Tokyo as Asia’s financial hub

By Ichiro Suzuki On July 1, the People’s Republic of China has imposed a new national security law on Hong Kong, in order to bring the territory to be more aligned politically with the mainland. The freedom that has been stipulated in the 1983 Sino-British agreement would almost certainly be eroded. Then, speculations grew in the financial community how much longer Hong Kong is capable of staying as Asia’s financial hub, a spacial status the territory has enjoyed since the 1980s. Amid such a speculation, Tokyo often gets a call to fulfill the function that has been performed by Hong Kong. Tokyo once openly displayed such an ambition in the late 1980s amid the infamous Japan Bubble that made the country’s future look limitless. The ever-rising yen had an aura of the currency of the 21st century, with a potential of wild expansion of its role in the international financial markets. Japanese corporations dominated the list of the world’s largest. It looked quite natural for Tokyo to aspire to be a financial hub. However, such an ambition quickly went down upon the burst of the bubble that drove the country into a long period of adjustments. Then as recently as in the summer of 2016, Yuriko Koike flirted her interest when she won an election to be the governor of Tokyo. Again this summer, it came back up on a development in Hong Kong. As it turned out in the aftermath of the bubble’s burst, Tokyo did not come anywhere close to what the city had once aspired. By the Japanese standards, the city may have gone up the ladder of globalization. However, Tokyo remains a notoriously difficult city in having oneself understood in English, a language of choice in international financial markets. The necessity of language proficiency has been advocated for many decades, but only marginal progresses have been made at best. Contrary to the old ambition, fewer young Japanese are interested in the world outside Japan, with a falling number of Japanese students enrolled in higher education overseas. This does not bode well in a serious pursuit of a status of a financial hub. Tokyo might have become more parochial over the last generation. In fact, it is questionable if Japan really has a serious interest in having a financial center on its soil. It is a great deal more than housing gleaming regional headquarters of J.P. Morgan, Goldman Sachs, Morgan Stanley, Citigroup, HSBC, UBS, etc. It is about attracting myriads of boutique firms in private equities and speculators (hedge funds). These much smaller houses unfortunately are not held in high regards in Japan. Worshipping for ‘making things’ continues to persist in the country two decades into the 21st century. Toyota is great because they make great cars that are visible. Nintendo is wildly popular at home as well as overseas, but do they make things that we can see? Finance? They make money, not things, out of thin air. In the financial industry, commercial bankers have been traditionally esteemed. In the age of credit-rationing until the post-World War II period, wholesale bankers, headed by the now defunct Industrial Bank of Japan, allocated credit throughout the Japanese industries, and what they did was regarded as a highly prestigious. Those ages are long gone, since the markets take care of where money flows into. Despite it, Japan’s antiquated mindset of hierarchy in the financials industry continues to persist. Those who are in the financial markets have been looked down upon. Speculators and traders rank the lowest of the low. Then, there are problems of regulations and taxes. Japan has always been known as a land of heavy regulations. Loosening, if not lifting, them has been on a political agenda and often end up as a lip service. On this, no exception is applied on the financials industry. Doing things often require too many approvals from regulators. Taxes have been notoriously high. The highest marginal income tax rate at 56% defeats all the welfare states in Europe. This compares to flat tax rates of 17% in Hong Kong and 15 and 22% in Singapore respectively. On top of income tax, 20% capital gains taxes are applied to profits from investments in Japan, unlike these two Asian financial centers. If these taxes were not enough, the Ministry of Finance had introduced an exit tax of 15% on assets to those who leave the country for good, Japanese or else. Even worse, the MOF had made those who have left the country subject to Japan’s notoriously punitive inheritance tax, 56% in the highest bracket, should one die within five years from his/ her departure from Japan. The exit tax was introduced in response to a growing number of wealthy Japanese who chose to leave the country for tax reasons. Aggressive young Japanese have been already running their hedge funds from Singapore. Why would anyone bother to choose Tokyo to live for a long time? After all, Japan doesn’t have a serious, die-hard, desire to host a financial center, especially when it means pampering lowly and vulgar people like speculators and traders who try to create wealth out of thin air. The country’s real strong interest lies in its proud manufacturing industries. So let Tokyo’s financial markets serve the needs of what is still the third largest economy. Presence of a large economy on its back reduces an aspiration to be an international financial center. City states like Hong Kong and Singapore were driven to where they are because their future hinges on being a financial hub. London has grown to be a financial hub, detached from a mid-sized domestic economy and after the British manufacturing industries’ fall. From this perspective, it is doubtful that Shanghai becomes a financial hub located at the gate of the second largest economy, especially with Hong Kong already having been doing that function. In addition, English is understood in Shanghai as well as it is in Tokyo. New York serves the massive U.S. economy, and has made little effort to be the center of global finance. Nonetheless, money keeps flowing in, with the city being New York, and this is an exception. If Hong Kong loses some businesses as speculated today, the slack would be picked up not only by Singapore but also by London, which knows the city needs to do something to stay viable now being outside of the EU. With modern communication technology, London can do it, leaving little room for Tokyo’s half-hearted wishes. About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.  

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