Over the past decade, Japanese business and finance have witnessed significant changes. Annual imports of contact lenses have surged by over 60 percent, driven by smartphone saturation and a fashion shift away from glasses. This has led to a large domestic supply deficit in contact lenses. Similarly, the field of corporate finance in Japan is facing a critical CFO supply-demand imbalance.

Unraveling Japan's CFO Crisis and the Path to Solution

Traditional Company Structures and the CFO Role

In many Japanese companies, the most senior finance officer typically rises through the accounting department. They often excel as financial comptrollers and have become world-class cost-cutters and cash hoarders. However, they often stop there and do not actively participate in big strategic discussions or become natural successors to the top job. For example, a Japanese CFO may perfectly maintain a certain balance between equity and debt but may not be involved in conceptualizing the ideal balance. In 2008, Japan implemented an equivalent of America's Sarbanes-Oxley Act, which led to a brief boom in creating CFO positions but without a fundamental reimagining of the role.

Many Japanese holders of the CFO title do not meet the expectations of outside investors. The discrepancy between the Japanese and international understanding of the CFO role helps explain why Japanese companies seem different from their US counterparts and why shareholder engagement often ends in frustration. Investors now expect to speak to a "real" CFO with specific views and a shareholder-focused mindset.

The Impact of CFO Deficit on Tokyo Stocks

Tokyo stocks are now at the top of the priority watch list of various investors. The CFO deficit has created an environment where undervaluation, disposable non-core assets, and opportunities for improving capital efficiency have proliferated. Activist investors, private equity funds, and overseas corporate buyers are all drawn to this situation. For instance, Alimentation Couche-Tard's $47bn bid for Seven & i shows the interest in Japan's CFO-light environment.

The current generation of investors in Japan is in the ascendancy, and their demand for a "real" CFO cannot be ignored. Japan has entered the age of the CFO without a substantial domestic pool of qualified candidates. The most practical solution, similar to that for contact lenses, is to import the best CFOs from overseas while also addressing the underlying structural issues.

The Path Forward: Importing CFO Talent

Mass imports of foreign CEOs may face significant resistance within Japanese companies, but importing foreign CFOs can simultaneously fly under the social radar while attracting investors. By bringing in external CFO expertise, Japanese companies can bridge the CFO gap and enhance their financial performance. This will not only meet the expectations of investors but also bring new perspectives and ideas to the table.

It is crucial for Japan to recognize the importance of having a qualified and active CFO community. By addressing the CFO deficit, Japanese businesses can better navigate the complex global financial landscape and position themselves for long-term success. The import of foreign CFOs is a significant step in this direction, and it holds the potential to transform the Japanese business and finance sector.