Survey of Derivatives Usage Among Non-Financial Japanese Firms --Implications of a Comparison with U.S. Firms--

Koji Inui

Summary

In surveying derivatives usage among 2，065 non-financial companies listed on Japan's securities markets， we found that 41% of the companies responding used derivatives， the same proportion as found in a survey of U.S. non-financial firms. The main instruments were currency forwards and interest rate swaps. The larger the company， the greater was the use of derivatives and the more varied the types used. The most frequently cited objectives were to avoid foreign exchange exposure， reduce financing costs， and hedge cash flow risk. On the other hand， the most common reasons for risk management in the U.S. were to hedge cash flow risk and earnings volatility.
The main underlying assets in both the U.S. and Japan are exchange rates and interest rates. However， the usage frequency of commodity and equity derivatives was far greater in the U.S. than in Japan. Derivatives are more widely used in the U.S. to manage a variety of business risks.
Only 1% of the derivatives users in Japan used stress test and value-at-risk management methods， compared to approximately 70% of U.S. firms. Since derivatives usage among Japanese firms is mostly restricted to hedging foreign exchange risks， advanced risk management methods may not be needed. Nonetheless， the disparity in risk management levels between the two nations is quite remarkable.
For derivatives to develop in a sound manner and contribute to efficient economic activity， further improvement will be needed in accounting and disclosure practices to improve the transparency of derivatives from the outside， and risk management within companies.