Can Tokyo Regain Its Luster as a World Financial Center?

Japanese Minister for Financial Services Yuji Yamamoto recently said Japan is considering steps to help Tokyo recapture its position as a world financial center that it enjoyed in the 1980s. The move prompted analyses in the Economist, Financial Times, Wall Street Journal, etc. of Tokyo’s ability to climb back. Among the problems it faces:

(1) Tokyo has the world’s second-largest stock market after NY. But it now has less than 10% of world capitalization, versus a third in 1990. Since then, foreign listings have fallen from 125 to 25, much below foreign listings of 446 in NY, 315 in London, and 150 in Singapore.

(2) Most Japan-focused hedge funds are based outside Japan. Investment banks often conduct Japan-related business in Japan’s neighbors.

(3) Commercial banks continue to lend at very low rates, and cheap credit is the “dead hand” on the capital market. Strong Glass-Steagall-type walls remain betwe!
en commercial and investment banks.

(4) “The country is a regulatory quagmire...Japan requires more paperwork than the rest of Asia put together.”

(5) The Tokyo Stock Exchange lags technologically.

(6) Tokyo doesn’t offer the range of financial products found in London and New York, because markets have only recently been deregulated. Rules governing new products are still unclear.

(7) “A lack of sophistication among market players.”

(8) Japanese language translation costs are high.

(9) “Everybody is absolutely afraid of the Financial Services Agency,” so instead of getting FSA cooperation in compliance, people go around it.

On the positive side, the economy is recovering; outbound M&A is the highest it’s been in years; corporate governance is improving; foreigners hold about 25% of shares; and Citigroup (C) completed the takeover of Nikko Cordial without interference. The biggest problems may be cultural and social. Both NY and London have long histories of welcoming foreigners to do business, and outsiders find it relatively easy to adopt to both business and social norms. Tokyo, with its unique language and culture, can be much tougher, especially for foreign women.

Comments

[Gen Kanai:]

Great post. It is obvious that Japan is not prepared to make the sacrifices necessary to regain it's position as a WFC. The government may 'say' that they want that, but the reality is clearly less convincing, and the market responds by listing elsewhere, by moving offices outside of Japan, etc. Without any radical change in policy, Japan will continue to be marginalized and fall further into the shadow of China, which, when you consider the history of Asia from more than just the 20th century, makes more sense.

2007 Jun 07 09:44 AM

[John Gaats:]

Can someone tell me why YTD return for TM is still lower than F and GM here on NYSE?

2007 Jun 07 12:20 PM

[Greg Pinelli:]

I am not sure what "the history of Asia" refers to...the last 7 or 8 years? The history I'm familiar with shows Japan as a country that will make radical decisions and changes when pushed to the wall. These began in the 19th century and have been renewed at critical intervals. China is a large question mark..They are far less cohesive cuturally and geographically. There are huge internal divides between coastal and inner regions. The problems they have to solve far outweigh Japans....and they involve far greater risk of outright civil conflict.
The real question in Japan, in my mind, is demographics. Is there a younger generation that is interested and influential enough that it can revitalize the post WW2 economic thrust?

2007 Jun 08 09:02 PM