A British thinktank published a “Global Financial Centres Index” ranking financial centers in 79 cities and territories around the world according to their international competitiveness. First was London, second was New York, third was Hong Kong, and fourth was Singapore. Tokyo was in sixth place, but came in third for the number of companies listed on its stock market. A structure for increasing investment in Tokyo needs to be created. For example, Tokyo needs to actively attract foreign financial institutions and become home to large numbers of investors and analysts from overseas.
1. Lure Finance Specialists by Designating Tokyo as an “International Finance Zone” and Reducing Income Tax There
One of the biggest barriers to attracting financial professionals to Tokyo is the high rate of income tax. There is certainly a big difference between the 22% rate in Singapore and the 55% rate in Tokyo. To achieve the goal of becoming Asia’s number-one financial market, Tokyo should be designated as an “international finance zone,” and bold measures should be introduced to attract foreign capital. For example, the income tax of foreign nationals living in the zone and employed in the financial sector could be halved for a certain period.
2. Proactively Use Public Funds
China invests some of its foreign-currency reserves, which amount to more than $2 trillion, in blue-chip companies via a sovereign wealth fund (SWF). South Korea, meanwhile, entrusts the investment of its $20 billion in foreign-currency reserves to the Korea Investment Corporation. The Japanese government possesses around 100 trillion yen in foreign-currency reserves, while the Government Pension Investment Fund (GPIF) holds pension assets worth approximately 120 trillion yen. If even a portion of these funds could be diverted into risk capital in the form of a Japanese SWF, the impact would be huge. Japan should look at other companies as benchmarks, and adopt a formal strategy. For example, it should select fund managers and determine an investment policy.
3. Assist with the Establishment of Financial Infrastructure in other Asian Countries
Recently, the need among Japanese companies operating in Asia etc. for deregulation has been growing. They need barriers in the area of financial infrastructure, including the procurement of funds, settlement services, and information disclosure, to be removed. To eliminate such barriers, Japan should proactively provide technical assistance to establish financial infrastructure in Asian countries. Establishing markets that have a strong affinity with Japan’s financial system in Asian countries will also make a big contribution to the revitalization of financial markets in Japan itself.
4. Merge Securities Exchanges and Strengthen Delisting Criteria. Make Companies Reinforce their Corporate Governance
Securities exchanges around the world are undergoing a major realignment. For example, the New York Stock Exchange, the world’s biggest, has merged with Europe’s Euronext. Japan also needs to establish a comprehensive securities exchange on which not just actual stocks but also other financial instruments, securities, and products are traded.
As part of this process, delisting criteria should be beefed up in order to enhance trust in the market and encourage investment. Current Tokyo Stock Exchange delisting criteria are too lax. For example, to be delisted the company’s market capitalization must fall below 1 billion yen (or 500 million yen for firms listed on Mothers) or its share price must drop below 2 yen. Toughening these delisting criteria, such as by doubling these figures, would have a big impact. By increasing the figures, companies whose share prices have dropped due to poor operating performance would be forced to delist. Once delisted, their fund procurement options would decline and there would be a loss of trust in their corporate brand. As a result, they would need to make ongoing efforts, such as merging or forging capital partnerships with other companies, to avoid delisting. This would make the circulation of funds smoother.
Furthermore, to make Tokyo Asia’s number-one financial market, companies need to make an effort to improve their operations and enhance their credibility. So companies should be actively encouraged to strengthen their governance functions such as by actively hiring outside directors.
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