TOKYO – The latest news from London isn’t going down well in Tokyo financial circles.
The inclusion of Chinese sovereign bonds in the FTSE Russell’s flagship World Government Bond Index had long been expected. But this week’s confirmation of that tectonic shift – and news that China will have the sixth-largest weighting – came just as Tokyo thought its moment back in the financial spotlight had finally arrived.
Japan’s “London of the East” dream just had a serious boost as the Tokyo Stock Exchange scored an initial public offering (IPO) by high-profile Taiwanese startup Appier. That’s at least how Tokyo Governor Yuriko Koike refers to what she views as Japan’s rightful place in the Asian pecking order.
The metropolis she runs has as many Fortune 500 companies as you’ll find anywhere, a top-three currency, some of the biggest and deepest markets, world-beating infrastructure and an asset management industry underpinned by one of the largest stockpiles of household savings.
Tokyo should be Asia’s London and New York combined, in Koike’s mind. And surely, the forthcoming Appier IPO on the TSE’s startup-focused Mothers board would only seem to buttress the point. The software firm CEO Yu Chih-han founded in 2012 has been the subject of intense lobbying from all directions. In Asian tech circles, Appier’s is among the most coveted startup ecosystems.
“Tokyo is becoming the global financial hub it deserves to be,” says Hiroshi Nakaso, a former deputy Bank of Japan governor and chairman of FinCity.Tokyo, which promotes the city.
Yet consider the listing an aberration that does zero to allay concerns Asia’s No 2 economy is destined to become more of a high-priced backwater as Shanghai and Hong Kong bag many of the biggest IPOs. And now, with an outward-facing US$16 trillion government bond market also hogging Tokyo’s spotlight.
Xi Jinping’s vision
This same reality check applies to New York, which is reveling in the Coupang IPO. That the Amazon of South Korea didn’t list in its own backyard but rather 11,265 kilometers away would seem a reminder of Wall Street’s lock on global capital markets.
This, too, may prove aberrational given China’s scale, financial ambitions and the Silicon Valley-like vibe President Xi Jinping envisions in the nation’s southeast.
The problem for Japanese Prime Minister Yoshihide Suga’s own ambitions is as much about political complacency at home as what Xi is creating over in the mainland.
A case in point is getting China’s swelling government bond market added to top indices. And upgrading market infrastructure in ways global punters can’t ignore.
“Many global investors are significantly under-allocated to China relative to its weight in global benchmarks, whether because of insufficient understanding of the investment opportunity and market complexity, or other factors,” says Mark Haefele, chief investment officer at UBS Global Wealth Management.
“Incorporating Chinese assets into a global portfolio can provide both growth potential and meaningful diversification benefits.” The bigger issue, he says, is that “China has become too big and distinct for global investors to ignore.”
China, Haefele says, now accounts for approximately 30% of annual global gross domestic product (GDP) growth. It also is angling to be a leader in technology and clean energy. The country, he says, hopes to achieve carbon neutrality by 2060, creating a potential galaxy of new investment opportunities.
That goes for major economies everywhere, making China an intriguing proxy for where global trends are heading. “Chinese economic and interest rate cycles often diverge from major global markets because of its domestically oriented economy and independent monetary policy,” Haefele says.
That, he notes, means Chinese assets offer diversification benefits for global investors beyond the obvious.
Given China’s eventual FTSE 5.25% weighting – or roughly $3.6 billion per month – HSBC predicts about $130 billion in inflows could be expected. This, notes portfolio manager Binay Chandgothia at Principal Global Investors, will “pull up the index yield a bit.”
It’s hard to say the same about aging Japan. In fact, one even has to question Tokyo’s stated role model here. London is no longer the place of Tokyo’s imagination that it was in 2016, when Koike became Tokyo’s first female leader. That was also the year she ordered up a 15-member blue-ribbon commission to plot Tokyo’s course back to financial domination.
Brexit is challenging ideas about London’s own financial center street cred. But something else has also changed in Asia since then, a political earthquake Tokyo thinks is working to its advantage: China’s clampdown on Hong Kong.
In October 2020, Koike’s metropolitan government stepped up efforts to capitalize on Hong Kong’s uncertainty. “The environment surrounding global finance continues to change dramatically,” Koike said at the time. “We’ll step up our efforts to win the tough competition with other cities.”
She added that now is the “last chance” to realize Tokyo’s financial hub vision.
Targeting Hong Kong
The Tokyo Metropolitan Government even set up an office in Hong Kong to advise entrepreneurs mulling a move to the Japanese capital. The pitch includes covering three months’ rent for any foreign company that might set up offices in the city. It aims to find space in Tokyo for overseas firms from November.
Trouble is, these same ideas – and language – seem plucked from 2008, when it launched its first big effort to wrestle away some of Hong Kong’s regional market share. The government of then-prime minister Yasuo Fukuda devised a seemingly ambitious plan to poach IPOs, investment banks, trading volume and top talent away from Hong Kong and Singapore.
Zero came of the push, though. Thirteen years on, Tokyo remains beset with prohibitively high taxes, a still-daunting language barrier and a labyrinthine bureaucracy that continue to stymie Japan’s finance hub dreams.
Japan, of course, has all the raw materials to have Shanghai, Hong Kong and New York looking over their shoulders. Yet Tokyo continues to forget the basics.
Corporate taxes alone continue to repel global capital. Though Suga’s predecessor Shinzo Abe cut levies, Japan’s 30.62% rate is still a galaxy away from Hong Kong and Singapore.
The top income tax rate of 55% is another major red flag for foreign chieftains and investors. So is Japan’s stubborn inclination to treat capital gains as income, unlike Singapore or Taiwan.
High costs are another hurdle. Though Hong Kong rents have surpassed Tokyo’s, neither the metropolitan government nor the national one is offering longer-term subsidies, creating special enterprise zone-like havens for startups or provide more regulatory alerts or prospectuses in English.
Or even to prod Japan Inc’s biggest names to raise websites to international standards.
Banks take flight
Even Moscow fares better than Tokyo on the World Bank’s ease-of-doing-business survey. Tokyo sits more than 20 rungs below Singapore, Hong Kong and South Korea. Not surprisingly, Japan is barely attracting more innovators than its rigid rote education system creates.
It’s quite the irony, considering the eight years between when Abe, prime minister from 2012 to 2020, declared Japan open for business.
His “Abenomics” push aimed to prod national and municipal government officials to slash high personal and corporate tax rates, internationalize multilayered regulatory framework, cut red tape, remove language barriers, remove regulations on managing pensions, liberalize labor markets, eliminate takeover defenses, reduce cross-shareholdings and put out the welcome mat for international talent.
Instead, Abe pressured the BOJ to dominate the bond market with trillions of dollars of purchases to boost economic growth. And it backfired, killing trading volume in debt markets. The sincerity of Abe’s Japan-is-back schtick is belied by the huge number of global banking names that either left Japan or scaled back operations, including Citibank, HSBC, Merrill Lynch, Royal Bank of Scotland, Societe Générale and Standard Chartered.
Japan is having a hard enough time getting the home team to invest at home. SoftBank founder Masayoshi Son and his $100 billion Vision Fund is investing big virtually everywhere except in Japan. In fact, Son hopes to bring South Korean startup Coupang, in which he’s an investor, to Japan.
Suga’s government is, to its credit, trying to revitalize the process. The push even includes encouraging three of Japan’s most viable financial hub candidates – Tokyo, Osaka and Fukuoka out west – to compete amongst each other for multinational companies.
China invests in the future
“The time has come to create the next-generation international financial center,” says Yoshitaka Kitao, CEO of financial firm SBI Holdings Inc. “We will increase our calls to make it come true.”
It’s going to take more than calls, of course. As Abe was distracted all that time planning a Tokyo 2020 Olympics that might never happen, Xi’s China was investing trillions of dollars in owning the future of all things tech and financing the startups of tomorrow.
As China invests hugely in owning aerospace, artificial intelligence, biotechnology, digital currencies, electric vehicles, 5G, renewable energy, robots, semiconductors and new generations of unicorns, it also is clustering them around Shenzhen and Hong Kong, where future startups like Appier are very likely to list.
Along with the regulatory software getting in the way, Japan lacks human capital hardware. Its shrinking and aging population collides with a cultural aversion to risk-taking and immigration. And its market infrastructure poses other challenges as China Inc comes online in a big way.
A comatose government bond market is an obvious case in point. Thanks to the BOJ hoarding more than half of all outstanding issues, there’s about as much return – 10-year bonds yield only 0.08% – as there are trading opportunities. Over the last 24 months, there have been many days when not a single Japanese government bond exchanged hands.
That’s as stark a contrast at you’ll find with a Chinese debt market going global as never before. And thanks to the FTSE Russell’s confirmation this week, it’s coming to a portfolio near you in short order.