Japan is proving to be one of the most aggressive nations to try and take advantage of a potential weakening in investor confidence in Hong Kong as an international financial centre, followingcontroversial political interventions from Beijing. However, Tokyo faces a tall order in persuading investment porfessionals to shift to the northeastern Asia country, courtesy of stiff taxes and a lack of English language.
The ambition of Japan to become an international financial centre is not new. It first broached the idea after the real estate bubble in the 1990s. The latest declared intentions appear to be an attempt by newly appointed Prime Minister Yoshihide Suga to notch up achievements ahead of the country's general election next year.
“We will look swiftly at the tax system, make sure administrative services are provided in English and consider easing visas to create an international financial center for Asia and the world,” he told the Diet in October.
The focus on reviewing tax makes sense. Japan's 33% rate on taxable income of ¥10 million ($94,900) is much higher than Hong Kong's 17% or Singapore's 15% for equivalent salaries. Plus its 29.74% corporate tax rate is far higher than Hong Kong’s 16.5% rate.
The party's tax research commission will present its findings on the issue by the end of this year. And the Financial Services Agency (FSA) said separately in August it was considering tax reform.
In addition, the country is preparing to open an English-speaking support office for foreign asset management firms seeking to do business in the country in January, Finance Minister Taro Aso said on November 6, as it aims to boost the country’s standing as a global financial centre.
However, these steps may well not be enough to encourage much foreign investment, said Katsuyuki Tokushima, head of pension research at NLI Research Institute’s Pension Research Center.
Japan has the merits of location, a large economic size and intellectual workers, but in addition to having higher taxes it doesn’t have an English-speaking environment. People can do financial business in Tokyo, but they can’t stay and live happily with their families, he added.
“Tokyo metropolitan government and some think tanks continue their discussion, but I believe it will fail."
Nagai echoed Tokushima’s opinions. He noted that the FSA has announced that it would set up a one-stop English office to attract more financial firms to go to Japan. But after people settle down in Japan they can't communicate with others well in English. "That's the real-life problem," Nagai said.
He added that lowering the tax is a big step for promoting Tokyo as an international centre, but it is not sufficient to build Japan as an international financial centre. "I think there're goodwill and some good steps, but not good enough to make a game-change."
To date there are few signs of any investors seeking to abandon Hong Kong for Tokyo, or indeed even prioritise the latter ahead of the former.
Nuveen, an investment manager that is owned by the Teachers Insurance and Annuity Association, recently announced it was shifting Shusaku Watanabe to Tokyo from Singapore to be its real estate head for Japan. However, the company noted that Japan is a major property market and that Watanabe had already covered from Singapore.
"The direction of our strategy for Japan is to establish a full commitment to that market via licenses and resources for both distribution and investment management purposes," it said in the statement. "The office in Japan is not to repurpose or reposition roles or responsibilities from the Asian headquarters of Hong Kong."
JAPAN NOT ALONE
Japan is not the only country to seek to capitalise on what Andrew Bragg, an Australian senator and former financial services policy adviser, claimed was “Hong Kong’s collapse as a credible financial centre in the region” following the imposition of a national security law in July.
The city has seen its status erode even more since, with China's National People’s Congress instructing the Hong Kong government to oust four sitting legislators last week for being “unpatriotic”. It did so, further undermining the degree of remaining autonomy in the territory.
Global investors and financial firms are concerned about the increasing pressure from Chinese authorities in Hong Kong. "In that respect, rule of law and freedom are guaranteed here in Japan. It's a very precious asset here," Nagai said.
If there are more aggressive Chinese interventions Hong Kong, it could be the driving force for financial firms to leave Hong Kong, he argued.
But would Japan be their first alternative? After all, Singapore boasts English as a native language and strong financial services capabilities; it seems the top alternative for international asset managers and wealth advisers.
Taiwan's regulators and investment industry also have ambitions to make the island a wealth hub that can compete with Hong Kong and Singapore. And while it lacks strong English skills, it does boast the same language as China, making it a potential alternative spot from which to cover the mainland.
Set against that, Japan may struggle to stand out; a point Nagai that conceded. "Japan still has many constraints to become a global financial centre," he said.