS9, IFRS10-12, IFRS13 and

IFRS16 and that the ASBJ would consider the need for

converging Japanese GAAP with these IFRSs.

Revision to the “Work Plan for

Accounting Standards under

Development”

In September, the ASBJ released the revised work plan for

accounting standards that are under development. Major

accounting standards or interpretations include the following:

On February 4, 2016, the ASBJ published Request for

Information as an early step in considering the

development of a comprehensive accounting standard

for revenue recognition. Comments were due on May 31,

2016. The ASBJ is currently analyzing the comments

from constituents and targeting June 2017 to release an

exposure draft.

The ASBJ published the Guidance No.26

Implementation Guidance on Recoverability of Deferred

Tax Assets and No. 27 Implementation Guidance on tax

rates used in applying Tax Effect Accounting (collectively,

the ‘Guidance’) in December 2015 and March 2016,

respectively. The ASBJ is discussing the transactions that

are not in the scope of the Guidance and targeting

October or November 2016 to release an exposure draft

for current tax.

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On June 2, 2016, the ASBJ released the Exposure Draft

of ‘Practical Solution on Accounting for Risk Sharing

Pension Plan’ (the ‘Exposure Draft’) and is targeting

October or November to publish the final standard.

Amendments to ‘Japan’s Modified

International Standards’

In July, the ASBJ issued the amendments to Japan’s Modified

International Standards ( JMIS). JMIS are standards and

interpretations issued by the IASB with certain ‘deletions or

modifications’ where considered necessary by the ASBJ. The

ASBJ issued JMIS in June 2015 and examined the accounting

standards by the IASB during 2013 since then. The ASBJ

undertook the endorsement process on the standards issued

by the IASB during 2013 and decided to make ‘deletions or

modifications’ for the following two items related to IFRS9

(2013):

Non-recycling of the hedging gain or loss on fair value

hedges of investments in equity instruments measured

at fair value through other comprehensive income

Basis adjustments in cash flow hedges (including the

accounting for the time value of options in hedging

accounting)

In July, the FSA announced that the amendments were

designated for use by companies applying JMIS and the use

of JMIS is possible in consolidated financial statements.

English translation of these amendments is available from the

ASBJ website (https://www.asb.or.jp/asb/asb_e/endorsment

/jmis/20160725.jsp).

Proposed updates to the list of

‘designated’ IFRSs

On October 13, the FSA proposed that additional IFRSs issued

from January to June 2016 be designated for use by

companies voluntarily applying IFRSs in Japan. New IFRSs

proposed for designatation include IFRS16 Leases and

amendments to IFRS2, IFRS15, IAS7 and IAS12. The proposal

also include designation of amendments to JIMS issued by the

ASBJ in July, 2016, as discussed above. Comments are due by

11 November.

New data on voluntary IFRS adoption

in Japan from TSE

On July 29, the Tokyo Stock Exchange (TSE) released data

showing that 141 companies listed on the TSE, accounting for

approximately 30 per cent of the market capitalisation, have

adopted or plan to adopt International Financial Reporting

Standards (IFRS). In addition, over 200 further companies are

actively considering adoption.

For more information, please visit: IASPlus.com (IFRS) or USGAAPPlus.com

(U.S. GAAP), or speak to our Deloitte experts Shinya IWASAKI, Partner

(shinya.iwasaki@tohmatsu.co.jp) or Alejandro SAENZ, Senior Manager

(alejandro.saenzmartinezgeijo@tohmatsu.co.jp).

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Tax News

Japan’s Recent Tax Treaty

Negotiations - Evidence of a

Shifting Landscape

One of the primary reasons that countries conclude bilateral

tax treaties is to encourage cross border investment through

the elimination of double taxation on income. Treaties do

this by limiting the right to levy tax under domestic laws, and

by providing mechanisms for the relief of certain foreign taxes

suffered. Japan’s policy towards the conclusion of such

bilateral treaties has been to reduce or eliminate withholding

taxes, and to strengthen measures to prevent tax avoidance.

Strengthening anti-avoidance measures with a limitation on

benefits (“LOB”) article, and/or a principal purpose test, is

consistent with the aims of the Organization for Economic

Cooperation & Development’s (“OECD”) Base Erosion & Profit

Shifting (“BEPS”) project.

Japan is also an early adopter of the Authorized OECD

Approach (“AOA”) to the attribution of income to permanent

establishments (“PE”), and has enshrined these principles into

some of its recently negotiated treaties, including those with

the UK, and more recently, Germany, Belgium and Slovenia,

Under these treaties there will be a comprehensive

recognition of internal dealings between a corporation’s head

office and its PE based on the arm’s-length principle.

apan’s new tax treaty with Belgium was signed on 12 October

2016, and will enter into force on the 30th day after the

countries exchange diplomatic notification that ratification

procedures have been completed. Assuming that the treaty

enters into force during 2017, it will generally apply to

corporation tax in respect of periods beginning on or after 1

January 2018, and to withholding taxes on payments made

on or after 1 January 2018. Dividends paid from a 10% or

greater shareholding will generally be exempted from

withholding tax (lowest rate was previously 10%). Interest and

royalties will also be exempted from withholding tax, subject

to certain conditions (previously capped at 10%). The new

treaty also contains an LOB clause, limiting benefits of the

treaty to only those residents which meet certain objective

criteria, and a principal purpose test that denies benefits

where one of the principal purposes of a transaction was to

obtain that treaty benefit.

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Recent treaties concluded with other European nations,

Germany and Slovenia, show a similar trend. The new treaty

with Germany will enter into force on 28 October 2016, and

will apply to corporation tax in respect of periods beginning

on or after 1 January 2017 and to withholding tax on

payments made on or after 1 January 2017. Dividends in

respect of shareholdings of 25% or more will generally be

exempt from withholding tax (lowest rate was previously 10%).

Interest and royalties will also be exempted from withholding

tax, subject to certain conditions (previously capped at 10%).

Anti-avoidance measures have been strengthened with the

introduction of a principal purpose test to go along with an

LOB provision. Similarly, Japan signed a treaty with Slovenia

on 30 September 2016 which includes a principal purpose

test, and a reduction in withholding taxes on dividends,

interest, and royalties to 5%.

Japan’s pursuit of a modern and extensive network of bilateral

treaties continued with the first round of negotiations in early

October 2016 with Austria, to replace the existing treaty

which is over fifty years old. Outside of Europe, Japan is also

engaged in efforts towards the conclusion of treaties with

Kenya and Kyrgyzstan, in addition to a recently negotiated

treaty protocol with India that will enter into force on 29

October 2016. The protocol with India introduces new

provisions for the exchange of information and assistance

with tax collection, which are in line with the goals promoted

by the OECD’s BEPS initiative.

Changes in the field of international tax continue to reflect an

emphasis on the strengthening of measures to prevent tax

avoidance, increased transparency, and the arm’s length

attribution of income in accordance with transfer pricing

principles. Japan’s efforts to update and expand its treaty

network are consistent with these trends, and the measures

to reduce withholding taxes and prevent double taxation

provide welcome encouragement to cross border investment.

Given the proliferation of anti-avoidance measures, however,

it is important that foreign investors ensure that there are

sound business reasons for the way in which they structure

their transactions with Japan, and that their entities which

seek to benefit from a bilateral treaty with Japan have genuine

substance.

For more information, please speak to our Deloitte experts

Kazumasa YUKI, Tax Partner (kazumasa.yuki@tohmatsu.co.jp), or

David BICKLE, Tax Partner (david.bickle@tohmatsu.co.jp).

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Front-office Finance: How CFOs Can Create Value

Through Business Partnering

With finance leaders being expected to help drive strategy

and improve performance, many are looking to build or

improve the finance function’s ability to be a “front-office”

business partner. These finance teams are seeking to

operate beyond traditional back-office roles to deliver value

by understanding the needs of the commercial enterprise,

acting as a cross-functional integrator and providing timely

and insightful decision support. Becoming a true partner to

the business means CFOs need to address issues related to

talent management, business analytics, pricing and service

delivery models

.While improving finance’s business partnering capabilities

has been a big part of the CFO agenda for the last several

years, findings from Deloitte’s first-quarter 2016 CFO

Signals™ survey14 suggest there remains a great deal of work

to be done. When asked to respond to the statement, “Within

my organization, finance is already an acknowledged partner

for sales, marketing and/or product,” only 40% of the 2,032

webcast respondents said they “agreed,” while 32%

“somewhat agreed,” 19% were “unsure,” and about 9%

disagreed. Moreover, 91% of CFOs responding to a Deloitte

survey on finance business partnering 15 indicated they

planned to increase the level of business partnering over a

three-year period.

14Deloitte CFO Signals™: 2016 Q1: http://www2.deloitte.com/us/en/pages/finance/articles/cfo-signals-survey-executives-sentiment-rough-start-economies-equities-

2016q1.html 15Finance business partnering - Making the right move, Deloitte Statsautoriseret Revisionspartnerselskab, 2015:

http://www2.deloitte.com/content/dam/Deloitte/dk/Documents/finance/Finance-Business-Partnering2015.pdf

Understand Where Business

Partnering Can Have a

Positive Impact

As CFOs work to build or improve finance’s relationship with

the business, it is critical that their teams understand where

the opportunities to drive value to the business and

shareholders lie, and the levers they can use to seize those

opportunities. Areas where business partnering can have a

positive impact include revenue and asset management,

operating margins and other key performance indicators.

Finance also can help improve account management as well

as visibility into price sensitivities and opportunities by

coupling accurate and timely data with advanced analytics.

Through decision-support analyses, finance can help

optimize inventory, increase management’s focus on

forward-looking information, and improve the accuracy of

sales, revenue and margin forecasts while minimizing

reporting gaps and failures. Just as strong business

partnering can help improve performance, a lack of, or

ineffective, business partnering can hurt shareholder value.

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14

Business Partnering Begins

with Building Trust

Business partnering is about contributing insights and being

recognized for the value provided. At the core of the

relationship between finance and operations is credibility,

which is the license to serve as a business partner.

Building trust with the business units is essential. You have

to put yourself in the shoes of the people you are supporting

so you understand the questions they are asked every day

and the decisions they have to make. That means you need

to start having conversations in the same manner that

business units discuss issues.

Examples of conversation topics range from assessing the

financial- and talent-related impacts of a new sales quota

system or analyzing the ROI of spending the next marketing

dollar on social media versus a new distribution channel. The

goal is to change the perception of finance from a policing

function to a knowledgeable partner that adds value and

addresses risk

Supporting the Business by

Leading Collaborative Efforts

Leading collaborative efforts is another important way

finance can support the businesses. By assuming the role of

cross-functional integrator, finance can act as a conduit for

functional groups that don’t necessarily work with one

another. At one organization, for example, the accounting

function was assigned to run the deal desk operation. The

accounting team brought together the sales, marketing and

product development teams early in the deal process so that

each function understood the impact of new pricing

structures and the marketing effort supporting those

structures. The collaboration provided a comprehensive view

of downstream impacts, which was critical for decision-

making, as well as optimizing and measuring profitability

upon signing deals.

Similarly, finance and sales can work together to improve

working capital by analyzing the tradeoff between pricing

concessions and days sales outstanding, and then developing

a plan to balance the two. Finance also can provide insights

about new business models by comparing revenue

generation under current contracts with contracts based on

new pricing and delivery models.

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15

Talent Capabilities for

Effective Business Partnering

Central to business partnering is business acumen, strategic

thinking, being customer focused and having the ability to

influence and challenge management. Business partnering

may require the finance team to develop new skills or prompt

the CFO to hire new team members. Transforming the

finance team into a business partner may entail difficult

discussions and hard decisions, especially when the CFO is

positioning the function to respond to the demands of the

marketplace and business.

For example, the required skills for data analytics usually are

associated with a data scientist rather than a staff person

experienced in using spreadsheets, audit software and ERP

systems. Data scientists develop predictive or visual analytics

to provide insights into trends and processes for decision-

making. However, traditional finance team members often

spend a significant amount of time on data manipulation,

reconciliations and reports that aren’t perceived as adding

direct value to the business.

In addressing the skills-gap challenge, the finance team may

need to focus on more strategic opportunities, including

understanding which processes drive value. For instance, in

the supply chain operation, if the objective is to provide

credible advice and have influence over business decisions,

the finance team may need to learn more about the

organization’s relationship with strategic vendors, how

customers buy and how products are sold, and how

transactions could be affected by various regulations.

Advanced analytics often provide finance with an

understanding of the upstream and downstream implications

of the levers that drive business, including metrics around

price realization, sales volume, SG&A and the cash conversion

cycle. As a result, finance could develop the capability to

provide important insights to operational partners once they

understand the levers. Such insights might include advanced

spend analysis around customers and products, proactive or

automated forecasting, analytical modeling and opportunity

valuation support.

Overcoming Barriers to

Developing Deeper Business

Relationships

Resource constraints can pose a challenge for CFOs seeking

to build finance’s business partnering capabilities. In

response, CFOs may need to open up their aperture a bit

from a talent perspective. Sometimes there may be team

members with backgrounds in areas other than finance and

accounting who could be tapped for partnering projects and

team members with traditional finance function backgrounds

willing to expand their scope.

Reporting structures also can be a barrier if collaboration

between business and finance professionals isn’t encouraged.

The issue can be addressed by creating organizational

structures, incentives and mandates that encourage finance

and business teaming, and clearly defining partner roles and

responsibilities. By taking a structured approach, regardless

of the project or business function, business partners will

know what to expect from a partnership and likely stay

interested in continued collaboration.

Access to high-quality and timely data also is critical if CFOs

and their teams hope to develop deep business relationships.

Finance should consider integrating relevant data from

disparate information systems and position itself as the

organization’s one source of “the truth” for providing decision

support.

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The bottom line is that finance cannot develop business

partnering relationships in a vacuum. Finance professionals

may need to better understand the levers that drive value

before earning enough trust to participate in the business

decision-making process. If you stay mired in the finance and

accounting weeds, it could be difficult to get business leaders

to perceive you as a business partner.

The Working Styles of CFOs and Their CEOs: CFO

Signals

CFOs are often regarded as detail-oriented, meticulous and

conscientious — a pattern of traits associated with the

Guardian, one of four working styles identified by Deloitte’s

Business Chemistry framework. However, CFOs increasingly

consider themselves to be Drivers, according to findings from

Deloitte’s second-quarter 2016 CFO Signals™ survey16. The

quarterly survey also found that most CFOs adapt to the

working style of their CEOs, although how they adapt

depends on the CEO/CFO working style pairing.

16 CFO Signals: What North America’s top finance executives are thinking—and doing, Deloitte CFO Program. Q2 2016

In the Q2 2016 CFO Signals survey, participating CFOs were

provided with the following descriptors typically associated

with the Business Chemistry types:

— Guardian: Concrete, process/detail oriented, meticulous,

traditional, calm, socially connected, loyal, conscientious;

— Integrator: Intuitive, imaginative, empathic, expressive,

consider all options and implications, web thinking,

diplomatic,

— Pioneer: Adventurous, creative, interested in new

experiences, high energy, spontaneous, optimistic,

adaptable.

— Driver: Analytical, logical, experimental, determined,

decisive, direct, tough-minded, competitive, pragmatic.

When asked to self-define their own dominant type and

working style, based on their own assessments of how they

aligned with these descriptions, it was found that the

surveyed CFOs increasingly consider themselves Drivers,

compared to when last asked this question, in 2014.

About 60% of the 140 CFOs of large North American

companies who were surveyed consider themselves and

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17

their working styles as Drivers. That is up from 50% in the Q4

2010 CFO Signals survey, the first time the survey asked CFOs

to characterize their dominant working styles.* Those CFOs

who describe themselves as Drivers account for more than

75% of the CFOs surveyed from the Technology, Telecom/

Media/Entertainment and Services sectors. They are least

common in the Manufacturing (50%) and Financial Services

(45%) sectors.

Integrators, the second most common self-identified working

style among the CFOs surveyed, nearly doubled in prevalence

to 19% in the Q2 2016 CFO Signals survey from 11% in the Q4

2010 survey. Executives with this type working style are

considered to be empathic, thoughtful of options and

implications, and diplomatic, according to Business

Chemistry. Self-described Integrators appear most

commonly among the CFOs surveyed from the

Manufacturing and Financial Services sectors (both at about

25%) and were not apparent among CFOs surveyed from the

Technology sector.

The rise in Drivers and Integrators may reflect the shifting

demands placed on CFOs. Based on what we see in our CFO

Transition Labs, CFOs are being increasingly tasked with

driving operations and getting the various parts of the

company to work together to execute the company’s strategy.

CFOs identifying themselves as Guardians totaled 16%, less

than the 29% in the Q4 2010 survey, and appear more often

in the Financial Services (24%) and Technology and

Retail/Wholesale (about 22%) sectors.

Only 5% of the surveyed CFOs indicated Pioneer as their

working style, and those were from the Energy/Resources,

Financial Services and Manufacturing sectors.

How CFOs View the Working

Styles of Their CEOs and

CEO/CFO Pairings

When surveyed CFOs were asked provide their perceptions

of their CEO’s working style, about 35% selected Pioneer, up

slightly from 33% in the Q4 2010 survey, while 33%

characterized their CEOs as Drivers, compared to 34% in the

Q4 2010 survey. Nineteen percent of surveyed CFOs said

their CEOs are Integrators, up from 11% the Q4 2010 survey.

According to the CFOs participating in the Q2 2016 survey,

12% of their CEOs are Guardians.

When asked which type of CEO they work best with, surveyed

CFOs overall were most likely to say Pioneer or Driver.

Driver CFOs are most likely to say they work best with Pioneer

and Driver CEOs. Integrator CFOs are most likely to say they

work best with Driver CEOs. Both Pioneer and Guardian CFOs

are most likely to say they work best with Driver and Pioneer

CEOs.

When it comes to pairings, the Q2 2016 CFO Signals survey

found pairings of CEO Pioneers with CFO Drivers the most

common overall. Guardian CFOs are most often paired with

a Driver CEO and are very unlikely to be paired with a

Guardian CEO, according to the survey. The CFO Signals

survey also found Integrator CFOs mostly paired with Pioneer

and Driver CEOs, and they work more with Pioneer CEOs than

they would prefer and less with Integrator CEOs than they

would prefer.

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18

How CFOs Adapt to Their

CEOs’ Working Styles

Most surveyed CFOs say they adapt to the working style of

their CEOs, with the type of adaptation depending greatly on

the CEO/CFO pairing. For example, Driver CFOs who are

paired with Driver CEOs indicate they tend to adopt more

Guardian traits. When Driver CFOs are paired with other

types of CEOs, they are likely to say they adapt to their CEO’s

type by adopting Integrator traits.

Pioneer CFOs paired with Driver CEOs say they adopt more

Guardian and Driver traits. Surveyed CFOs who are not paired

with a Driver CEO say they are likely to adopt Integrator traits.

When Integrator CFOs are paired with a Pioneer CEO, they

say they adopt Pioneer and Guardian traits, but they take on

Driver traits when working with Driver CEOs.

Guardian CFOs say they are likely to adapt to their CEO’s

working style, either by ratcheting up their Guardian traits or

by adopting more Driver traits.

It should be noted that the validity of these findings is limited

by the fact that they are based solely on CFOs’ perceptions

and also on the choice of a single working style. Despite these

limitations, these findings can provide insight into how CFOs

view themselves, their CEOs, and their working relationships

— and also into how these factors might have changed since

late 2010.

*The sample size for the fourth-quarter 2010 CFO Signals

survey was 91.

CFO Insights | 2016 Q3

19

Why Many CFOs Are Retiring Early and Implications for

Succession Planning

Research from executive search firm Spencer Stuart points to

a rising trend toward earlier retirement among large cap

public company CFOs. Beginning in 2015 and continuing

through the first half of 2016, the average retirement age

among Fortune 200 finance chiefs has dropped to 58.7 from

a recent peak of 60.6 in 2011. Moreover, the data indicates

the trend toward CFOs retiring at an earlier age may be

spreading beyond the largest companies, according to Joel

von Ranson, who leads Spencer Stuart’s Financial Officer

Practice in North America. What’s behind the trend? As Mr.

von Ranson explains, it may be a combination of increasing

demands of the CFO role, recent wealth creation and a rise in

the number of opportunities for CFOs to serve on outside

boards.

Whatever the reasons, if the trend lasts, it could have

significant implications for companies and how they respond,

as well as for aspiring CFOs.

Q: What specifically are you seeing in terms of CFO retirement,

and what might explain your findings?

Joel von Ranson: I’ve seen a marked decrease in the

retirement age of CFOs over the last eight years and an even

bigger dip in the last four to five years. According to Spencer

Stuart research, the average age of Fortune 500 CFOs who

retired in the first half of 2016 was 58.6 years, and 58.4 for

Fortune 1000 CFOs who retired in that same time period.

Those figures compare to a recent peak of 60.2 for Fortune

500 CFOs in 2012 and 60.7 for Fortune 1000 CFOs in 2012.

There are several factors at play. First is the increasing

opportunity to serve on outside boards. Since Sarbanes-

Oxley, active CEOs are serving on far fewer boards on average,

the thinking being that a public company CEO role is too time-

consuming to serve on more than one or two outside boards.

That has created increased demand for CFOs in the

boardroom and opened the way to CFOs to have a broader

board portfolio. Additionally, my impression is that many

boards are drawn to candidates who could have a significant

tenure on their board, meaning CFOs could feel more

marketable to boards at a younger age. A board role can

leverage all their experience and be very satisfying, engaging

and prestigious.

Wealth creation is another factor. Over the last five or six

years, the stock market has performed well overall, and that

has created a great deal of wealth through company stock

options for many of large-company CFOs. Related to that is

the increase in M&A activity over the last 18 months; when a

company makes an acquisition, it often results in a sizable

bonus for its sitting CFO, as well as a generous payout for the

CFO of the acquired company.

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20

A third contributor is the increasing demands and stress of

the CFO role. I think it is fair to say the job has never been

more demanding and more 24×7 than it is today. In coming

years, it may be harder for CFOs to experience the same jump

in their wealth that has occurred of late, and that may

encourage them to work a little bit longer. But the element

that is not going away is the intensely demanding and all-

consuming role of being a public company CFO.

As for the correlation between earlier retirement age and the

largest companies, I believe we at Spencer Stuart are seeing

this trend earlier and more clearly among Fortune 200 CFOs

because they are the ones receiving the most prestigious and

robust board opportunities and perhaps enjoying the most

wealth creation.

Q: Do you see this earlier retirement age trend playing out in

some sectors more than in others?

Joel von Ranson: Statistically speaking, we see the most early

retirements in the life sciences sector, with an average

retirement age recently around 56 years old. It’s probably not

a coincidence that there has been quite a bit of wealth

creation and merger activity in life sciences in the last few

years.

Q: What are some of the implications of these earlier

retirements for companies and CFO searches?

Joel von Ranson: In our CFO recruitment work, many larger

public companies focus on hiring a proven CFO. With the

trend toward earlier CFO retirements, this means we are

operating in a tight CFO marketplace. By and large, many

board directors are surprised to learn that CFOs at 56 or 57

want to retire. For companies, it may be that management

needs to build awareness among boards that the CFOs are

retiring at a younger age, which could lead to new approaches

to retention, external recruiting and development of internal

successors.

Q: Have companies begun responding to this trend, and if so,

how?

Joel von Ranson: We’re finding the topic of CFO succession is

an increasingly explicit part of the CFO search process. When

CFO candidates are brought in to talk to the CEO and board,

they are getting questions like, “How are you going to build

your team? What is your approach to succession planning?”

CEOs and boards want to know who the CFO sees as their top

lieutenant and what are their skillsets and strengths, as well

as what gaps they need to fill to get to the next level.

We also see more companies focusing on planning for their

CFO’s eventual exit by grooming internal candidates. So when

Spencer Stuart is engaged to do a CFO search, we find it much

more common today that an internal candidate—and

sometimes more than one—is being seriously considered,

compared to five years ago.

Q: What are some key practices you see among organizations

that stress succession planning for the CFO role?

Joel von Ranson: I think the companies with more robust CFO

succession planning make it an ongoing topic in the

boardroom. It is important to have directors elevating their

interest in succession and communicating that interest to the

CEO, CFO and general counsel, even asking about specific

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21

plans and seeking exposure to the next level of talent

beneath the CFO. The management teams of organizations

with a deep bench of finance talent tend to develop their top

performers by rotation through diverse finance assignments

and board exposure. And they are bringing potential

successors into the boardroom earlier and more often to

interact with the directors and get that exposure.

Effective succession practices also include providing

exposure for that next level of finance talent to investors and

the analyst community. Gaining experience in that kind of

interaction with stakeholders can be an important

opportunity for aspiring CFOs, especially given the rising

importance of investor relations experience and credibility in

CFO searches17

Brexit: A Textbook Lesson on Disruption

Mention “disruption” and the conversation often defaults to

technology. As in, what new and emerging technologies are

both upending and changing what’s possible for business?

That’s an important story. But when it comes to disruption,

it’s not the only story. Disruption also occurs when the

conditions or assumptions that underlie an organization’s

business success change—and change quickly. A textbook

example? The shock and aftershocks brought about by the

Brexit referendum.

On June 23, 2016, the British people voted to leave the

European Union (EU). Even as the votes were counted, most

British citizens, U.K. government leaders, world leaders and

interested observers thought the Remain vote would win the

day. The next morning, the Leave campaign’s 52% victory was

met with both disbelief and alarm.

Some consequences were immediate: The resignation of the

British prime minister, the fall of the British currency, a tumble

in the equities market and the subsequent breakdown of the

opposition leadership. The impact was huge, the uncertainty,

unprecedented. Business leaders were forced to confront a

situation that few had taken seriously.

17 How Shareholder Activism Is Impacting CFO Searches, The Wall Street Journal,June 2015

What’s the Broader Lesson for Business Leaders?

Certainly, the Brexit referendum is important in and of itself.

This is particularly true for companies with investments,

people and exposure in the United Kingdom, as they face

unparalleled disruption and a reorientation to a new set of

trading relationships. But Brexit also offers a broader lesson:

Geopolitical, geo-economic and international issues beyond

our control can suddenly disrupt conditions that had only

yesterday seemed like safe bets, and the circumstances upon

which we make decisions on how to compete and win in the

marketplace can shift in abrupt and unexpected ways.

Brexit brings two challenges to the fore: The first and more

immediate challenge is how business leaders should react to

this prolonged uncertainty. There is no precedent to know

what this transformation will look like. Equally as challenging

is determining how long it might take, as estimates for the

transition range from at least two to 10 years. Without that

knowledge, it’s hard to make strategic decisions confidently.

The second and longer-term challenge for business leaders

is how to better anticipate and manage strategic surprise. It

is one thing to acknowledge that the world changes quickly

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22

and that events in distant markets may have unexpected

consequences on strategic commitments. It’s another to

create capabilities that can help companies be better

prepared and more resilient when those surprises occur.

Only time will tell what the Brexit vote really means. Is it a

domestic political story confined to the United Kingdom? Or

might it signal a broader retreat from globalization and a

withdrawal from economic trade relations that have been

developed over the last 60 years? If the latter, it could

potentially trigger a cascade of instability—not only within the

European Union, but also with the EU’s trading partners

around the world.

So where is the Upside?

At the moment, it’s difficult to know where opportunities may

lie. But sudden change means that advantage can be seized

by those who are ready to act. For example, there are already

opportunities where organizations can acquire valuable

assets that have suddenly dropped in price. There will also be

“relative” opportunities for organizations that can identify and

take advantage of circumstances more quickly than others.

When sudden and unexpected change occurs, there are two

dominant responses: denial and paralysis. Both are natural

tendencies but they do nothing to help a company gain or

maintain competitive advantage.

The upside, therefore, may be found for those organizations

that can mobilize before the dust settles. Companies that can

move beyond denial and paralysis, recognize the many

variables in play and develop a plan of attack should be better

positioned in the evolving U.K. and EU marketplace.

Companies that sit on the sidelines may see opportunity pass

them by.

What Can Executives Do Now?

Brexit is a call to arms for business leaders who are

concerned about where they see growth and opportunity and

how they win in a global marketplace. This call can be

answered with a commitment to:

Look out into the world beyond our control

Scan for changing circumstances

Rigorously explore, aggressively question and

methodically review how those circumstances could

threaten the fundamental assumptions of how to go to

market.

Every strategy and strategic commitment is built on

assumptions about how the world works. What Brexit has

shown us is that leaders must create the capacity to take

nothing for granted because circumstances can, literally

overnight, change the game, and upend the strategies they

have in place. And the resulting consequences may take years

to resolve.

Business leaders can’t singlehandedly make the world more

stable. But they are in a position to anticipate, adapt,

maneuver, make decisions and adjust course as needed to

help their organizations become more resilient. They also

have scenarios, simulations and other tools at their disposal

to support and accelerate this process.

Brexit isn’t the first big surprise that organizations have had

to manage, and it won’t be the last. As a leader, it is important

to consider how well prepared the organization is for

disruption, from wherever it may come.

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The CFO Program | Japan

23

The CFO Program for International Companies

Deloitte’s Chief Financial Officer (CFO) Program brings together a multidisciplinary

team of Deloitte leaders and subject matter specialists to help CFOs stay ahead

in the face of growing challenges and demands. The Program harnesses our

organization’s broad capabilities to deliver forward thinking and fresh insights for

every stage of a CFO’s career - helping CFOs manage the complexities of their

roles, tackle their company’s most compelling challenges and adapt to strategic

shifts in the market. Deloitte’s vision is clear: To be recognized as the pre -

eminent advisor to the CFO.

The CFO Program in Japan hosts regular events for executives of international

companies to provide insights and networking opportunities.

Contact: Tom Hewitt | tohewitt@tohmatsu.co.jp

Website: http://www.deloitte.com/jp/en/cfo

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