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Levelling up – enhancing Tokyo’s proposition

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By A Paris – A stable, clean country, with a sensible government – Japan is well set for building out its fund industry. Proposals are being made to overcome barriers like high tax levels and legal restrictions, promising lower income and inheritance tax rates. And although the timeline of these changes is yet unknown, the plans bode well for the growth of the industry.

By A Paris – A stable, clean country, with a sensible government – Japan is well set for building out its fund industry. Proposals are being made to overcome barriers like high tax levels and legal restrictions, promising lower income and inheritance tax rates. And although the timeline of these changes is yet unknown, the plans bode well for the growth of the industry.

One hurdle expected to change sooner rather than later is related to the language barrier. The recent launch of the initiative called Promoting the Use of English and Establishing a Single Point of Contact for Foreign Asset Management Firms will be a key development for global managers looking to set up a business in Japan.

In early November, the new prime minister Yoshihide Suga gave his first policy speech to the Diet, the national legislature of Japan. He said: “Strengthening Japan’s functions as a global financial centre will help to make global financial markets more resilient against crises such as natural disasters through geographical diversification of financial centres. Also, that will help create new employment and business opportunities as well as economic growth in Japan. The entry of foreign asset management firms into Japanese markets is important for that purpose.”

According to Shinichiro Shiraki, CEO, Japan, AIMA: “Japan can attract many more managers, but we know Tokyo is less attractive than Singapore and Hong Kong because of higher tax rates, the language barrier and other unique restrictions in the legal guidelines.

“Industry associations like AIMA and private equity fund association and venture capital association are bringing the industry voice to the government and regulators on these issues and advocating for a faster pace of change in this regard.”

Encouraging the use of English will bring about considerable change in Japan. Many investment management professionals have lamented the complexity of the registration, legal entry and setup process. Having legal documents published in English will help ease this difficulty.

Hedge fund prospects

The hedge fund industry in Japan has been somewhat dormant of late. The Tokyo Metropolitan Government (TMG) launched Emerging Manager Program (EMP) in 2017 to stimulate growth in the sector, however it has not yet achieved the hoped-for success.

The programme was designed to ignite a new hedge fund scene in Tokyo by relieving some of the cost pressures managers face when launching their funds, providing greater flexibility in licensing and easier access to real estate.

Through this initiative, the TMG also aimed to provide institutional investors with an incentive to let emerging managers, who possess a license and do business in Tokyo, handle their funds.

Shiraki outlines the main reason why the uptake has been slow: “None of the large institutional investors in Japan have seeded these emerging managers yet. Once this seed capital starts to come through, then we are likely to see more emerging managers being set up as a result.”

Meanwhile, the TMG has continued to add firms to the list of official qualified outsourcing service providers within the programme. Enfusion is one of the more recent selections. Thomas Kim, Enfusion CEO, commented: “We are thrilled to continue to expand our global footprint and client base by working closely with the Tokyo Metropolitan Government Emerging Manager Program. It’s an honour to be recognised as a key partner and to play a leading role in a strategy that encourages the revitalisation and continued growth of Japan’s hedge fund industry. We look forward to building momentum in the region with leading asset managers and hedge funds.”

Enfusion joins SS&C Eze, Sumitomo Mitsui Trust Bank, Nomura Research Institute, XNET Corporation, Mitsubishi UFJ Trust and Banking Corporation, State Street Trust & Banking Co, Broadridge Managed Solutions and Tora Trading Services.

The Consortium for Japan International Asset Management Center Promotion (JIAM) released a white paper on the state of play in the Tokyo financial industry. The document collated data and opinions gathered by various means over the course of the last three years.

This reported listed what the JIAM considers to be impediments to the promotion and support for emerging managers. The first is the difficulty in obtaining comprehensive and accurate information about the process of setting up an asset management firm in Japan. This can be eased once the aforementioned regulation around the use of English and the single point of contact comes into force.

Another hurdle is winning mandates from institutional investors in Japan. Shiraki expands on this and the prospects for hedge fund managers: “Japan is an investors’ market. It is not a service provider or managers’ market. Therefore, the needs and appetites of the institutional are critical in driving growth in the industry.

“There are large institutions like the GPIF and PFA which have invested but not on a regular or systematic bases into hedge funds yet. These are the organisations which have large pots of capital and are looking for opportunity to invest in these types of assets, given the zero interest rate here in Japan. Investors such as these have to generate a return so hedge fund strategies will hold considerable appeal.”

The JIAM report confirms the Tokyo EMP is an attempt to provide incentives to asset owners and gatekeepers to encourage allocation of funds to emerging managers. “However, the current programme is not sufficiently known by players in the market and there are comments suggesting that the incentive and flexibility of the programme in its current form are not attractive enough. There is room for better publicity and for improving the mechanics of the programme,” the report notes.

Michael Bugel, Managing Director, Co-Head of APAC, AIMA concludes: “We need to help these smaller, mid-sized hedge funds. There is no shortage of launches – we’re getting on average between five and 15 new launches but we know there are several Japanese hedge funds based in Hong Kong and Singapore, run by Japanese professionals who would most likely be thrilled at the prospect of moving back to Tokyo if it made sense for them financially. Tokyo needs to make sure it is ready to receive any new applications.” 

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