During the bubble economy of the 1980s, Japan was a behemoth of global finance, with Tokyo and its financial institutions vying neck and neck with New York City and London. But everything changed when the country’s asset price bubble burst in 1992, generating a loss of 100 trillion yen — approximately 20 percent of Japan’s total gross domestic product — over the course of a decade.
Despite successful restructuring efforts, Japan’s financial sector continues to be overshadowed by its counterparts in New York and London as well as its close neighbors in Singapore and Hong Kong. But the world is in constant flux and recent events such as Brexit and the Hong Kong protests signal opportunities for Japan to reclaim its former standing.
In order to realize these opportunities and promote investment in Japan, veterans of Japanese finance have come together to form The Organization of Global Financial City Tokyo, also known as FinCity.Tokyo. Established in April 2019, FinCity.Tokyo provides policy support to relevant institutions and industry groups. It also provides feedback and up-to-date information to investors and asset management companies in and outside Japan.
On March 19, FinCity.Tokyo held its FinCity Global Forum at the Grand Hyatt Tokyo in the Roppongi district. With a focus on enhancing asset management, the forum invited guests from across Japan’s finance sector, as well as from abroad, to speak and participate in panel discussions centered on the future of Tokyo’s role as a global financial hub.
In his opening remarks, Hiroshi Nakaso — chairman of FinCity.Tokyo and former deputy governor of the Bank of Japan — traced the trajectory of Japan’s finance industry while identifying obstacles and opportunities in Tokyo’s pursuit of becoming a “gateway” for global finance. He pointed to how, in 2016, Shanghai overtook Tokyo in the Global Financial Centres Index, pushing Tokyo down to rank six. Though he noted that ranks are not the be-all-and-end-all of financial indicators, he asserted that Tokyo’s current rank does not accurately reflect the city’s untapped potential.
Nakaso focused attention on Japan’s household assets, which currently amount to around 1.9 quadrillion yen and about half of which are held as cash deposits in bank accounts. He noted that in order to enhance asset management in Japan, it would be necessary to turn these assets into investments that yield high returns. According to his projections, over a 20-year period, diversified investments will yield a 2 to 8 percent return.
Another key to energizing Japanese finance is the number of growing companies in the country’s outlying regions, said Nakaso. These companies boast technical prowess in a number of fields. With the help of Tokyo serving as a gateway to global investors, these firms can attract international investment and facilitate flows of funds. By activating underutilized assets in regions with aging populations, Tokyo can also function as a hub to effectively transfer funds to regions that need it most, thereby helping realize the Environment Ministry’s “regional circular and ecological sphere,” a project established to complement and support regional resources.
As observed by Nakaso, one of the main impediments to Tokyo’s growth as a global finance hub is Japan’s tax structure. Due to this structure, which, on its surface, features a high tax rate, many investors view Japan as less attractive than other regions. In many cases, however, these investors are unaware of Japan’s various tax deductions, failing to distinguish between statutory tax rate and effective tax rate. Addressing this misconception is just one of the ways FinCity.Tokyo intends to engage with international investors and create a financial ecosystem that bolsters asset management.
Following Nakaso’s opening address, Toshihide Endo — commissioner of the Financial Services Agency — delivered a keynote speech discussing how asset management firms can create an environment that strengthens Tokyo’s prospects.
Endo emphasized the need to reform the corporate governance of asset management firms in Japan. He noted that, unlike firms in the U.S. and the U.K., which often share ownership among founders, partners or public investors, Japanese firms are universally owned by their parent companies. The boards of directors seldom include independent directors and are generally assigned by their parent company. He stressed the need for these firms to secure a degree of independence in order to become organizations that prioritize customers’ returns.
Endo also noted the lack of clear, detailed strategic thinking among Japanese asset management firms. Although these firms present general approaches, they do not formulate the kinds of precise strategies found abroad, which account for externalities and their specific circumstances. As a solution, Endo suggested firms clearly identify their mission, strengths and formulate short- and long-term strategies that can be assessed and revised when necessary.
Endo argued that addressing these organizational issues would create a feedback loop that, in addition to strengthening asset management, will improve financial literacy and enhance the behaviors of asset owners, thus heightening Tokyo’s status as a center for global finance.
FinCity. Tokyo is an ambitious attempt by veterans of Tokyo’s finance sector in examining the city’s future role as a global financial hub. This article, the first in a three- part series, outlines the group and its goals.