Japan has endeavored to develop its capital, Tokyo, as one of the major global financial centers — circulating domestic capital and capital from abroad and invite foreign financial institutions and firms to establish businesses in Tokyo — for many decades.
To realize this vision, the government took various measures in recent years under the Abenomics program launched in December 2012 after Prime Minister Shinzo Abe came to power. First, the effective corporate tax (including central and local government taxes) was lowered gradually from around 35 percent in fiscal 2012 to about 30 percent in fiscal 2016. Second, the basic portfolio of public pension reserve assets (¥145 trillion) managed by the Government Pension Investment Fund (GPIF) was reformed in 2014 by increasing investment in domestic equity and foreign equity. Third, the Nippon Individual Savings Account (NISA) and Junior NISA were adopted in 2014 and 2016 respectively to foster individual equity investors age 20 or older and under 20 with the provision of tax-free treatment on dividends and capital gains up to certain amount of investment per year.
Since 2014, moreover, the Tokyo Metropolitan Government has also taken its own initiatives to achieve the above-mentioned vision. The move was inspired by the September 2013 decision by the International Olympic Committee to select Tokyo to host the 2020 Olympic Games since it was seen as a rare opportunity for Tokyo to take advantage of the global attention that will focus on it over this period. A task force was formed and came up with a report with detailed proposals including tax incentives and measures to improve the living environment for foreigners with a more business-friendly environment.
Japan’s advantages are the sheer size of its economy (the world’s third largest in terms of GDP) and the status of the yen as the third international currency after the dollar and the euro. In addition, Japan’s financial and capital markets are large with abundant capital. Given its location, Tokyo has the potential to become at least a regional financial center that transfers excess capital to emerging Asian economies that desperately need funds for long-term investment projects in order to escape from the middle-income trap.
So far, this vision has not materialized to the extent that had been expected, since Japan’s external financial investment continues to be destined toward the U.S. and Europe, and has been largely in the form of investment in relatively safe high-rated debt securities. Japan’s capital remains risk averse as households keep half of their financial assets in the form of deposits and cash. Increased corporate profits since 2013 are also maintained largely at commercial banks. The resultant limited availability of risk money for financing overseas diverse economic and financial activities appears to have hampered Tokyo from becoming a global financial center.
By contrast, foreign investors’ financial activities in Japan have concentrated on the stock market with their stock holdings now accounting for 30 percent of the total market value. Stock market prices rose rapidly under Abenomics with massive monetary easing by the Bank of Japan and the GPIF reform — although they have recovered only to about half of the maximum price levels reached in December 1989. The longer-term impacts of such interventions on the market functioning need to be examined.
Moreover, a steady decline in the number of foreign-listed enterprises — from the maximum number of 127 firms recorded in 2012 to only five firms currently — gives the impression that Tokyo is more inward-looking than other global financial centers such as New York, London, Singapore and Hong Kong. A lack of diversity in debt securities markets is another factor that has limited the number of foreign investors and firms coming to Japan.
What can be done? Japan needs to foster new, relatively young investors as individual investors in the stock market are now largely senior citizens with substantial accumulated assets. Accelerating financial technology using smartphones and PCs together with a wider range of financial assets is essential to facilitate their access to financial services and stimulate their investment appetite. The availability of diverse digital currencies and payment methods including distributed ledgers could be desirable.
In addition, households’ large cash holdings (due to the low interest rate) has undermined the efficiency of the financial system and thus effectiveness of monetary policy — because of a growing disconnect between entities with extra cash and entities short of funds. Advanced, innovative financial technology with diverse digital currencies could give Tokyo a chance to become a more attractive and competitive global financial center with a more efficient financial system.
Sayuri Shirai is a professor at Keio University and a former board member of the Bank of Japan.