Solidifying Tokyo’s investment momentum—views from the experts

Japan is attracting attention from overseas investors and entrepreneurs. How do you view this momentum?

Semaya: There’s a new dynamism, an increase in the metabolic rate at companies. There's much more appetite for an equity-oriented business approach, with more efficient use of capital and stronger shareholder focus. Higher dividends and stock buybacks are pushing up earnings per share, and there is investment in growth strategies. You see that in the wider ecosystem as well, for instance in the Tokyo Stock Exchange’s focus on raising the price-book value ratio of listed firms.

But we’re not out of the woods yet. Historically, demographics were seen as a negative but now they are a positive, with the worker deficit pushing up wages. However, large Japanese companies need to continue to increase wages year after year to show the world that this time is different.

Moreover, with China being seen as less attractive in certain asset classes than before, more overseas funds are allocating to Japan. Japanese society is also changing, with younger people more willing to take risks. This has led to more investment in startups, new ideas and disruption, with the support of local and national governments.

Honda-san: Tokyo offers some obvious benefits. Japan has the world’s third-largest economy with a diverse range of industries and the yen is a trusted hard currency, easing transfer and conversion risks. Also, Japan is known for rule of law and political stability, attributes highly valued by investors in these times.

Moreover, corporate governance reforms have been notably effective. Japan also offers a large and stable local investor base, both institutional and retail. The government is actively promoting new tax incentives such as the NISAs, which are directing a significant influx of funds into the stock market.

While taxes may be higher than in jurisdictions like Singapore and Hong Kong, they are at a similar level to those in the US and Europe. I should add that Tokyo ranked #1 in affordability in a recent Bloomberg survey and is of course known for its exceptional safety.

Yamakawa-san: The current startup momentum is very strong. Supportive government policies are creating a mindset shift regarding access for foreign entrepreneurs. For example, numerous municipalities across Japan have implemented the new startup visa. There’s business launch support in several languages and accelerator programs that help to create an environment conducive to innovation and collaboration between entrepreneurs and larger firms.

I also love that there are METI officials out there on social media tweeting about the positive changes. Everyone is pulling in the same direction and we haven’t really seen that before. It sends a strong signal to entrepreneurs.

What needs to happen to make this dynamism permanent?

Semaya: More action on workplace diversity will mean more willingness to do different things. Secondly, Japan needs to upgrade its asset management industry, from distribution-driven to investment-driven. It needs a more financially educated public, asset owners who take responsibility, and lower prices and costs.

Most importantly, we need to attract investment expertise from outside Japan. This will raise efficiency, bring procedures to a global standard, and help smaller companies enter the market.

An emerging managers program can help revitalize asset management. Small overseas managers coming here will bring in human capital, hire local employees, and help them understand strategies for managing money. The same goes for startups. If we can bring in more venture capital firms, they will hire locals, and force Japanese players who may have been a little slow to up their game.

Honda-san: I would like to urge asset owners and asset managers overseas to consider not only investing in assets in Japan, but also allocating resources here. By this I mean having analysts and portfolio managers spend more time here to identify investment opportunities, not only in equity but also in real estate and other asset classes.

Tokyo, as the largest city in the world, offers a significant concentration of firms, which is a huge advantage. Banks, global finance institutions, technology giants, venture capitals—you can reach them all within 30 mins.

Yamakawa-san: We need to raise more awareness about all the great things happening in Japan and the success stories. Perceptions of the “difficulty” of doing business in Japan are changing. Many US startups that I’ve met understand the challenge but still take the leap. Before, they would do lots of research to manage a soft landing, but now some just take the plunge, find somewhere to live and co-work, and get moving.

A stronger push to help entrepreneurs collaborate with large companies is also needed. This is the source of a lot of game-changing technology. Effective strategies to boost such open innovation will help us stay attractive to both global investors and entrepreneurs.

How can hidden gems in Tokyo’s finance and startup ecosystem be nurtured and brought to global attention?

David Semaya: The key is to help entrepreneurs expand their networks and encourage local financial institutions to take more risk and help finance the startup ecosystem. This is already happening; we just need more financial firms getting involved, and more focus on this from both local and national governments.

Honda-san: Wherever you are—in Tokyo, New York, or wherever—someone always has better first-hand information. Moreover, approximately 30% of stocks on the Tokyo Stock Exchange are foreign-owned (as of March 2023), indicating that some non-Japanese asset owners and asset managers have already discovered valuable opportunities. To uncover more prospects, I believe the key is to encourage investors to deploy additional personnel in Tokyo who can gather and analyze information, and recognize the value and potential of businesses here.

Yamakawa-san: Events will be important. Again, it’s about visibility. Tokyo hosts, for example, the Japan FinTech Week or Sushi Tech Tokyo, which is about sustainable tech. Such events illuminate the dynamic Japanese landscape to a global audience and provide a unified platform for professionals to innovate inside and outside Japan. In finance, Tokyo’s promotion of green finance under the Tokyo Green Finance Initiative will be a catalyst for new thinking by bringing together the demand for sustainable finance solutions with Japan’s prowess in digital technology.

The success of these strategies depends on the commitment of all stakeholders in the ecosystem and supportive government policies. But if I compare with ten or twenty years ago, we are really seeing a seismic change.