Even as the Japanese government trumpets its aim to transform Tokyo into an international financial centre, every week brings another rumour about one hedge fund or another moving people off-shore, usually to Singapore or Hong Kong, or yet another investment bank downsizing its Tokyo operations.
Representatives of foreign hedge funds and investment banks in Tokyo, while reluctant to publicly complain about their Japanese hosts, will readily discuss in private their growing disaffection with Japan’s regulatory and tax environment. The latest issue to rile the foreigners has been a surge in activity by Japan’s zealous tax authorities, who have stepped up scrutiny in recent months, particularly of foreign financial institutions - a strategy guaranteed to feed discontent in a country with a 40 per cent-plus corporate and personal income tax rate.
Adding to foreign disenchantment with the onerous regulatory environment and high costs of doing business in Japan is a gathering campaign by the Singapore government to lure foreign financial institutions and boost stock exchange listings. The Singaporeans have been making regular, low-key forays into Tokyo, directly approaching the offices of hedge funds and other financial institutions with appealing reasons to transfer to Singapore - including low tax rates of 15 per cent, discount office space and an array of other incentives.
Singapore’s efforts are paying off, with recent figures from Eurekahedge that show strong growth in assets under management for Singapore-based hedge funds, while growth for Japan-based hedge funds is running out of steam. And on the commercial real estate front, Bloomberg reports on Friday that foreign investors are buying Singapore office buildings at a record pace as rents surge after corporate tax cuts lured investment banks including Morgan Stanley to expand in the city state.
Overseas private equity groups and funds have spent S$2.4bn ($1.6bn) buying office towers so far this year, 70 per cent of all such transactions in Singapore, exceeding the S$1.9bn of foreign acquisitions for the whole of 2006, according to real estate consultant CB Richard Ellis, Bloomberg says.
All this is fuelling mutterings around Tokyo about the “hollowing-out” of the Japan-based financial services industry.
Now, a couple of bulge bracket banks in Tokyo are quietly closing up their equity capital market departments or re-allocating staff to more lucrative locations such as Hong Kong, underlining the paucity of initial public offerings in Japan and relatively low levels of activity in equity capital markets, writes the FT’s Mariko Sanchanta in Tokyo for FT Alphaville.
HSBC, which has been focused on building up its operations in China, last year shuttered its ECM department in Tokyo due to the dearth of lucrative deals. Credit Suisse and Lehman Brothers have not participated in any new IPO activity in Japan since 2005. Other global investment banks are understood to be re-assigning ECM bankers to other Asian centres, amid falling equity issuance, Ms Sanchanta writes.
Japanese firms have raised only $12bn in new equity issuance this year, compared with $84m for the rest of Asia, according to Thomson Financial. Last year, the value of IPOs on the Tokyo Stock Exchange – the world’s second biggest bourse – was only Y1,252bn, a miniscule amount compared with other big exchanges.
“I can confirm that following a review of the business, as of the end of 2006, we have not had an ECM team here in Japan,” said an HSBC spokesman in Japan. “From 2001-2004 we were big on the IPO front. After 2005, things quieted down. We looked at the business and decided to discontinue it.”
The dearth of IPOs comes as Tokyo loses ground to HK and Singapore as Asia’s leading financial centre. Only four foreign companies have listed in Tokyo since 2004, while bourses in Singapore and Hong Kong have been extremely successful in luring mid-cap Chinese companies to list on their shores.
One investment banker in Tokyo said: “When I speak to colleagues in Hong Kong they have to turn down smaller deals because they don’t have the capacity to execute them. I would love to be in that position here.”
Meanwhile, several Japanese concerns have chosen to list abroad in recent years because of the country’s onerous regulations. Japanese real estate investment trusts run by Babcock and Brown, Galileo, Rubicon and Kenedix Challenger have all listed in Sydney. Last year Secure Design KK, a Japanese biometrics company, listed on London’s AiM market – its first Japanese stock ever.
“Overseas bourses are starting to woo Japanese companies, especially since Japan is set to introduce its own version of Sarbanes-Oxley, which will make regulations more onerous,” said Kyomi Ando, analyst at KBC Securities.
Bankers also say that foreign investment banks are increasingly losing mandates because Japanese houses such as Nomura and Daiwa Securities are much more capable of international placements than in the past.
Just 14 companies are set to go public in Japan in the coming month, compared with 26 companies last year, and more than half plan to raise less than Y1bn each through their IPOs, reports Ms Sanchanta.
We at FT Alphaville believe all this makes Tokyo’s push to boost Japan’s financial centre role very timely. But like many observers, we wonder if it’s a case of too little, too late - and, without radical corporate tax reform - too unrealistic.
