Commentary / Japan

Tokyo may be too late to the financial hub party

by William Pesek

Gov. Yuriko Koike may be taking Tokyo’s “London of the East” dream a bit too literally, inking a four-year partnership agreement with the British capital.

Predecessors dating back to Shintaro Ishihara (1999-2012) long coveted London’s energy, heft and influence in financial circles, wondering, well, why not us? Tokyo, after all, prints a top-three currency and boasts deep markets, more Fortune 500 companies than anywhere else, household savings almost comparable to annual U.S. output and world-class infrastructure.

Yet there are already a couple of problems with Koike’s push to, as she says, get Tokyo off “Galapagos.” One is joining arms with a city negotiating its own “Galapagosization” from Europe. How London emerges from Brexit with its financial-center street cred intact is anyone’s guess. The more serious concern, though, is the tiredness of the ideas making the rounds.

Granted, the 15-member panel Koike convened is still brainstorming. Its interim report isn’t due for another five or six months. But Koike’s broad strokes — including talk of special enterprise zones — has my mind wandering back to 2008.

That was arguably the last time Tokyo embarked on a comparably ambitious plan to poach investment banks, trading volume and the best financial minds away from Hong Kong and Singapore. Among those heading that episode was economist Takatoshi Ito, an adviser to then-Prime Minister Yasuo Fukuda. Ito sold the Bank of Japan on the inflation targeting it’s now using to defeat deflation.

Fast forward nine-plus years, and Koike is sounding much the way Ito’s team did in 2008. Just like Koike today, Ito called for importing more talent, simplifying work visa procedures, lower corporate taxes, a more international regulatory environment and better English proficiency. Yet I’m reminded of something Ito told me in an April 2008 interview: “This is our last chance” to morph Tokyo into a London or New York, adding that “we have to do this in the next five or 10 years, or it really will be too late.”

Here we are, nearly 10 years on and officials are still talking. It’s grand that Koike is getting serious about extricating Tokyo from Galapagos, but is the Japanese capital now too late to the party? Haven’t Hong Kong and Singapore already cemented their places in Asia’s pecking order? What’s more, it’s not Prime Minister Shinzo Abe’s Japan that Asia’s finance hubs fear, but Shanghai and Shenzhen.

This further dawned on me over the last couple of weeks during trips to China, Hong Kong and the Philippines. At conferences and in meetings with executives, entrepreneurs and policymakers, there was loads of talk about China’s prospects in 2018, reform in Indonesia, South Korean politics, Indian startups and how financial technology (fintech) and blockchain innovations are about to change everything. The word I heard all too seldom was Japan.

Asia’s No. 2 economy is on a tear: the longest expansion in 16 years, the lowest unemployment in 23 years and the Nikkei 225 average at 26-year highs. Yet weak wage growth and negligible inflation five years into Abe’s revival effort have investors and executives harboring doubts. A steady parade of scandals from Kobe Steel to Mitsubishi Materials to Subaru has others thinking we’ve seen this Japan-is-back movie before.

But Tokyo doesn’t need a panel of experts to tell Koike and Abe what everyone already knows. The national and municipal governments must reduce high personal and corporate tax rates, revolutionize an arcane regulatory framework, tackle the language barrier, alter bureaucratic rules for managing pensions, make labor markets more flexible, reduce cross-shareholdings and takeover defenses, and attract more talent.

There are also the matters of the BOJ dominating the bond and stock markets and vested interest. As Abe argued in recent years that “I am back, and so shall Japan be,” a who’s who of global banking either left or scaled back Tokyo operations — Citibank, HSBC, Merrill Lynch, RBS, Standard Chartered and others. One problem is size. Financial services account for 12 percent of U.K. gross domestic product but just 5 percent in Japan. Another: The foothold enjoyed by domestic giants make for an unappealing landscape. Koike and Abe must level the playing field.

Yet talk of turning Chuo Ward and Chiyoda Ward into a special enterprise zone exemplifies the timidly of the effort. The zoning approach that pulled banks, hedge funds and other players to Canary Wharf only works because London — at least in its pre-Brexit incarnation — got many of the key ingredients right. Tokyo has years of disruptive heavy lifting to do to position itself for where the business world is heading.

Hong Kong, remember, just shuttered its trading floor, a bow to how technology is decentralizing finance. Only time will tell if Tokyo is coming to the financial hub game too late. But the one thing that’s not on the Japanese capital’s side is time. As markets race into the future, we’re still debating what everyone knew should’ve been done a decade or more ago.

Based in Tokyo, journalist William Pesek is the author of “Japanization: What the World Can Learn from Japan’s Lost Decades.”