The capital’s uncertain future as a major financial centre
Twenty years ago Tokyo was Asia’s leading financial centre with aspirations to rival London and New York. How times have changed.
According to the City of London Corporation’s 2009 Global Financial Centres Index, which ranks the world’s financial centres by competitiveness, Tokyo now languishes behind not just London and New York, but also Hong Kong and Singapore.
To make matters worse, last year Tokyo lost its status as Asia’s biggest stock market by trading value when it was overtaken by booming Shanghai.
The situation certainly seems grim. But what are the chances of a Japanese recovery? Could Tokyo one day regain its position as the number one Asian financial centre and again challenge London and New York?
The simple answer to that – for the foreseeable future at least – is no, says Philippe Avril, BNP Paribas’ chief country representative for Japan and general manager for BNP Paribas Securities in Japan.
“I think the debate now is more about how to revitalise Tokyo and how to make sure Tokyo can continue to compete with markets like Hong Kong, Singapore and, to a lesser extent, Shanghai,” says Avril, who is also chairman of the EBC Banking Committee.
To do that, however, Tokyo will need to overcome several major handicaps.
“The first thing to recognise is that the cost of operating in Tokyo is very high in many ways … and the tax rate is high,” says Avril. “So there is a very strong rationale for foreign companies to say, ‘if we have to establish a regional centre in this time zone, let’s do it in a way that’s cheaper and go to Hong Kong or Singapore.’ ”
A 2009 survey by KPMG highlights one crucial cost difference: corporate tax. It lists Hong Kong’s corporate tax rate at 16.5%, Singapore’s at 18% and Japan’s at 40.69%.
If costs are one hurdle, then the next, says Avril, is Japan’s banking and finance regulations, which are not always in step with the rest of the world.
“The biggest problem we have as Europeans is the regulatory separation in Japan between the various business areas, such as banks, securities, trust banks, asset management and insurance. In Europe we work on a universal banking model,” says Avril.
Then there is the difficulty that firms face attracting the best staff to Tokyo. Pete Millett, director of People Services International, a recruitment firm that operates in the finance and banking sphere in Japan, Hong Kong and Singapore, says Japan experienced an exodus of foreign human resources to Hong Kong, Singapore and other markets during the recent financial crisis.
For a myriad reasons, he doubts most of that talent will want to return to Japan anytime soon.
“The language barrier, strict visa policies, small apartments, excessive red tape, high taxes, and declining importance of the market globally are some core issues that currently make Japan less attractive than Singapore or Hong Kong to many foreign bank employees,” says Millett.
“Remedying these issues is just a small part of the total solution needed by Japan to bounce back and to stay.”
In defence of Tokyo, Atsushi Saito, president and CEO of the Tokyo Stock Exchange Group, says Tokyo’s true merits don’t necessarily show up in statistics, especially when compared to its Asian rivals.
“People outside the industry tend to judge the competitiveness of stock exchanges in terms of trading value or volume; I’m more concerned by the real differences in quality between each trading venue,” says Saito.
“How can you compare the real value of a company or society, where profit levels are low because they follow environmental policies and are concerned about the well-being of employees, with those where the opposite is true?”
Tokyo can point to tangible progress in recent years. In June 2009, the Tokyo Stock Exchange and London Stock Exchange jointly launched Tokyo AIM. The market seeks to provide a new funding option for developing firms in Japan and the rest of Asia, as well as investment opportunities for professional investors from Japan and overseas.
Tokyo AIM’s president and CEO, Tetsutaro Muraki, says he is optimistic that Japan can once again become the premier Asian hub, but admits there are obstacles to overcome, particularly a lack of English-speaking ability.
AIM also allows companies to conduct their listing in English only, and in accordance with international accounting standards. That’s as well as giving developing companies the advantages that come with being listed – such as greater opportunities to raise capital, and increased credibility and branding within Japan.
Avril, too, points to improvements – particularly on the regulation side, where there have been government initiatives to increase transparency and improve communication among banks and securities houses, and the regulatory authorities.
But as Asian competitors surge ahead, Tokyo simply hasn’t been able to keep up, he says.
“A lot of effort and progress has been made in Japan and I think there is a chance for Tokyo to catch up, but long term it’s more a case of managing the decline.”