Watching Hong Kong and Singapore soak up the global spotlight isn’t going down well in Tokyo.
As home to Asia’s biggest markets, its highest standard of living and world-class infrastructure, the Japanese capital is the region’s natural financial hub. Tell that to international investors increasingly favouring centres elsewhere in Asia.
Takatoshi Ito wants to change that. Fresh from being vetoed as a candidate for deputy governor of the Bank of Japan (BoJ), the University of Tokyo professor is redoubling efforts to make Japan into another London.
“Tokyo should take lessons from London,” Ito said in a 17 April speech at the Foreign Correspondents’ Club of Japan. Doing so, he said, “is very important to the future of Japan.” Ito calls the UK a “role model for the rest of the world” for its success in opening and regulating financial markets, importing talent, granting work visas and adopting a favourable tax regime. The government adviser is uniquely positioned to help persuade Prime Minister Yasuo Fukuda to apply those principles to the second biggest economy.
The bad news is that the odds are stacked against Ito’s dream of making Tokyo the London of the East.
For one thing, Japan may be coming to this effort too late. The “Big Bang” of the 1990s didn’t have the intended effect of deregulating Japan’s rigid financial sector. Tokyo’s equity bourses fell behind technologically and failed to become as international as pledged.
Not ‘first class’
Along with spooking investors, the banking crises of the late 1990s and early 2000s prompted policymakers to turn inward. That allowed Hong Kong and Singapore to make inroads at becoming centres for equity trading and foreign exchange dealing. Hedge funds and private equity outfits, in turn, put their headquarters there. In January, Hiroko Ota, minister of economic and fiscal policy, summed things up in unusually blunt terms: “Unfortunately, Japan is no longer in a situation in which the nation is a first-class economy.”
For another thing, the political establishment isn’t focused on Japan’s financial future. It cost Fukuda considerable political capital just to get a new BoJ governor confirmed, never mind shaking up a business culture that may be too grounded in the past to compete in the future.
In his five years as prime minister from 2001 to 2006, Junichiro Koizumi tried to set the stage for the kind of changes Margaret Thatcher brought to the UK and Ronald Reagan to the US in the 1980s. Since Koizumi, Japan has had two premiers—neither very focused on economic matters.
The financial pages are filled with reports of cross-shareholding between friendly companies making a big comeback. Takeover defences and poison pills to avert mergers are back in vogue. Corporate governance remains a concern for many investors.
When it comes to competing with Hong Kong, London, New York and Singapore, Ito, 57, is a key person. He sits on the Council on Economic and Fiscal Policy, the government’s brainstorming body that pushed for structural changes during the Koizumi years.
Ito didn’t get the BoJ job because he favours inflation targeting, something many politicians find too radical. Yet, isn’t trying something new what Japan needs? The bright side is that Ito can focus on deregulating Japan Inc. Private sector voices like Ito’s are badly needed in Tokyo.
Japan’s to-do list includes greater openness to foreign investment, better tax treatment for overseas firms, freer trade, more flexible labour markets and immigration policies, reducing the world’s largest public debt, boosting female participation in the workforce and encouraging shareholder activism.
Accomplishing any of these goals is difficult in the best of times. The political vacuum in Tokyo makes success even less likely. Slowing global growth isn’t helping things. Neither is turmoil in credit markets.
I asked Ito last week whether Japan’s becoming-a-global-financial-centre effort is too little, too late. “This is our last chance, but it’s not too late,” he said. “We have to do this in the next five or 10 years, or it really will be too late.”
While its demographic profile is gloomy—21% of Japanese are past age 65—the nation is home to an unusually wealthy population. Japanese are sitting on household savings that exceed the annual output of the $13.2 trillion (Rs526.68 trillion) US economy. Pension funds have assets roughly equivalent to China’s $1.6 trillion of currency reserves. Then, there’s Japan’s $988 billion of reserves. “Mobilizing that capital would be good for Japan’s economy and markets,” Ito said.
The bigger issue, though, is getting more foreigners interested in investing in Japan and trading in Tokyo. Overseas investors were discouraged to see Children’s Investment Fund Management Ltd, the UK activist fund, recently fail in efforts to double its 9.9% stake in Electric Power Development Co. The government invoked national security; many saw it as a reminder of Japan’s reluctance to welcome foreign investment.
Tokyo has the raw materials to emulate London’s success in Asia. If it doesn’t work much harder and much faster, though, the odds will mount further against it.
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