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September 2nd, 2020

Expanding and internationalizing the asset management sector in Japan is a national priority. Recent discussions in the Japanese parliament centered on whether the government can take advantage of current uncertainty in Hong Kong to lure business away from the region’s long-time financial centre.

The move has sparked new fire under a two year old initiative that started in Japan’s capital city. Under the guidance of governor Yuriko Koike, the Tokyo Metropolitan Government (TMG) has been looking to increase its prominence as both a regional and global finance centre. Over the last couple of years the government is hoping to move beyond strictly Japanese asset managers and financial institutions to also include more international-based institutions who chose to base their operations in Tokyo. The umbrella name used by the government for this effort is “Global Financial City: Tokyo.”

One part of these efforts included the creation in 2018 of the Subsidy for the Outsourcing of Middle and Back Office Operations. The scheme provides rebates of up to half the cost of middle and back office services from a list of approved vendors, up to ¥7 million (around $65,000) per year. The stated purpose of these efforts are two-fold: reduce the burden on middle and back office areas and outsource these operations so independent asset managers with limited human resources can concentrate resources on their main business.

With the scheme entering its third year, more information is becoming available to determine whether the program is meeting its stated objectives and what further adjustments could be considered to accelerate its impact. The short answer is that the impact is more limited than the architects of the plan had originally hoped for, but there is a solid foundation to build on.

A particularly noteworthy element of the program is its sub-national level. Tokyo operates as an independent municipality similar to a prefecture or state with limited ability to set regulatory and legal policy. For example the central bank of Singapore and The Accounting and Corporate Regulatory Authority teamed up this year to provide a new Variable Capital Companies (VCC) framework designed to encourage the co-location of fund managers’ substantive fund management and domicile in Singapore. An equivalent program in Japan would have to be approved by the national legislature or the national Diet of Japan.

By funding start-up managers, the program allows cost-constrained emerging managers to focus on investment operations, whether that be research staff, additional technology or research needs. It helps remove costs out of the budget in a particularly sensitive part of a businesses’ lifecycle. The government chose a handful of official, trusted technology partners for the project. Narrowing the options ensures new providers use companies with a proven track record in providing effective execution and post-trade services – and further simplifies starting a fund, by having a small select list of accredited vendors.

Limitations of the scheme

While Japan is one of the world’s largest asset management markets, it has been an insular one. The vast majority of investments are made by Japanese managers, within Japanese companies and for Japanese investors. Which has meant licensing and other regulatory paperwork must be completed in Japanese, the country’s only official language. While other competing jurisdictions including Hong Kong and Singapore allow (and in some cases require) paperwork to be submitted in English. Since this is the international language of business and the world’s most commonly spoken second language, this tends to place Japan at a competitive disadvantage.

In practice, the majority of the managers who have taken advantage of the scheme are either Japanese nationals looking to return home or people with another connection in Japan. The available funds, while always worthwhile, tend to pale in comparison to the millions or even tens of millions that managers are hoping to generate when they solicit investments for a fund. The funds on offer are in many cases not enough to single-handedly force a change in venue. The Japanese government could consider programs that increase the number of people involved in the scheme to ultimately attract new sources of capital. Another option could be to take a deeper look at the tax structures and vehicles in the same vein to what is on offer in Singapore, where a new corporate structure for investment funds assists in co-location for fund managers’ substantive fund management and domiciliation activities there.

Why now may be the imperative moment for Japan

None of this denigrates the efforts made so far by the Tokyo government, which includes informational seminars and speeches from bureaucrats trying to continuously educate the sector on what the scheme has to offer. Rather, we believe it should stand as the foundation for the program to build upon. The national government (and specifically Japanese regulatory bodies) can look to other countries for things they can do.

Regulators in Japan can expand the currently hidden and relatively meager websites that can provide links and introductions to bilingual services to handle registration paperwork. Both Hong Kong and Singapore have extensive online hubs that serve as guides for new market entrants, as do many offshore centres in the Caribbean who tend focus on asset domicile. The Japanese government might do well to consider expanding or offering subsidies for translation services, or offering ‘digital nomad’ visa schemes such as what is on offer in Estonia.

We also think that it is imperative for the scheme to continue to expand awareness of the program and what they are trying to achieve within the region. Building the outreach and awareness at industry forums, publications and network events will help to generate more participants in the scheme and build a broader understanding about the investment opportunities that exist inside Japan. New opportunities abound as traditional industry events and gathering have been canceled due to the pandemic – Tokyo can make a stronger play to be a centre of international discussion and policy for asset managers.

The beginnings of a national-level outreach strategy have begun to emerge. In response to a question in the Diet, Prime Minister Shinzo Abe said the country would “actively promote” the re-settlement of asset managers looking to leave Hong Kong but stay in Asia. The Financial Services Agency, the Foreign Ministry, the Ministry for Trade and Industry and the Tokyo Metropolitan Government are feeding into a report due for publication later this year. Still to be addressed are issues around visas and taxation that traditionally have seen traders opt for Singapore over Tokyo as a secondary destination in Asia. Whatever happens may be kept largely behind the scenes. Reports in the media speculated that any move to capitalise on Hong Kong’s fall in status will be handled gingerly so as not to offend China. Singapore based economics professor Antonio Fatas told the South China Morning Post that “it is a delicate issue and I cannot imagine a government in Asia making a strong public announcement to lure firms into their country. Not sure China would see this as wise”. However, the opportunity certainly exists, especially as it becomes clear just how much things will change for the everyday lives of people based in Hong Kong as the national security law comes into force.

The Japanese market provides a unique model for collaboration between government and the asset management industry. This is commendable. We hope that the national government continues the conversation, leading to mutually beneficial improvement.