Japan: New Beginnings

Tokyo is reviving ambitions to be Asia’s top global financial hub. Many factors, including the country’s fully diversified economy and high level of household savings, favor the effort. But will it work this time around?

Last September, Tokyo placed fourth in the Global Financial Centres Index compiled by the think tank Z/Yen and the City of London. Tokyo had slipped just one spot since 2019, to stand behind New York, London and Shanghai, respectively, but was still ahead of close competitors such as Hong Kong and Singapore.

For many countries, fourth place would be an entirely respectable showing, if not a cause to celebrate. But for Japan—whose fully diversified economy ranks third in the world for GDP and whose aging citizens have stored up some $18 trillion in savings and household assets—it is not quite good enough. By October, Japanese Prime Minister Yoshihide Suga was adding his support to plans to reinvent Tokyo as a global financial hub.

Since 2017, Tokyo Governor Yuriko Koike has been urging change under an initiative labeled “Global Financial City: Tokyo.” “Regrettably,” Koike says, “Tokyo has not yet secured exceptional status on a par with New York and London. Compared to other major international financial cities abroad, the number of asset management companies and fintech companies in Tokyo is, well, rather low. There is a need to cultivate domestic operators, and in parallel, to aggressively attract companies and talent from abroad.”

The multipronged effort seeks to enhance the environment—legal, regulatory and cultural—for foreign-financial as well as domestic-financial and fintech sectors. In addition to reducing tax and regulatory burdens, the government seeks to ease entry of foreign firms by providing a full range of support. It even includes enhancing the city’s livability, so city leaders were pleased to see Tokyo take the top spot in Global Finance’s annual ranking of the World’s Best Cities To Live.

Will it work this time? Attempts to attract foreign financial services professionals and institutions to Tokyo aren’t new. “Ever since the Japanese asset price bubble from 1986 to 1991, officials have launched one initiative after another,” says Nicholas Smith, a Japan strategist at CLSA Securities in Japan, “but to no avail.” Smith has worked in Tokyo’s finance sector since 1990.

The effort is more than just a government push. Japan’s corporate sector has joined via the Organization of Global Financial City Tokyo—known as FinCity. Tokyo—a public-private partnership for asset managers, fintechs and other interested parties. The organization is actively touting Tokyo’s increasing attractiveness as a financial hub and an opportunity for investors, pointing to its largely untapped pool of blue-chip small and midsize enterprises and a growing sustainable investments asset class worth some 336 trillion yen ($3.2 trillion) as of 2019.

Keiichi Aritomo, FinCity.Tokyo’s executive director, is encouraged by the current approach: He says this time all the key players—national and metropolitan government, regulators, industry, new entrants and academia—are aligned. “In the past, we tended to have industry leaders and academia getting together to come up with theoretically sensible solutions; but none of them were based on actual facts or aggregated voices,” says Aritomo. “So, we decided to do it in a more structured manner to convey the message to the government that these are the direction and regulatory reforms that need to be taken.”

Real Reforms

Over the years, foreign finance professionals have raised concerns about regulatory and tax reform in Japan, says William Bordeaux, former managing director and head of strategy and growth at FTI Consulting. For example, the registration process for foreign investors looking to set up a company in Japan can take months, compared to just hours in neighboring countries like Singapore, he says.

Proposed tax reforms include reducing the burden of corporation tax, currently 30%, on nonlisted asset management companies by making performance-based executive pay tax deductible; exempting foreigners from inheritance tax, which is currently up to 55% for overseas property; and clarifying regulations regarding whether income earned from the distribution of profits from equity investments should be classed as capital gains.

Steps have also been taken to open Japan’s corporate culture: The 2018 Revision of the Corporate Governance Code, and other changes, resulted in an increase in boardroom diversity in Japan, with more than 50% of the country’s top 100 firms now having two or more women as board members, according to FinCity.Tokyo.

One element that makes this time different is Covid-19. The pandemic turbocharged digital initiatives everywhere; and in Japan, particularly, it has shaken up cumbersome old ways of doing business.

“Japan is a traditionally cash- and paperwork-obsessed country that still uses fax machines,” says Jeff Quigley, vice president of global business development at Telcoin, a blockchain-powered fintech platform.

Yet many argue that so-called hanko culture, which refers to the Japanese custom of stamping official seals on paper documents, was already on the way out, a trend accelerated by the pandemic.  “The situation is changing rapidly since Covid,” says Hideo Tomita, representative director of financial-market data firm Refinitiv Japan. While there are still some fax machines, Tomita says nobody uses them. “We expect the government to launch a digital agency that will really transform government-related procedures into a truly digital culture,” Tomita explains. “That will change the situation dramatically.”

Players in fintech, blockchain technology, e-money, contactless payments and cryptocurrencies—all nascent sectors in Tokyo—are excited about the prospects for digital transformation of such a society. “There are a lot of openings for digital players to enter the fold,” Quigley says. 

Japanese leaders also see a successful financial future tied to a more sustainable future, with capital allocation in the green sector. Yasuhiro Sato, chairman of the Mizuho Financial Group, says the government’s 2050 carbon-neutral target will be boosted by the establishment of a green finance market in Tokyo, and believes Japan’s high domestic savings—some $18 trillion worth—could be revitalized by green bonds and green finance.

Last July, Mizuho, in line with guidance from the Task Force on Climate-related Financial Disclosures, outlined an aim to raise 12 trillion yen in environmental financing between 2019 and 2030, starting with a €500 million ($602 million) green bond. “Social implementation of SDGs [sustainable development goals] and green finance is inseparable from technological innovation,” Sato comments in a written statement. “DX [digital transformation], which the government has made one of its major pillars, will contribute greatly to it.”

A 2020 market report on Japan’s green finance sector by the Climate Bonds Initiative (CBI) notes that the Japanese green bond market experienced outstanding growth, with $17 billion in cumulative issuance at the end of 2019, an increase of 70% over the previous year. Japan placed eighth in the CBI’s global rankings, second only to China in Asia.

Already, Japan seems to be finding itself in favor with investors again. Last August, it was reported that Berkshire Hathaway’s Warren Buffett placed a $6 billion bet on Japan’s five largest securities trading houses. Buffett’s intervention was remarkable in part because the investing guru has shown little interest in Japan before. But the country has a reputation for shunning value investors such as Buffett, Bordeaux points out. The renewed interest on both sides leads many in Tokyo’s finance sector to believe the revival may take hold. Bloomberg reported that foreign investors bought some 1.42 trillion yen in Japanese stocks the week ending October 9, 2020—the fifth-largest amount on record.

One big prize would be the $1.4 trillion Government Pension Investment Fund, the largest pool of retirement savings in the world but currently severely restricted in investment choices. If it were freed, insiders agree, that would be a game-changer. So far, however, the nation’s retirement fund is not on the table.