Amid global uncertainty, how can Tokyo leverage its strengths as a financial center for a sustainable tomorrow? For expert perspectives, we invited Keiichi Aritomo, Executive Director of FinCity.Tokyo, to a discussion with Fumiyo Harada, Managing Executive Officer of the Development Bank of Japan (DBJ), and Mr. Alberto Tamura, President and Chief Executive Officer of Morgan Stanley Japan Holdings and Chairman of the International Bankers Association (IBA) Japan.
How do you see Tokyo’s position as a financial center in the current global financial environment?
Tamura-san: The outlook is definitely uncertain. But here we should point to Tokyo’s underlying stability. Japan has strong balance sheets and a solid banking sector. The government and regulatory bodies are focused on ensuring that markets are stable and maintain the critical depth needed to facilitate transactions.
One good example is the real estate market. Throughout the pandemic it remained functional because investors could exercise due diligence and get cheap funding. That was not the case in other developed markets. Japan did a good job, which is reflected in the stability of real estate prices.
Harada-san: Whereas in the past few years everything hit us all at once, I think from now on we will have more visibility over what’s coming. For instance, the need for financial support for businesses to deal with Covid-19 seems to have passed the peak.
From an APAC perspective, Tokyo may not be as globalized as some other East Asian markets, but our financial markets are supported by a strong industrial base and there’s plenty of scope to attract investors. In my view, carbon neutrality, innovation and new technology will be Tokyo’s growth engines. We need to look at the capabilities of Japanese companies to contribute to the world, and consider how to improve mechanisms and regulations to make Tokyo truly global.
Aritomo-san: Actually, when I travel overseas, people say Japan has handled the pandemic comparatively well, even without a hard lockdown. On carbon neutrality, we have been the frontrunner in cleantech patents for decades.
In terms of the demographic challenge, Japan is definitely the frontrunner, but other Asian countries are catching up. The solutions that Japan comes up with will be applicable elsewhere. We can share what worked and what didn’t. I think this is the role we should play in the world.
I’d also like to highlight our robust democracy, especially freedom of speech. One of FinCity.Tokyo’s missions is to share information about our city’s financial ecosystem and regulatory environment, and we don’t hesitate to say that things are not perfect. Instead, we say, come to Tokyo and let’s fix these issues together.
We are privileged to be able to say things like that, right? So, freedom of speech and democracy are among our strengths, especially at a time when democracy and authoritarianism are facing off around the world.
Mobilizing finance will be key to fighting climate change. How do you view Tokyo’s role?
Harada-san: What is notable is the way Japan is taking the lead in transition finance. Thanks to government efforts to issue roadmaps for each industry, companies, issuers and borrowers can follow targets toward a transition. Also, the world is realizing that transition finance can play an effective role. When I attended COP27 last November, I felt that there was a huge change in people’s views compared to COP26.
Japanese firms’ urgent need to become carbon neutral will help the market develop. Going forward, we can share experiences with other countries. One example is the Just Energy Transition Partnership [JETP] with Indonesia, which could be a good model case for other Asian countries.
Aritomo-san: The World Alliance of International Financial Centers [WAIFC], which I am now chairing, has launched an initiative led by Tokyo to transform supply chains. Historically, Japan has always been a frontrunner in supply chain management. We have the best practices; just look at all the books on just-in-time manufacturing.
Scope 3(1) emissions will be the biggest challenge. Nobody really knows how to measure them, although they make up most supply chain emissions. We see increasing tension between Global South and North, and cynicism about greenwashing. Who should pay? How can we secure funding? We have to answer those questions. There must be accountability. We must develop methodologies and technologies.
Tokyo is best placed to make this happen given Japan’s extensive supply chain network and strong manufacturing industry. And I think we can do it scientifically, without the polarization, for instance, around ESG seen in some nations.
Tamura-san: Investors seeking opportunities in sustainable finance and transition finance will find that Japan offers both depth and scale—key incentives for people to enter the market. In addition, corporate balance sheets in Japan are very healthy, the banking sector is strong and there is rule of law, proper regulatory oversight and a stable political landscape.
When you put that together, it tells you there will be stability for the foreseeable future, which is, of course, vital for investors.
An aging society, digitalization, climate change—can Japan’s growing startup scene help resolve these challenges? Is Japan innovative enough?
Tamura-san: The answer is yes. When you combine human initiative with stable financing, you get more innovation, more competition, better products, better services and better technology.
Government agencies used to be the top target for new university graduates, but now more young people go straight into startups after university. There are also people leaving companies to start businesses because they see the potential and are willing to take the risk.
IPOs in Japan have numbered around 100 over the past two years, and I see this continuing. I think that’s a great representation of what’s happening out there.
Also, startups were concentrated around software, but now, new companies focus on a wider range of interests, from energy to human resources to fintech. Startups are being backed by financial institutions and corporations, not just VC firms and angel investors. There is also more collaboration between the private and public sectors, and academic institutions are becoming more active in developing new technologies and commercializing them. There is a lot of energy.
Harada-san: We will need a breakthrough to reach carbon neutrality by 2050. Some innovation might come from large corporations, but everybody—financial institutions, government, local government, local communities and academia—understands how important startups will be to find solutions. The commitment is very serious, not just from the government, but also from major banks and regional banks, which are offering a lot of advice and funds to local startups and local universities.
Aritomo-san: One key is to integrate Japan’s many STEM students and national universities into our investment ecosystem. We can do more to teach them how to monetize their knowledge. The University of Tokyo, Tokyo University of Science and Sofia University are already enthusiastic about playing a bigger role in the investment value chain.
Another key is communication, particularly with investors, which FinCity.Tokyo is addressing through our Disclosure G initiative. This is not about English capability, but rather how to tell a compelling growth story, regardless of language. Such training is required for top management of new firms, even after they get listed on the Tokyo Stock Exchange.
Tokyo is actively promoting collaboration between global financial centers. What are the benefits of this?
Harada-san: Collaboration is vital, particularly for improving communication with investors. Global investors need certain standards to properly assess opportunities in different markets. Especially in sustainable finance, I believe we can learn from each other and create a global standard of disclosure.
This is true for transition finance, too. We need to be careful when trying to share best practices for transition finance, as it can be difficult to compare across countries and industries. However, good examples by Japanese companies may be references for other countries looking at issuing transition bonds.
Tamura-san: I agree with Harada-san. There’s definitely such a thing as sharing best practices. In areas where Japan can show leadership, including transition finance, we should be active and forward-thinking and present our case to the world.
Supply chain management, including key elements such as production and financing, can be well coordinated among financial centers around the world. Climate change responses and best practices around risk management can also be shared by financial centers.
Aritomo-san: There are issues in Japan regarding regulation and taxation that we still need to rectify. Understanding how other centers do things will help us understand what and how to improve. And other countries can learn from how we handle social issues that they will face going forward.
Complex issues, such as achieving net zero in supply chains, are global in nature and must be resolved by financial centers working together. As mentioned, through WAIFC, Tokyo is now leading a project to identify workable solutions for the green transformation of supply chains. Such collaboration is the way of the future. We must talk to each other and learn from each other. If we do that, we can tackle our pressing challenges.
We thank Aritomo-san, Harada-san and Tamura-san for their insights. With its many strengths as a financial center, Tokyo will play a key role in realizing the breakthroughs the world needs by nurturing startup innovation, spearheading transition finance, and accelerating the green transition of supply chains.
(1) Emissions from assets not owned or controlled by the company itself, which happen indirectly in its value chain.
