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Categorized | Financial

Tokyo relaunches bid to become top financial centre

Posted on November 21, 2016

Tokyo’s first female governor will this week launch a drive to establish the Japanese capital as Asia’s leading financial centre and take advantage of the domestic political turbulence affecting Hong Kong, New York and London.

The effort by Yuriko Koike, which will call on global investment banks and others to reverse years of downsizing in Japan, will begin with a “warts and all” appraisal of why a breakthrough for Tokyo has proved so elusive, her advisers say. 

As well as dealing with well known — and still largely unsolved — issues such as the language barrier, high personal tax rates and arcane regulation, a specially convened panel will this week discuss more recent turn-offs for business such as the dominance of the bond market by the Bank of Japan.

The 15-member panel set up by Ms Koike includes Jonathan Kindred, chief executive of Morgan Stanley Japan, and Atsushi Saito, chairman of KKR in Japan. It will hold its first meeting this Friday and its interim report on Tokyo’s struggle will be published in six months.

Complaining that Tokyo’s financial scene had evolved into a closed-off “Galápagos”, Ms Koike told reporters this month that “regulations and tax systems that are far from global standards have prompted the world’s financial institutions to go to Singapore, Hong Kong and Shanghai where it’s easier to do their jobs”.

Yasushi Ando, the chief executive of Japanese private equity firm New Horizon and an adviser to Ms Koike, said language was just one of many hurdles.

Tokyo governor Yuriko Koike wants the city to rival Hong Kong, London and New York © AFP

“Until now, most things have been decided by the three major megabanks and brokerages,” Mr Ando said. “We need to find the underlying causes on why Tokyo has failed to achieve a status similar to Hong Kong and Singapore without being bound by vested interests of the industry.”

The campaign makes Ms Koike the latest in a long line of Tokyo governors desperate to promote the idea that Japan’s deep markets, acquisitive companies, globally liquid currency and massive household savings make it a natural international hub. As the city’s promoters like to point out, Tokyo is also home to the headquarters of more Fortune 500 companies than any other city in the world.

Past campaigns have stalled but this time, say people close to Ms Koike, it may be different. Because of shrinking domestic markets and negative rates, both household and corporate Japanese investors are far more interested in overseas assets than in the past. Fresh from blocking a move of Tokyo’s fish market to an environmentally questionable new site, Ms Koike has already demonstrated her willingness to take on powerful vested interests. 

Furthermore, said the Japan head of a large global asset management company, “it is clearly a shaky time to be funnelling talent to London and Hong Kong. Even New York may take a while to settle back into business as usual after [Donald Trump’s] inauguration.”

Tokyo was ranked fifth behind London, New York, Singapore and Hong Kong, according to the Global Financial Centres Index, a closely followed annual study produced by the Z/Yen Group in London and the China Development Institute in Shenzhen.

“That is probably where it belongs and will stay,” said the Japan head of a global investment bank who is sceptical about Tokyo’s chances. “Every time this debate comes up, we raise the same issues about managing human resources here and the fact that the financial services regulator is not as predictable as we would like. The fact is that Tokyo, unlike London or Hong Kong, does not have a hinterland of young talented people who really want to work in financial services.”

Financial services represent about 5 per cent of Japan’s gross domestic product, compared with about 12 per cent in the UK.

Tokyo’s recent tally of departures by international banks has been unusually high — even as the policies of “Abenomics” have attempted to convince Japanese households to move some of their $17tn of financial assets from bank deposits into investments. RBS, HSBC, Standard Chartered, Société Générale, Merrill Lynch and Citigroup have either reduced or abandoned their presences in Japan, with most citing the difficulty of making any inroads into business areas where domestic incumbents can undercut any challengers. 

Prime Minister Shinzo Abe has already made efforts to reduce Japan’s corporate tax rate to 30 per cent but the rate is still high compared with 20 per cent in the UK and roughly 17 per cent in Hong Kong and Singapore, and it would stand out even further if the US sharply brings down its business rate.

One proposal the panel is expected to make is to designate Tokyo as a special economic zone to allow a further reduction in corporate taxes to at least 20 per cent.