WHEN THE MAN who spearheaded the disposal of the Japanese banks’ non-performing loans and forced through the privatization of Japan Post talks, the nation listens. If he assesses a challenge as being complex, tough and time-consuming then it probably is. Heizo Takenaka, in a moment of understatement at Euromoney’s Japan Capital Markets Congress in September, said: "To make Tokyo the centre of Asian financial markets, we need to work on a lot of things."
That said, there is a feeling in the current administration of Yasuo Fukuda – a feeling born, perhaps, in former prime minister Junichiro Koizumi’s revolutionary reign and continued through Shinzo Abe’s – that the goal of restoring Japan’s regional market primacy is essential if the country is to recover its former prosperity and its sense of place and relevance in the world. Some of the barriers to success, such as Narita international airport’s anachronistic midnight closing time, will be more straightforward to remove than others. There’s one big problem that Takenaka’s speech rather glossed over.
In March the International Bankers Association, Japan published its Recommendations to promote Tokyo as a financial centre, in which it set out the criteria for success. "In our view," reads the report, "Tokyo’s key strengths as a financial centre lie in its deep pools of capital. Attracting more listings, especially from Asia, will be an important measure of progress." If the numbers for 2007 so far are anything to go by, that’s going to be a Herculean endeavour.
Japan’s equity capital markets volumes fell to $19.3 billion in the first nine months of the year, down 61% on the same period in 2006. The total volume of initial public offerings fell by 79%. In the first three quarters of 2006, $10.4 billion was raised from 144 deals, whereas in the same period this year just $2.2 billion was raised in 94 deals. Japan has slumped from second to 11th in the global rankings of total ECM volumes, beaten by countries including Germany, France, Canada, and – perhaps most worryingly for its aspirations in Asia – Australia and China. This decline has obviously had a severe impact on revenues: according to Dealogic’s figures, Japan’s ECM revenue fell by 61% to $598 million in the first nine months of 2007.
The statistics are dispiriting for anyone who wants to see Japan become Asia’s financial hub, or at least its location of choice for raising capital. They look worse still when put in a global context: in the first nine months of 2007, while total ECM volume in Japan fell by 61% year on year to its lowest level since 2003, it rose in every other region. Southeast Asia and the Australia-Pacific region enjoyed growth levels of 75% and 82% respectively.
|
ECM Japan volume |
 |
|
Source: Dealogic |
Why has this happened? There seems to be a number of contributing factors, chief among them the attitudes of the foreign and domestic investor bases. Anecdotal evidence from bankers Euromoney interviewed for this story suggests that many Japanese investors still view equities as a somewhat suspect asset class, perhaps because they remember the Nikkei index’s steady decline in the 1990s, the more recent well-publicized IT problems at the Tokyo Stock Exchange or the 2.8% slump on the Nikkei that followed the livedoor scandal.
"Japanese investors in my view are underweight on equities," says Henry Ritchotte, head of global markets, Japan, at Deutsche Bank. "Perhaps because they have long memories. Nonetheless, it’s remarkable to me that domestic institutions seem to spend so little time on the equity markets. Right now these institutions have a lot of cash and the ability to take risk – for once Japan is not at the eye of the storm in the current global volatility problems – and the asset class that offers the greatest value is equity. Dividend yields are currently trading slightly below government bonds, which is hard to rationalize."
While Tokyo wilts, Hong Kong blooms. Events in mid-October offered a telling snapshot of the relative fortunes of the two cities’ respective main stock indices. On the 16th, Hong Kong’s Hang Seng index hit a record high of 29,795; on the following morning, Tokyo’s Nikkei dropped below 17,000 for the first time in weeks after investors (domestic and foreign) sold bank stocks amid fears of further fallout from the sub-prime crisis. The indices are not directly comparable, of course, nor are they the sole measure of the relative health of the equity markets they track. However, the figures nonetheless trace the ascendancy of a compelling challenge to Tokyo’s bid to be Asia’s premier exchange. During the Euromoney Congress’s panel discussion on "how to make Tokyo a world-class financial centre", the outspoken LDP senator Kotaro Tamura offered the following assessment.
"Collaboration between Hong Kong and Shanghai is the biggest threat," he said. "They have the required market size, and Hong Kong has the experienced professionals needed. London is also eating a slice of our pie: you are seeing more and more Asian companies trying to raise money on the London exchanges."
The attractions of rival exchanges have indeed been seducing Asian (and – more gallingly – Japanese) companies away from Japan, as Dealogic’s figures attest. Reluctant investors aside, one reason consistently cited by market participants for the lacklustre IPO levels in Japan is the sheer practical difficulty of listing on the country’s exchanges. A mere five foreign companies have chosen to list on the Tokyo Stock Exchange in the past six years, a testament to the fact that costs were high, documentation needed to be submitted in Japanese and the rewards for jumping through such hoops were uncertain. The announcement on October 17 of a new programme to strengthen the compliance department’s self-regulatory function might not help to alter the perception that listing on the TSE is difficult and time-consuming, and that regulation is difficult to understand and make prior provision for. The TSE states on its website that 25 foreign companies are listed on the exchange; in the early 1990s there were more than 100.