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The nation’s push to make itself a more attractive financial hub faces a taxing problem if it is to halt the departure of finance professionals to other cities in Asia.

While the pandemic has put most relocations on the back burner for now, Prime Minister Yoshihide Suga is trying to better position Tokyo as a potential base for financiers when transfers and hiring return. Efforts so far show that the government has identified taxation and the language barrier as key hurdles.

China’s intensifying crackdown on Hong Kong has raised hopes Tokyo may finally have a better chance of competing as a banking destination. But Japan still appears a long way from making the numbers work.

Finance industry stars with million-dollar salaries would have to hand over half their earnings to the government for the privilege of working in Tokyo. That suggests recent efforts may struggle to turn the tide.

Employees with more modest salaries might actually be better off in Tokyo than in Hong Kong or Singapore, because Japan’s tax rates are progressive and living costs are surprisingly low.

Years of deflation have driven Tokyo rents way down since the heady days when the land under the Imperial Palace was supposedly worth more than all of California.

The monthly cost of a three-bedroom apartment in the center of the capital, for example, is now $3,210 — about 40% less than the equivalent in Hong Kong and half what you’d pay in San Francisco or New York, according to cost-of-living calculator Numbeo.

But lower rent and cheaper eats may not matter much to traders or C-suite executives, because Japan’s tax burden would erase those savings many times over.

Thomas Ip, an accountant from Hong Kong who’s lived in Tokyo for almost two decades, says he loves the city but that international schools are pricey and taxes can be unbelievable.

“People with families would need to think very carefully about making a move,” he says.

Consider take-home pay on a $400,000 salary. In Tokyo, combined central and local government income taxes would hit 55%. Factor in social insurance premiums and exemptions and that would whittle actual earnings down to about $225,941, according to an online payroll estimator by accounting firm HTM. Japan’s National Tax Agency declined to offer its own calculation.

In Hong Kong or Singapore, you’d have more than $331,000 left over after paying personal income taxes, with marginal rates that don’t exceed 22%. Any capital gains would be tax free.

No wonder big-earners on Tokyo trading desks sometimes ask for transfers out, while others try to engineer their schedules so they spend less than half the year in the country to avoid being classified as tax residents.

“Everybody loves Japan, but the big hurdles to luring hedge funds to Tokyo are taxes and the language component,” says Hennessy Japan Fund’s Masakazu Takeda, who buys and sells Japan stocks from a desk in Hong Kong.

To try to stem the bleeding, Japan next month will open a one-stop service center for foreign financial firms that will allow them to start filing paperwork entirely in English.

On taxes, the government says it will treat more fees from fund performance as capital gains instead of income, offering a break similar to the carried-interest loophole in the U.S.

From April, foreign bankers and other workers on high-skilled visas will also be exempted from Japan’s “terrifying” inheritance taxes on assets bequeathed abroad.

Setting aside the politics of giving tax breaks to rich foreigners, it’s unclear how much business the moves will generate for Japan.

Foreign financial institutions trimmed staff in Japan by 10% in the eight years through March 2019, according to economy ministry data.

Personal income taxes and the language barrier aren’t the main reasons, though.

Companies are putting people where the money is. In Asia that’s meant getting closer to China, where economic growth has outpaced Japan’s sixfold in the last decade.

Joshua Bryan, who heads the financial services practice at recruiter Robert Walters Japan, says more foreign nationals may be willing to work in Tokyo these days given Hong Kong’s problems, but there aren’t enough jobs for them.

“Businesses must see strategic advantages to making Tokyo their regional headquarters,” he wrote in an email. “As long as companies locate HQs outside of Japan, ambitious individuals may have some hesitations about relocating here.”

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