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Maximising Japan’s domestic strengths

Japan is focusing on utilising its domestic wealth and maximising the investment potential of its ageing population. This translates into opportunities for investment managers looking to grow their footprint in the country and establish a strong Japanese client base. In its endeavours to strengthen its reputation as a financial hub, Japan is also working to help foreign investors discover hidden gems within its capital markets.

Keiichi Aritomo, Executive Director of FinCity.Tokyo, outlines the country’s well-known demographic challenge which sees a third of the population being over 65. However, two thirds of Japan’s wealth is also in the hands of this group of people, making them very powerful indeed.

“We need to grow Tokyo as a financial centre to address these challenges,” Aritomo says, “To do this, we first have to upgrade our investment capabilities. Secondly, we have to ensure the sustainability of our investment. And third, due to the fact that we have quite extensive supply chains, we need to provide sufficient funding for SMEs to make these supply chains more secure, robust and resilient.”

In its “Global Financial City: Tokyo” Vision 2.0, the Tokyo Metropolitan Government (TMG) details how it aims to build an investment chain that links domestic and international capital demand to worldwide capital supply, against a backdrop of enormous domestic capital demand based on the existence of diverse companies and projects in Japan and domestic capital supply capacity.

Tokyo’s strengths include being the world’s third largest economy, coupled with approximately ¥1,900 trillion in personal financial assets, high levels of comprehensive strengths as a city, political stability, and firm rule of law.

Establishing Tokyo as a global financial city will involve creating a virtuous cycle of investment and return where asset managers and financial institutions are actively engaged in the market by supplying funds to domestic and foreign companies and projects, all supported by “comprehensive urban functions and enhanced social infrastructure”.

Supporting ESG disclosures

One way of advancing Tokyo among international investors sees FinCity.Tokyo and TMG supporting Japanese companies to better disclose their ESG credentials and endeavours.

“There are Japanese companies that aspire to address social issues to improve our society, but they don’t have enough capacity and capabilities to engage international investors,” says Aritomo, “They don’t know the ESG terminology and often don’t communicate in English. Therefore, their ESG ratings are low which results in limited traction from overseas investors. One project we have started is to address this issue by helping companies such as these to better communicate in English.”

Five companies formed part of this project last year and this year, this number has risen to 15.

Developing this information platform on ESG-related corporate initiatives is one of Japan’s major initiatives to further sustainable finance in the country. Companies are being encouraged and supported to disclose ESG-related information on companies in a way that is easy for everyone to use. This will be done, “while taking into account the moves by the government and Japan Exchange Group to establish an information infrastructure and certification framework for green bonds.”

Japan also has broader green ambitions and has been promoting transition finance, encouraging investment in supporting high-carbon companies start their journey to becoming greener.

“We are trying to become a hub for transition finance for Asia. Japanese major corporates are already putting together their roadmap for transition finance. These corporates have extensive supply chain connectivity with the vast majority of Asian markets; therefore if other Asian companies get endorsed by Japanese corporates or Japanese regulators for transition financing, it can result in significant support from international institutional investors as well.”

Data from the government shows Japan’s share of the global sustainable investment market is still just 8%. Therefore, the room for growth here is significant.

In the document quoted earlier, TMG notes how the stimulation of green finance is becoming increasingly important as Tokyo aims to become a global financial center. This, “will accelerate decarbonisation efforts and contribute to sustainable recovery, leading to sustainable economic growth for Tokyo and, ultimately, to the realisation of affluent lifestyles for Tokyo residents,” the report says.

Encouraging investment

Japan is home to a significant bulk of household assets, circa ¥1,900 trillion in savings, which are under utilised. Putting this money to work is one of the critical junctures for the country to drive it’s financial agenda forward.

“We have sufficient money, but our investors are not sophisticated enough to diversify that investment across their wealth. So that’s why we would like to attract long-term oriented investors so that Japanese investors could follow their example,” Aritomo says.

International, sophisticated investors can engage the local market, influence and also maybe educate Japanese investors on how to implement a long-term investment strategy. This large accumulation of assets offers asset managers and foreign operators significant business growth opportunities.

Part of the focus is also being placed on supporting emerging managers. Aritomo describes the programme being built to attract emerging managers, called “Emergence Japon,” due to be launched in the second quarter of 2023.

“We would like to have a broad range of investors chipping in an amount, for example around $5 million each, to encourage growth within the emerging manager we identify. These managers generate alpha and by investing early, asset owners can achieve some supplementing capabilities in securing the future capacity within their strategies,” he says. In its efforts to build this network of managers and investors, FinCity.Tokyo organises a number of events, the most important being the Tokyo Asset Management Forum on November 15. This provides matching opportunities for emerging managers and asset owners and every year, the organisation aims to have preeminent speakers on the agenda in order to elevate the level of information and education being provided.

TMG also provides asset managers with subsidies for outsourcing middle and back office operations. As a result, they have more time to focus on their core investment activities.

Strengthening capital markets

The Japanese market is considerably vast with around 3,800 companies. However, Aritomo explains that a very small portion of these, less than 150, are covered by international equity analysts – leaving 88% of Japanese companies untouched.

In Aritomo’s view, there are many undervalued, hidden gems in Japan which international investors can benefit from. Japan is the home to the third largest economy in the world, by GDP, and as a result has a broad variety of sectors and industries which can be invested in.

One way of helping these companies appeal more to foreign investors includes carving out a clear CFO role. “Japanese companies are very peculiar. Companies, even large ones, have accountants but not necessarily a CFO. Companies in Japan are very good at accounting in terms of bookkeeping and reconciliation and internal control management, but we need to build out a bigger picture. We want these companies to have a CFO, someone who can design business models, carry out balance sheet optimisation, supply chain finance and data enabled projections,” Aritomo outlines.

Aritomo has ambitions for corporate CFOs to become an integral part of Japan’s capital markets. This will once again contribute to attracting more capital to Japan.

Through the initiatives detailed here and various other projects, Japan aims to build its reputation as a global financial city to encourage investment and engagement. Such activity will create a vibrant financial community while maximising the potential of domestic ownership
and commitment.

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