In recent years, a surge of hedge funds and private equity funds have cropped up in Tokyo’s chief metropolitan area.
These funds are gathering in the Kabutocho neighborhood of Nihonbashi, where, during Japan’s bubble economy, thousands of brokers crowded the trading floor of the Tokyo Stock Exchange. The area has since quietened due to the introduction of an electronic trading system. Over the past two years, however, many funds have set up shop in the former traders’ stomping ground.
Spurring this influx was the “Global Financial City: Tokyo” initiative introduced by Tokyo Gov. Yuriko Koike in November 2017. The initiative focuses on strengthening Japan’s asset management and financial (fintech).
It was crafted to counter a common perception among investors that Japan is a less attractive market than regional rivals Singapore and Hong Kong. This perception is partly informed by Japan’s tax environment as well as a lack of accessible information regarding the country’s administrative procedures.
For Japan, which is home to one of the world’s largest aging populations, a strong financial sector is vital for economic prosperity. Recognizing the importance of asset management, “Global Financial City: Tokyo” created subsidy programs to help emerging asset managers get a head start. In addition, the Financial Services Agency simplified the license-acquisition process and established a Financial Market Entry Consultation Desk to support asset managers in Tokyo.
Private businesses are also lending their support. Spearheaded by Heiwa Real Estate Co. — owner of the Tokyo Stock Exchange Building and Osaka Securities Exchange Building — FinGATE Kabuto is a serviced office space established to support domestic asset management businesses, foreign fund managers and fintech businesses. They offer office space via flexible contracts ideal for financial ventures. Rent is considerably less expensive than most notable share offices.
FinGATE is currently home to hedge funds, private equity funds, venture capital funds and fintech companies. Among these businesses are firms that relocated their base of operations to Tokyo from Singapore and Hong Kong, as well as new, independent funds. These emerging managers are in increasingly frequent contact with major global funds, giving rise to a market environment not seen in Tokyo for a decade.
Major factors in attracting funds to Tokyo are the large number of companies listed on the Tokyo Stock Exchange (around 4,000) and the relatively low costs. Japan’s corporate governance has undergone significant reforms in recent years. The country’s technical prowess across a wide array of fields, as well as its strong global supply chains, make it an attractive environment for investors.
This is especially true for sectors engaged in environmental technologies and services geared towards aging populations, as they align with ESG, an investing method that considers environmental, social and governance inputs.
Rising costs in Singapore and Hong Kong have also made Japan more attractive. Despite Japan’s less preferable tax environment, increased costs of goods, personnel, office space and living quarters in Singapore and Hong Kong have made the total business costs of doing business in those countries on par with Japan.
Yukihiro Sugihara, CEO and founder of Hayate Investment Co., is adamant that there is deep, untapped potential in Japan, especially among what he defines as “mid-small-cap” firms. These firms have a market cap of less than ¥100 billion and make up around 3,000 of the approximately 4,000 companies listed on the Tokyo Stock Exchange.
Sugihara cites language barriers, cultural barriers, and time and geographical distance as the main reasons why these firms do not receive proper attention from global investors. In order to facilitate investment, Sugihara has established close relationships with these firms and conducts in-depth research and analyses in order to inform investors of the opportunities lurking in Japan’s market.
Susten Capital Management is another asset management firm focused on unleashing Tokyo’s unrealized potential. CEO Dai Okano sees great potential in Japan’s ¥1.9 quadrillion of household assets. Okano pointed out that despite this trove of assets, Japan’s investment trust market only accounts for around ¥100 trillion. A large portion of household assets are held by seniors. Okano believes there are immense opportunities for high-quality asset management services as these individuals become more familiar with digital technologies and realize the need for financial stability beyond public pensions.
With recent developments such as the Hong Kong protests, Tokyo is being reconsidered as a stable market in an uncertain world. FinCity.Tokyo, which was established in April 2019 as part of the “Global Financial City: Tokyo” initiative, is spurring this process along by holding events both inside and outside Japan. With its rich business environment and underutilized household assets, Japan offers immense opportunities for international asset management firms and fintech firms.
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 third in a three- part series, outlines the group and its goals.