Tokyo’s growing attractiveness as a global financial hub

Tokyo means business with transformative reforms and global capital is taking notice

Japan has been capturing the attention of global finance in the past few months with the country driving up a global revival in M&A activity.

Blackstone’s acquisition of Takeda Consumer Healthcare Company for around US$2.3 billion and Berkshire Hathaway’s US$6.5 billion investment in Japan, both in August 2020, are just some of the deals that have pushed the foreign direct investment flow into Japan to reach a 15-year high.

The latter notably happened just three days after ABE Shinzo’s surprise departure as Japan’s longest-serving prime minister. Despite the fact that Mr ABE’s successor was not yet clear at the time, Berkshire Hathaway still went ahead.

Without a doubt, Warren Buffett’s investment in Japan is a strong vote of confidence for the country. To disclose news of such a large investment during what for any other country would be a period of political uncertainty shows the underlying conviction in Japan’s stability.

Tokyo —the next financial hub for Asia and the world?

In a time of global uncertainty, Japan does indeed seem to be charting a steady course ahead. Amidst a growing trend for protectionism and intensifying US-China friction, the country has steadfastly championed global free trade. The number of COVID-19 infections in Tokyo is comparatively low, and the pandemic has had less impact on daily life than in many other financial cities around the world. The social environment, meanwhile, is known for its safety, quality of life, and excellent infrastructure. Perhaps then, it is no wonder that Tokyo is emerging as a strong contender for Asia’s next financial hub.

“Tokyo is becoming the global financial hub it deserves to be,” says NAKASO Hiroshi, former Deputy Governor of the Bank of Japan and now Chairman of FinCity.Tokyo, the driving organization behind the efforts to continuously enhance Tokyo’s capabilities as a global financial city. “It is not only the world’s largest city by GDP, but also home to the world’s third-largest equity market. The yen is the third most traded currency globally with deep and liquid markets. What’s more, factors that have in the past discouraged global capital and talent from the city are now being dealt with decisively.”

A pioneering vision by the Tokyo Metropolitan Government

Tokyo Metropolitan Government (TMG) has been a major force behind this trend. Determined to reclaim Tokyo’s position as Asia’s No. 1 financial hub, with capabilities on par with New York and London, Tokyo Metropolitan Governor KOIKE Yuriko has worked alongside FinCity.Tokyo to attract financial talent, funds, information, and technology from around the world.

Under Governor KOIKE’s strong leadership, TMG formulated the vision of a “Global Financial City: Tokyo” in November 2017. Deliberations began shortly after her inauguration in 2016 in collaboration with a diverse group of experts from industry and academia, including well-known foreign financial professionals. The vision has three pillars: (1) creating an attractive business and living environment, (2) nurturing players for participation in the Tokyo market, and (3) contributing to solving social issues through finance.

Based on this vision and with the participation of a wide range of finance-related businesses, FinCity.Tokyo was established in April 2019. TMG has also signed a MoU (Memorandum of Understanding) with the UK’s City of London Corporation to exchange information on building a global financial city. The two have also held joint seminars in Tokyo and London.

Focus on asset management and fintech

Alongside these comprehensive efforts, initiatives are also under way to assist international companies considering business development in Tokyo. TMG is particularly focused on attracting asset management companies, which play an important role in building stable assets for the people, supplying risk capital to growth industries and fintech companies that can provide new ways of advancing financial services and spark the development of growth industries.

These activities include a TMG-run program to locate and attract international financial companies. From 2017 to 2019, the city attracted 35 companies from nine countries and regions. In 2019 the target was raised to 50 from 40 companies within the four years between 2017 and 2020.

Well-developed subsidy programs

TMG offers subsidies to all international asset managers and fintech companies that set up operations in Tokyo, not only to those that TMG has reached out to. Subsidies apply to costs involved in establishing a base in Tokyo as well as costs to grow the business in the second and third years.

Asset managers can also receive subsidies for the outsourcing of middle and back-office operations to help them focus management resources on business development and fund management.

In November 2020, TMG started to subsidize office expenses for preliminary research to support international financial companies in their preparations to enter the Tokyo market.

Comprehensive support for international firms

Alongside the subsidies, various support programs are available for international companies considering doing business in Tokyo according to the stage of their business. From consultation on opening a business to establishing a business foundation, support includes:

● Business Development Center Tokyo (BDCT), is a general consultation desk that supports business expansion into Tokyo. The center offers a financial one-stop support service that provides assistance with administrative procedures, comprehensive consulting and specialist referrals. The organization also offers consultation on daily life in Japan for family members moving to Tokyo. BDCT has also opened an office in Hong Kong.

● Through the special zone system, TMG offers help with accessing English-language medical care, multilingual serviced apartments and international schools.

● Under the supervision of the Financial Services Agency, TMG has prepared a “Guidance to the Asset Management Industry in Japan.” This provides a clear explanation of Japanese financial regulations and registration procedures for financial institutions in English.

● The Tokyo Financial Award, established by the TMG in 2018, recognizes financial businesses that provide innovative services that respond to Tokyo residents’ needs, as well as businesses that promote ESG investments. TMG actively promotes award-winning companies to the public.

Initiatives for the future

With the TMG now refining the “Global Financial City: Tokyo” concept in response to international mega-trends such as digitalization, sustainable finance and ESG investments, these initiatives will continue to evolve. The next few years will see accelerated efforts to realize the vision of a “Global Financial City: Tokyo,” including new measures to suit the recent drastic changes in the international financial environment.

Reforms on the national government level

Japan as a country is also actively working towards the enhancement and development of its international financial center.

The new prime minister SUGA Yoshihide made clear his desire for change at his inaugural news conference on October 28, 2020, by stating, “With the aim of making Tokyo a financial hub for Asia and the world, we welcome financial professionals from overseas. To this end, we will promptly review the relevant parts of the taxation system, provide a wider range of administrative services in English, and relax residency requirements.”

In response, the Cabinet approved a policy package on December 8, 2020. The changes aim at realizing ambitions outlined in the Financial Service Agency’s vision and policy package named as “Financial Place Japan.” This includes strategically reforming financial and capital markets to make them more attractive for foreign businesses and highly skilled professionals.

The project will seek to remove regulatory and taxation bottlenecks to make it easier for asset managers to operate in Japan and provide business launch support and daily life assistance for their employees in a seamless fashion.

Specific initiatives include:

● Simplified registration procedures for fund managers focusing on overseas investors;

● All correspondence with financial authorities, from preliminary consultation to registration and supervision of overseas asset management companies newly entering the Japanese market, to be conducted in English;

● Enabling financial administrative processes in English through AI-driven multilingual translation technologies and improving English translations of financial laws and regulations;

● Simplified requirements for highly skilled financial professionals to secure work permits for housekeepers and spouses;

● Improving the availability of information on topics including company formation, acquisition of residence status and daily life issues such as medical care, housing and international schooling, as well as establishing a “financial business start-up support network” that provides one-stop support in English through the public and private sectors.

In addition, tax reforms to be put forward to the Diet for approval in early 2021 include an exemption in inheritance tax on overseas assets of foreigners under certain conditions, and an expansion of the scope of companies that can claim performance-based compensation paid to executives as a deductible expense.

“Under Prime Minister SUGA’s leadership, the Japanese government will work with financial authorities and relevant ministries in charge of residence status, entrepreneurship, and the living environment,” says ITO Hideki, Vice Commissioner for Policy Making at Japan’s Financial Services Agency. “Japan’s readiness to consider these new rules shows its firm commitment to attracting international and diverse talent.”

Mr SUGA is particularly focused on promoting the digital economy. In September this year, he will launch a new Digital Agency that will promote sweeping digitization of government and society.

Here, fintech will play an important role. In fact, Tokyo is fast turning into a global fintech hub. According to a projection by Yano Research Institute, Japan’s fintech market will more than triple to a size of US$11 billion by 2022 from US$3.27 billion in 2019. The Government’s Growth Strategy Committee (formerly the Council on Investments for the Future) is seeking to double the ratio of cashless payments to 40% by 2025.

Global recognition

The various initiatives, based on TMG’s vision, are gaining global recognition. In the latest Global Financial Centres Index, published by British think-tank Z/Yen in September 2020, Tokyo ranks fourth globally and a close second in Asia after Shanghai. When Global Finance Magazine, whose readers include US-based financial professionals, announced its Top 10 Best Cities to Live ranking in October 2020, Tokyo took the top spot, beating New York and London.

Moreover, Japanese stocks are regaining global attention. The Nikkei Stock Average is trading near a 30-year high. In the second week of December, overseas investors overbought Japanese stocks for the sixth consecutive week at a net purchase amount of 255.7 billion yen, up from 155.9 billion yen in the week before. Meanwhile, the Mothers market, which focuses on high-growth and emerging stocks and lists more than 320 start-ups, has produced around ten companies with a market value of over US$1 billion and climbed more than 30% in 2020.

With the TMG moving swiftly to materialize “Global Financial City: Tokyo” together with the national government and the private sector, the day will soon come when Tokyo stands next to New York and London as a global financial hub.