Japan has explicitly stated its goal is to make Tokyo the number one financial city in Asia. This isn't a goal picked at random, of course. Japanese officials see an opportunity to lure the Asian headquarters of global financial firms to Tokyo as Hong Kong struggles under new scrutiny from Beijing. Without a doubt, Japan has a number of attractive features as a stable global power and the world's third largest economy, but there are real hurdles that will have to be cleared to make Tokyo a viable alternative to Hong Kong.
- Japan is eager to attract financial firms considering an exit from Hong Kong as China continues to crack down.
- Already a financial power with a stable stock market exchange, Japan is a competitor for financial firms in Asia-Pacific.
- Unfortunately for Japan, the business climate has yet to significantly improve for foreign firms despite decades waiting for promised reforms.
Doing Business in Japan
Japan does appear to be serious about moving firms from Hong Kong to Tokyo, but most of the ideas being discussed are still ideas rather than concrete policy. Among the ideas being floated are tax incentives, streamlined paperwork, and special economic zones. These could be attractive for financial firms if they are actually introduced. Until that actually happens, firms have to look at the current reality of doing business in Japan.
Japan already has many foreign firms operating in it, and the Tokyo Stock Exchange is a global power. Beyond that, however, Japan has some drawbacks as a destination for firms looking to move out of Hong Kong. For one, Japan is at a serious tax disadvantage compared to Hong Kong. Hong Kong has a top income tax rate of 17% compared to Japan's 45%. Obviously this is a disincentive for high earners working at these financial firms to set down roots in Tokyo when nearby neighbors like Singapore (22%) have more competitive rates.
Adding to the tax burden, Japan is generally seen as much harder to do business in. Japan bureaucracy can be very difficult to navigate due to the low level of English and the layers of government. Even if corporate rules are eased, the foreign employees of those corporations will still have to navigate the bureaucracy to set up their home lives. The low English levels also slow the speed of business for non-native firms and often lead to staffing up with local employees to support foreign talent.
Japan Has Been Here Before
Japan has seen a change in leadership, and prime minister Yoshihide Suga has once again committed to the difficult structural reforms that are needed if Japan is going to go after foreign firms. The list is long, but it includes deregulation of protected industries like agriculture, addressing the country's business culture of creating zombie firms by supporting failing companies with nonperforming loans, introducing more international board members into large publicly traded firms, and easing labor regulations to end the concept of employment for life once an employee reaches a certain level of seniority regardless of performance.
If this all sounds familiar, it is not by mistake. These are the same reforms that were hoped for when Shinzo Abe came to power with his three arrows of Abenomics. In fact, some of them go as far back as the Elvis-loving Koizumi administration. Obviously, the need for these changes is recognized, but the domestic resistance is real and entrenched. Suga does not seem to be addressing many of these issues head-on, but he is working around the edges now by targeting digitization and making the beginnings of a case for deregulation. The question is whether global financial firms want to take the leap from Hong Kong to Tokyo, given the glacial pace of change over the past five decades.
The Exodus Might Never Happen
It is not just Japan that is eyeing financial firms getting nervous about unrest and government measures in Hong Kong. Competitors include the aforementioned Singapore as well as Australia, but the biggest competition is Hong Kong itself. Hong Kong is a de facto gateway into China, and even with unrest and more pressure from Beijing, many firms will likely stay just to be closely connected to China. If an exodus of international firms does start, that could cause Beijing to reassess its approach to Hong Kong, as it will be losing the financial hub that made bringing Hong Kong into the fold attractive in the first place.
Japan's interest in attracting financial firms to Tokyo is a positive sign in that it suggests the country is eager to make the changes needed to spur economic growth. Beyond that, however, Japan's current business climate doesn't make it a competitive alternative to Hong Kong as an Asia-Pacific financial hub.
At this point, it is going to take more than vague promises to turn Tokyo into an alternative to Hong Kong. If the Suga administration actually follows through on structural reforms that have been promised for decades, however, Japan could conceivably compete in the future. As it stands now, Japan's pitch is likely to fall on deaf ears.