Will Japan Be a Financial Hub in Asia?
In an online seminar sponsored by the Alternative Investment Management Association (AIMA), held on December 17, 2020, Hiroshi Okada, Director of the Strategy Development Division of the Japan Financial Services Agency (FSA) talked about Japan’s ongoing bid to attract foreign asset management firms to Japan.
This longtime dream encountered some serious dents earlier this year when Japan’s immigration authorities put the brakes on entry into Japan. Even long-term residents, including those with permanent residence status, spousal visas, or working visas were denied re-entry if they left Japan. A number of these people even had to miss a parent’s funeral, or medical care in their home country, not to mention just ordinary trips to spend time with their families outside of Japan. Never mind that by being denied re-entry these people risked losing their jobs, even losing their homes, and not being able to be reunited with spouses and children who remained in Japan when the visa holder left. Japanese immigration had no sympathy for any of them either. Meanwhile, Japanese citizens had no such restrictions and were free to travel and return at will.
At the same time, Japan was talking about attracting foreign asset management firms from Hong Kong where the Chinese government was making some serious moves against the populace. Many of my foreign acquaintances in Japan gave that goal a hearty laugh of disbelief. The general sentiment was a feeling of, “Sure Japan, we’ll leave the tax friendly and foreigner friendly skies of Hong Kong (or Singapore) to take up residence in a country that has super high tax rates for companies and individuals, taxes people even on unrealized capital gains, and generally speaking doesn’t really welcome foreigners. Yeah, Japan, hold your breath and watch those people rush to move here!” Needless to say, there has been no thundering herd of companies looking to open an asset management company in Japan.
But now, according to Mr. Okada (pictured above), some serious changes may actually be on the horizon. Albeit this is only for the asset management companies at this time, but maybe this little crack in the dam will lead to a greater flood of tax and immigration changes that are desperately needed if Japan genuinely wants to attract more foreign talent and companies of all types.
So, what positive aspects does Japan have, or what will be developed to make the country a more desirable destination for people and companies?
The FSA points out that Japan is stable both politically and legally (there are some, including Carlos Goshn who would strongly argue the latter point). It’s touted as a safe place to live. Global Finance ranked Japan as number 43 in terms of safety measured by three factors: war and peace, personal security, and natural disaster risks. Japan fits in there right below Bulgaria and just above Kazakhstan.
One major factor that might prove attractive to the asset management firms that Japan so desperately wants to attract is the amount of household assets. With a sum of over 18 trillion dollars socked away by Japanese savers, enormous opportunities await the firms that can get their hands on some of these funds.
One could say that the number of challenges to opening up Japan equal the amount of money held by households, but to be fair, that would be a very gross exaggeration. Still, challenges do persist, least of which are the language barrier and a lack of social diversity.
Over the last couple of years, until Covid’s ugly head fouled the scene, Japan had become a major tourist destination, especially for tourists from China and South East Asia. In 2019 Japan profited from nearly 32 million tourists visiting the country. Many Japanese commented that in the popular shopping area of Ginza in Tokyo it was almost impossible to find another Japanese amongst the hordes of shoppers. Kyoto was overrun by kimono clad tourists seeking the best photo ops. As of September 2020, fewer than four million have been allowed to enter Japan. Ginza, Kyoto, and other popular destinations are nearly deserted.
Japan’s goal is to remake the country as not only a popular tourist destination, but also an attractive place for business, especially for those in the financial sector. The intent is to do this by providing highly sophisticated financial services to attract highly qualified financial businesses and professionals.
The FSA hopes to make this dream into a reality by addressing three main areas:
1. Encourage foreign asset management firms to enter the market with simplified entry procedures and revisions in the tax structure for businesses that manage overseas funds.
2. Invigorate the capital market by enacting changes in the Corporate Governance Code, increasing diversity, expanding the list of products that can be offered, reviewing regulations regarding firewalls between banks and securities businesses, and strengthening the resilience of the Tokyo Stock Exchange.
3. A smooth supply of funds for growth that includes revisions in the treatment of unlisted stocks, relaxing some requirements for professional investors, and improving the environment for some private sector initiatives.
In addition, the FSA plans to remove a few bottlenecks that are currently sticking points in the regulatory processes. In 2021 the Diet will consider a new bill to allow fast-tracking market entry for those who manage funds provided by foreign professional investors, and speeding up the process to approve business operations within a certain limited period that are conducted by asset managers who have a good track record in another jurisdiction where they are currently authorized to operate.
Other areas to be updated include a revision in the corporate tax for asset management firms (it’s 30%) to allow unlisted companies to deduct performance-based compensation. The next area to undergo scrutiny is the inheritance tax, which can be as high as 55%, and is levied against worldwide assets for any foreigner who has lived in Japan for ten years or more. The new regulation will exempt overseas assets for those who entered under a working visa when the heir is a non-Japan resident. Finally, the income tax rate for asset managers, for capital gains on the profit distribution of a carried entity will be taxed at 20% (vs 55%).
Japan also plans to start a support network for Financial Sector startups. This will include a one-stop support service to help with incorporation issues, getting residence status and a financial business license, and help in setting up a living environment. This support office is supposed to be established in January 2021.
Given Japan’s generally low abilities in English consultation and conversation, and the lack of fluent English speakers at the FSA, plans are to incorporate AI to assist in voice and text translations.
Investment management businesses will also be able to make use of the credit guarantee system and be eligible for loans from Japan Finance Corporation.
A dedicated website will be opened to help firms find lawyers, accountants, medical institutions, real estate agents, and other professional services to make entry to Japan, and life in Japan, easier. More efforts will be given to doing research on the status of international schools across the country. Promotional activities will be held to attract foreign businesses.
Additional efforts to make life easier for families will include elimination of the need to have a child under the age of 13 before a family can hire a domestic helper, even increasing the number allowed from one to two helpers, and allowing spouses to obtain a working visa within 10 days.
All in all, quite a number of efforts are going into these plans to open up Japan to foreign businesses, especially for the foreign financial firms. Will it all work? Will Japan be able to entice the type of, and the number of, firms it hopes to? Only time will tell. Good luck, Japan!
Joe Peters is the Managing Director of iSearch, an international recruiting and executive search firm with offices in Tokyo and San Francisco since 2004. iSearch is a member of the Continental Search Alliance with offices in 13 countries. The contents of this article are not to be taken as tax advice, legal advice, or other advice in any person or company’s plans to open a business in Japan. Proper tax and legal advice should be sought from firms who are qualified to handle such matters.
