Japan's Financial Center Hopes: Just Another Small Asian Country

The Chinese stock market is now bigger in terms of market value than the Japanese market if Chinese companies listed in Hong Kong are taken into account, underlining the dramatic surge in the country’s financial markets over the last several years. As of August, the Japanese market capitalisation was $4,700bn, while the combined value of the Chinese market has surged to $4,720bn.

That's not the only indignity for Japan's financial mandarins. Hong Kong has risen as the financier for China, while Singapore has rolled out the red carpet for foreign investors, offering low taxes and hands-off regulation. Moreover, a new batch of Asian contenders, from Shanghai, Mumbai and Dubai, have sprung up. London also accounts for 34% of the world's currency transactions versus a mere 6% for Japan, 42% of foreign stock transactions are done in London, and the UK accounts for 20% of global cross border bank FDI, versus only 7% for Japan. Moreover, foreign capital accounts for 53% of bank assets in the UK versus 47% for domestic banks. In other words, the "Wimbledon effect" which Japan's mandarins used to smugly refer in the 1980s to the wholsale takeover of the UK's indigenous financial sector by foreign capital has kept the UK's city as the global financial center which in many ways is more global than New York.

The City of London (although not exactly a disinterested observer) publishes The Global Financial Centres Index, which ranks the global money centers as follows.

Global Money Center Ranking

London--806
New York--787
Hong Kong--697
Singapore--673
Zurich--666
Frankfurt--649
Genova--645 (Italy)
Chicago--639
Sydney--636
Tokyo--625

This is a far cry from the 1980s, when Japan was at the top of its game, and poised to take over the world in everything from automobiles, consumer electronics, DRAMs, PCs, acquisitions of overseas companies and real estate, and banking. Japanese banks were ranked in the world's top 10 banks and a few of the biggest companies listed on the Tokyo stock exchange had more market capitalization than whole stock markets in Europe. Just one company, Tokyo Electric Power, had more market cap than the entire Hong Kong stock exchange. Foreign brokers were jostling for a chance to bid for a seat on the Tokyo Stock Exchange, while seats on the Hong Kong Stock Exchange were available for a measely $65,000.

Now, Tokyo is worried that they are losing their position as a global financial center, and with good reason. Even Japanese savers are moving their substantial JPY1,500 trillion of personal financial assets into offshore investments. The "Heisei Malaise" decimated Japan's major banks and resulted in basically four "megabanks" that still look very undernurished in terms of profitability compared to their global peers. Japan's Financial Service Agency, the nation's financial banking and securities mandarin, will draw up a plan by year's end to "restore" Tokyo's status as a major financial center, and is touring Wall Street and the City in London in search of the secret of their vitality. Yet Japan's financial elite still don't get it, and are having trouble figuring out what makes New York and London financial markets so dominant.

Proposals so far are cosmetic and, according to Martin Frackler in a November 15, 2007 International Herald Tribune article, "read more like excerpts from a real estate brochure than a manifesto for financial ascendancy. Those of us old hands in Tokyo remember that Prime Minister Hashimoto's "big bang" plan for liberalization was supposed to have accomplished the same thing, but failed miserably. When Yuji Yamamoto, former financial services minister and chief architect of the financial center revitalization plan visited the US Fed, he was warned that Japan will become "just another small Asian country" unless Japan opens up its markets.

What the Japanese mandarins don't fully realize is that restoring Japan as a global financial center is not about (quoting the International Herald Tribune article) "more spacious apartments, earthquake resistant offices and plusher sports clubs, or restaurants that serve Western far after midnight, or English-speaking hospitals and schools, or a faster train link to the main international airport.

What is needed is greater transparency and freedom from the Financial Services Agency and Japanese regulators, who are stifling the market with murky powers and enormous discretion in setting rules and enforcing them in jealously guarding its power, byzantine paperwork and proceedures, a change in attitude by both politicians and the private sector to dispel the popular perception that finance is a dirty money game, and high corporate and personal income taxes.

People would rather live in Tokyo because it is one of the safest and cleanest, but long-term hands such as TJI have become almost completely given up on Japanese politicians, regulators and even captains of industry because of their persistent inbred, and inward looking world view that is seriously hampering progress.