Anthony Rowley

Rivalry among financial centers to be ranked best in their region or even in the world is like a beauty contest. New York is “Miss World” and London number two while Misses Shanghai and Hong Kong jostle for third place and Tokyo and Singapore follow. Dubai too has lately figured among the top dozen contestants.

But there is more to being a financial hub than just the “glamour” of it, as Tokyo is beginning to demonstrate. Generating income from foreign exchange dealing and foreign securities trading, plus offshore banking, is all very well, but no financial centre can thrive for long on such shallow and ephemeral business.

Finance is supposed to be the “handmaiden” of industry and business as well as of services activity — a means to an end rather than an end in itself. Financial skills are best put to work in serving wider national needs than simply those of the financial community itself.

Once a nation builds up wealth “by the sweat of its brow” as Japan did in early postwar decades from its export “miracle” and as China has also done more recently, the overriding need from the perspective of national prosperity and welfare is to be able to manage that wealth well — both at home and overseas.

Analysts have long speculated as to which Asian financial centre — Hong Kong, Tokyo or Singapore (and more recently Shanghai or Shenzhen) — would eventually emerge on top while Japanese policymakers toyed with incentives to boost Tokyo’s position. Now, however, the debate is becoming more serious.

The reason is that Japan has begun to realize what the true value of a financial centre is, beyond being a kind of prestige symbol or “fashion statement” for the national economy. This realization has dawned suddenly and clearly and it has implications for others like China and those beyond China.

The real financial centre “game” is not about earning revenues (and also creating employment) from providing services aimed largely at overseas or “offshore” clients — the “beauty contestants” flaunting their attractions to the world. It’s also about managing a country’s domestic and international assets more effectively at home and abroad.

This is why the FinCity, Tokyo project launched by the Tokyo Metropolitan Government together with 42 Japanese and foreign financial institutions and other organizations and backed by Japan’s central government, is more than just another whimsical foray by Tokyo into financial centre activities.

The core aim of FinCity: Tokyo is not so much about becoming a financial centre per se as training Japanese nationals in the science (or “art” as some like to term it) of fund management. And that is not simply because fund management, like investment banking, is viewed a glamorous profession.

Japan has some 1,900 trillion yen of household savings, an impossibly large figure to imagine in yen and still a huge 18 trillion or so in dollars — the largest in the world in fact. But as people like veteran Japan analyst Jesper Koll notes Japan is not good at managing these vast assets.

The result is very low financial returns for Japanese savers in general and critically for pensioners in Japan’s fast-ageing society with pension funds from the mighty Government Pension Investment Fund (GPIF) down consistently and badly underperforming those elsewhere.

Equally bad from the point of view of using national wealth efficiently is the fact that Japanese financial institutions are not exactly star performers when it comes to investing overseas. This applies as much to investing in Asian ventures as to overpaying for “trophy” assets (like the Empire State Building or Pebble Beach golf courses) in the US.

Executive Director of FinCity: Tokyo Keiichi Aritomo (a former McKinsey consultant and accountant) is frank in acknowledging that Japan needs to sharpen its fund management skills and that the way to do this is to import foreign talent. Japan needs “people who can train people on the ground” as he says.

As Aritomo commented to this writer, “Japan was very weak in rugby and football but we imported talent in the past and had them train up Japanese players. We don’t need to steal talent. We need to borrow people to inspire our own young people”

Tokyo is likely to be “borrowing” people on a large scale from now on, especially from Hong Kong where expatriate fund managers and also Japanese nationals working there are seen as being anxious about their future. Tax and other incentives like office space will be used to lure them to Tokyo.

There are larger dimensions to this debate. Finance has traditionally been looked down on in manufacturing nations such as Japan. Yet, viewed in a wider context, finance is not so much an end in itself, as a means to an end, which is maximizing national wealth. Tokyo is now “getting” that.

Former Asian Development Bank president Mitsuo Sato once lamented the fact that Japanese investors preferred to put their (collectively huge) savings into exotic securities issued by obscure overseas entities instead of investing them in Japan or in solid and worth ventures elsewhere in Asia and beyond.

The fact that Japanese investors  are more or less forced to do this by virtue of poor fund management skills within Japan itself has not been well appreciated until now. But this could change as Tokyo (along with other Japanese financial centers such as Osaka and Fukuoka) focus on nurturing home-grown skills.

In order to become a successful financial centre, a city usually needs a large economic “hinterland” capable of generating income from manufacturing and services as well as from foreign trade. London and New York qualify in this regard and financial services have developed there to match the need.

But a “financial hinterland” also matters in this regard and Japan clearly has that given the enormous size of its domestic savings, not to mention Japan’s own manufacturing and trading capabilities. But Japan has never exploited this financial hinterland to full effect.

What applies to Japan also applies to China. China earns huge export surpluses yet these have chiefly found their way into passive investment in US Treasury bills (or into the Belt and Road Initiative) rather than being actively deployed overseas by Chinese fund managers.

China can take a leaf out of Japan’s book and develop fund management talent in centers like Shanghai and Shenzhen (and perhaps prevent an exodus of such talent from Hongkong). Meanwhile, Singapore’s hinterland is ASEAN.

Which will be the winner among Asian financial centers? All of them can in fact be winners — provided they play their cards right and keep in mind the fact that finance is primarily a means to a wider end. That end needs to be clearly identified and targeted, as Japan is now doing.