Tokyo as an International Financial Centre · tokyo as an international financial centre 7 indices...

TOKYO AS AN INTERNATIONAL FINANCIAL CENTRE AN ANALYSIS OF TOKYO’S PERFORMANCE IN THE GLOBAL FINANCIAL CENTRES INDEX

July 2016

CFA Society Japan was established in 1999 as a member society of CFA Institute and later incorporated in April 2011.

Our mission is to lead the investment profession in Japan by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society.

In partnership with CFA Institute, CFA Society Japan conducts educational programs and disseminates information and ideas related to the investment profession. Our membership of close to 1,000 professionals are mostly holders of the Chartered Financial Analyst (CFA) designation and are engaged in a wide variety of roles in investment and advice.

We promote ethical and professional standards within the investment industry; encourage professional development through the CFA Program and continuing education; facilitate the exchange of information and opinions among people within the local community and beyond; and work to further the public’s understanding of the CFA designation and investment industry. For more information, visit www.cfasociety.org/japan

The CFA Society of Japan Inc. (CFA Society Japan) 5F, Otemachi Financial City South Tower,1-9-7 Otemachi, Chiyoda-ku, Tokyo 100-0004 JAPAN

Fax: (81) 03-3517-5472 | Email: [email protected]

http://www.cfasociety.org/japan

mailto:[email protected]

TOKYO AS AN INTERNATIONAL FINANCIAL CENTRE 3

CONTENTS

1. Preface ---------------------------------------------------------------------------------------------- 4

2. Executive Summary ----------------------------------------------------------------------------- 6

3. Methodology --------------------------------------------------------------------------------------- 10

4. Background ---------------------------------------------------------------------------------------- 11

5. Tokyo and its Peer Group ---------------------------------------------------------------------- 16

6. Instrumental Factors ----------------------------------------------------------------------------- 22

7. Strengths, Weaknesses, Opportunities and Threats ------------------------------------ 27

8. Conclusions ---------------------------------------------------------------------------------------- 30

9. Acknowledgements ------------------------------------------------------------------------------ 32

4 WWW.CFASOCIETY.ORG/JAPAN

1. PREFACE Since our founding in 1999 as a not-for-profit organisation of investment professionals, CFA Society Japan has been working to help our country build a better financial system. We are driven by the belief that lasting economic growth depends on trust, competence, and transparency in financial markets, and we know that it must be led by professionals who are ethically centered and professionally trained to the highest standards. As a member society of CFA Institute1, we are proud to be a part of the global CFA community encompassing more than 138,000 members across 151 countries and territories. We see ourselves as a bridge between Japan and the international investment community. Not only are we standard bearers of Japan on the global stage, we also undertake to introduce and promote within Japan global standards of practice and professional excellence, so that the industry in Japan stands on par with the very best in the world. In an era when asset management and investors are increasingly global in their aims, Japan faces a very real risk of being left in the dust if we do not embrace internationalization. For too long the Japanese markets have been neglected by international investors until Abenomics was introduced in 2013. While the country may be the third largest economy in the world by nominal GDP and boasts of Asia’s largest stock market by market capitalization, it is typically written off as a stagnant and boring economy, one which is opaque and difficult to penetrate for non-residents. In the eyes of investors, Japan pales in comparison to the high-growth regions in Asia and resource-rich Australia. Business leaders of Japan, however, have recognised this problem at long last and some reformers started in earnest to seek solutions

1 CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behaviour in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an

in cooperation with the government. What can be done to make Japan more attractive? What do investors throughout the world want, post-Lehman crisis? Beyond merely chasing performance, investors are now demanding higher levels of transparency and accountability. They want clear and regular communications. They need reassurance that markets function with the utmost integrity, that financial advisers and corporate leadership act in their best interests and that their rights are duly protected. And so the government introduced in swift succession the Stewardship Code in 2014 and a new Corporate Governance Code (“CG Code”) in 2015, encouraged large public pension funds to increase their allocations to equities and threw doors wide open for foreign asset managers. These reforms were in tandem with an ambitious initiative rolled out by the Tokyo Metropolitan Government to transform Tokyo into a truly global financial centre and leading hub in Asia. The initial results have been encouraging. As at May 2016, 207 institutions have signed up for the Stewardship Code. On the corporate governance front, more companies have appointed independent directors and the comply ratio of companies to the new CG Code is high. Japanese corporates are warming up to the concept that better corporate governance can lead to higher corporate value, and are starting to engage in constructive dialogue with investors. There is no room, however, for Japan to be complacent with the initial outcomes. This latest set of reforms is a major departure from previous efforts by the government, in that it attempts to reshape the very heart and soul of corporate Japan. It is never easy to change the mindsets of people, even less so with culture. Reforms, too, inevitably cause conflicts, given the vested interests of various

environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has more than 138,000 members in 151 countries and territories, including 131,800 CFA charterholders, and 147 member societies. www.cfainstitute.org

http://www.fsa.go.jp/en/refer/councils/stewardship/

http://www.jpx.co.jp/english/equities/listing/cg/tvdivq0000008jdy-att/20150513.pdf

http://www.cfainstitute.org/


stakeholders. Without true understanding, acceptance and eventually whole-hearted adoption, businesses and financial institutions may in time lapse to paying mere lip service. In this regard, CFA Society Japan has launched a series of advocacy actions supporting these two Codes. We have been heartened by the reforms as they speak to the spirit of our mission. We participated actively from the start of the process by sharing our views and recommendations with regulators in the policy consultation phase. In the implementation phase, we have been organising a number of large-scale seminars and panel discussions on these issues, bringing together key stakeholders such as regulators, self-regulating organisations, investors, listed companies, researchers and asset managers. Our aim is to create a platform for all relevant stakeholders to participate in open dialogue, to educate and to gradually socialise these much needed changes among the wider community. We are grateful to CFA Institute for supporting the activities under its Future of Finance initiative, a global effort to shape a trustworthy,

forward-thinking financial industry that better serves society. This report takes our advocacy for Japan’s internationalisation to the next level. Even as Japan presses on with implementing the new Codes within the country, these changes must be taken in the broader context of Japan’s ambition to go global, to transform into a truly investor-friendly, trustworthy international financial centre. We are thus pleased to engage Z/Yen Group in this project, given the group’s significant experience and track record in publishing the semi-annual Global Financial Centres Index (“GFCI”). We are glad to share the report findings and hope they contribute an added, meaningful perspective to the debate among all stakeholders on this important issue. While it was not by deliberate design, this report was completed in the midst of a dramatic geopolitical event unfolding on the world stage – Britain’s historic referendum to exit the European Union. It is a time fraught with dramatic uncertainty and yet also a time rich with possibilities. There is no better time for Japan to seize this opportunity.

Masataka Aoto, CFA President CFA Society of Japan Inc. Taketsugu Harada, CFA Secretary & Board Director Advocacy Committee Chair CFA Society of Japan Inc. Shuichi Seo, CFA Immediate Past President CFA Society of Japan Inc.

https://www.cfainstitute.org/learning/future/pages/index.aspx


2. EXECUTIVE SUMMARY In 2014 the Tokyo Metropolitan Government (TMG) launched an ambitious initiative to transform Tokyo into a truly competitive and leading global financial centre. A TMG Taskforce was set up, discussions were held with different stakeholder groups and financial industry organisations came together to form working groups, including the Council for Tokyo Global Financial Center Promotional Activities (“the council”). The conversations centred on Tokyo’s current role and status, what it should aspire to be and areas that need to be improved to achieve its vision of going truly global. A number of observations and recommendations have since been submitted. Specifically looking at the investment industry, it was noted that Tokyo possessed unique strength among Asian markets in having an unrivalled scale of domestic companies underpinned by over 1,700 trillion yen in financial assets, giving Tokyo’s financial market considerable depth in domestic trading. Yet there was a perception from some quarters that despite such depth, Tokyo’s asset management industry (relative to the size of its economy) lagged those of other peer countries. One key proposal identified the asset management industry as a significant area of growth opportunity that Tokyo should develop, as it plays a key role in boosting Tokyo’s status as an international hub, through promoting investments and participation in Tokyo’s markets by non-resident investors, financial institutions and asset management firms. Two other key points can be distilled: Tokyo must offer diverse, appealing products in the stock, bond and derivatives markets; it must also create and maintain an attractive business environment for overseas and domestic institutions and investors alike to participate in Tokyo’s market and compete with each other. This report prepared by Z/Yen Group for CFA Society Japan is designed to address TMG’s vision for Tokyo by delving deeper into the city’s competitiveness in the various aspects that make up a global financial centre. Z/Yen Group Limited has significant experience in researching and measuring different aspects of competitiveness of financial centres around the world. The Global Financial Centres Index (GFCI) developed by Z/Yen and first published by the City of London in January 2007 has recently issued its 19th edition (GFCI 19 - March 2016). This report examines Tokyo’s performance in the GFCI, in particular vis-à-vis a group of six other peer cities namely London, New York, Singapore, Hong Kong, Seoul and Shanghai. This selection was to include the four cities above Tokyo in the GFCI and two other successful Asian centres. The methodology for this study is outlined in section two below. In GFCI 19 Tokyo remains in fifth place among the group of seven cities with a rating of 728 (up three points since GFCI 18):

Despite being in 5th place overall, Tokyo is an ‘Established Transnational’ centre rather than a ‘Global Leader’. This is because Tokyo appears to be more insular and less open to foreign talent than the international, cosmopolitan hubs of Hong Kong and Singapore. Tokyo is therefore less well connected with other centres than the other leading centres. Tokyo is in fifth place in the ten sub-

CityGFCI 19

RankGFCI 19 Rating

GFCI 18 Rank

GFCI 18 Rating

Change in Rank

Change in Rating

London 1 800 1 796 - ▲4New York 2 792 2 788 - ▲4Singapore 3 755 4 750 ▲1 ▲5Hong Kong 4 753 3 755 ▼1 ▼2Tokyo 5 728 5 725 - ▲3Seoul 12 705 6 724 ▼6 ▼19Shanghai 16 693 21 698 ▲5 ▼5

http://www.zyen.com/

http://www.longfinance.net/global-financial-centre-index-19/992-gfci-19.html


indices of the GFCI showing that it performs well in all areas and is a ‘well-balanced’ centre with similar strengths in all areas. In terms of the assessments given to financial centre by industry professionals, it is interesting to note that assessments from Western Europe are significantly lower than assessments from other regions. The chart below shows that the mean of assessments from Western Europe is 36 points lower than the overall mean and that the mean of assessments from Asia is 17 points higher than the overall mean:

We performed detailed analysis of the instrumental factors used in the computation of the GFCI and this is shown on pages 22 to 26 of this report. Looking at the instrumental factors in more detail and adding the results from our professional opinions questionnaire and the statistical modelling results, it is possible to draw conclusions regarding Tokyo’s main strengths and weaknesses. We summarise our conclusions below:

Strengths

Economic and political stability

Generally, Tokyo is modern and well run. Overall political and economic stability are strong relative to many competitors. Health care, and quality of life are generally good.

Levels of risk

Risk appears to be well managed with Tokyo topping the peer group in Banking Country Risk Assessments. Levels of crime and corruption are also under control.

Overall government effectiveness

The government runs the country better than international perceptions would suggest. In the Government Effectiveness data (World Bank), Tokyo comes third in the peer group behind only Hong Kong and Singapore. Overall prosperity is good (Tokyo is first in the peer group in the City Prosperity Index (United Nations) and infrastructure is better than in many capital cities (6 instrumental factors place Tokyo in the top 3 amongst the peer group).

-150 -100 -50 0 50 100 150

Asia/Pacific

Eastern Europe & Central Asia

Latin America & the Caribbean

Middle East & Africa

North America

Western Europe

Mean of Assessments by Region


Business environment

As an advanced economy, the environment that affects businesses is good. Uncertainty is managed and the OECD’s Country Risk Classification is also good.

Weaknesses

International reputation

Tokyo is clearly a better financial services centre than it is assessed to be in certain regions. Europe is where the least positive perceptions endure. This suggests that a marketing / promotional effort in this region is needed.

Ease of doing business

Several instrumental factors point to problems in this area. Japan is 6th in its peer group in the Ease of Doing Business Index by the World Bank (a widely respected and often cited index). Overall, Japan is ranked 34th out of 189 countries. The top four financial centres (London, New York, Singapore and Hong Kong) are within the top 7 out of 189 countries. The index is derived from 10 sub-indices. Japan ranks 36th for protecting minority investors and within its peer group ranks only above China (134th) in this category. It ranks 51st for enforcing contracts, 52nd for cross border trade, 68th for dealing with construction permits, 79th for getting credit and 81st for starting a business. It is 121st for tax administration.

Attracting international skills and talent

It is hard to form a genuinely global centre without a global workforce. Tokyo is not as welcoming to expats as Hong Kong and Singapore. This is shown in two factors relating to talent: among its peer group, Tokyo ranks 6th in the Global Talent Index (EIU), 5th in the World Talent Rankings (IMD) and 6th in the Human Development Index (UN).

Professional services

Linked to the point above, Tokyo does not seem to attract global professional service firms as well as the centres ranked higher in the GFCI. FDI inflows are relatively low (7th in the peer group) as companies are less willing to open offices in Tokyo than in other peer centres. In the GFCI Professional Services Index Tokyo is 113 points behind top-ranked London - a larger gap than in the other sub-indices.


Reviewing recommendations submitted by different stakeholders to the TMG, three main areas have been identified that need to be developed for Tokyo to become a truly competitive and leading global financial centre: ♦ Tokyo must offer diverse, appealing products in the stock, bond and derivatives markets; ♦ the markets must attract overseas investors; ♦ asset management industry must become world leading. In conclusion the overall business environment within Tokyo is considered to be a key strength. Tokyo benefits from economic and political stability, well-managed risk, good infrastructure and overall government effectiveness. From these viewpoints, Tokyo is well positioned among its peers to achieve its internationalisation ambition. However, there are areas that need improvement. We believe three critical areas need addressing: Openness The government needs to continue with policies and reforms to open up in a number of areas. It must make it easier to do business in Japan, and in particular more attractive for foreign institutions to enter the market. Above all, Japan must create an open environment that enables overseas financial institutions and asset management firms to participate at a level that is on par and consistent with international best practices and standards, that allows for top domestic and overseas players to compete with each other on a level playing field, and ensures investors feel secure and that their rights are duly protected At the individual level, more openness is needed as well. In an era where talent is global and human capital fluid, Japan cannot afford to lose out in the war for talent. Yet this is one area where it scores poorly in a number of indices. No doubt the overall lack of openness has sharply affected Japan’s international reputation and attraction to foreign talent. In the IMD World Talent Report 2015, Japan dwindled at the bottom of its peer group, ranking 50th out of 61 countries in the category measuring foreign high-skilled people’s attraction to the country’s business environment. The next best performer among the peer group was South Korea, which was 13 rungs higher at 37. Professionalism Japan has significant catch-up to do in this area. A number of indicators point to the fact that graduates in Japan are simply not equipped to meet the talent needs of the country nor ready to compete in the global economy, and this inadequacy is particularly stark in financial services. A world-class financial centre has to be sustained by a ready supply of the right talent possessing the highest standards of professionalism. Ethical Behaviour This is an area where Tokyo can certainly do better. As evidenced by this report, issues of transparency, corruption and regulatory enforcement, while not dire (Tokyo is 4th among the 7 peer cities), can be improved. The fact that the Japanese government has placed strengthening corporate governance at the heart of its drive to rejuvenate the economy is an encouraging sign. But relying on regulations and edicts are not enough as there is a real risk that companies and organisations simply pay lip service to these changes, rendering them to a box-ticking exercise. More fundamentally, there needs to be a change in mindset and culture. Voluntary adoption of ethical codes coupled with pressure and demand from investors would help foster a true transformation.


3. METHODOLOGY Z/Yen uses a six-stage, general problem-solving tool to help clients understand problems and make better decisions, Z/EALOUS:

1. Establish Endeavour – We selected a ‘peer group’ of competing centres for Tokyo including

London, New York, Hong Kong, Singapore, Seoul and Shanghai. This selection was to include the four cities above Tokyo in the GFCI and two other successful Asian centres. For these centres we reported: • the number of assessments; • the mean of the assessments; • the standard deviation of the assessments; • the breakdown of assessments by location of respondents; • the GFCI ratings and rankings over time; • the GFCI ratings and rankings by area of competitiveness groupings; • the GFCI ratings and rankings by industry sector; • the GFCI ‘increased significance’ ratings.

2. Assess & Appraise – we examined the GFCI instrumental factors for correlation with GFCI 19

index – take the top 40 in terms of correlation and identify Tokyo’s performance in these.

3. Lookaheads & Likelihoods – we looked briefly at where assessments (perceptions of the industry professionals) match or oppose the instrumental factor indications.

4. Options & Outcomes – we ssummarised the main strengths and weaknesses of Tokyo suggested by the results of sections 1 to 3.

5. Understanding & Undertaking – we have suggested possible opportunities available to Tokyo and outline any threats to Tokyo’s competitiveness;

6. Securing & Scoring – we have produced this report of our findings.

1. EstablishEndeavour

2. Assess &Appraise

3. Lookaheads &Likelihoods

4. Options &Outcomes

6. Securing &Scoring

5. Understanding &Undertaking

1. EstablishEndeavour

2. Assess &Appraise

3. Lookaheads &Likelihoods

4. Options &Outcomes

6. Securing &Scoring

5. Understanding &Undertaking


4. BACKGROUND In 2014 the Tokyo Metropolitan Government (TMG) launched an ambitious initiative to transform Tokyo into a truly competitive and leading global financial centre. A TMG Taskforce was set up, meetings were held with different stakeholder groups and financial industry organisations came together to form working groups, including the Council for Tokyo Global Financial Center Promotional Activities (“the council”)2. The discussions centred on Tokyo’s current role and status, what it should aspire to be and areas that need to be improved to achieve its vision of going truly global. A number of observations and recommendations have since been submitted. Specifically looking at the investment industry, it was noted that Tokyo possessed unique strength among Asian markets in having an unrivalled scale of domestic companies underpinned by over 1,700 trillion yen in financial assets, giving Tokyo’s financial market considerable depth in domestic trading. Yet there was a perception from some quarters that despite such depth, Tokyo’s asset management industry (relative to the size of its economy) lagged those of other peer countries. One key proposal identified the asset management industry as a significant area of growth opportunity that Tokyo should develop, as it plays a key role in boosting Tokyo’s status as an international hub, through promoting investments and participation in Tokyo’s markets by non-resident investors, financial institutions and asset management firms. 3 Two other key points can be distilled: Tokyo must offer diverse, appealing products in the stock, bond and derivatives markets; it must also create and maintain an attractive business environment for overseas and domestic institutions and investors alike to participate in Tokyo’s market and compete with each other. This report prepared by Z/Yen Group for CFA Society Japan is designed to address TMG’s vision for Tokyo by delving deeper into the city’s competitiveness in the various aspects that make up a global financial centre. Z/Yen Group Limited has significant experience in researching and measuring the different aspects of competitiveness of financial centres around the world. The Global Financial Centres Index (GFCI) developed by Z/Yen and first published by the City of London in January 2007 has recently issued its 19th edition (GFCI 19 - March 2016). Over the years the study has become an increasingly important and respected yardstick that various professional bodies, research institutions and city authorities across the world use to benchmark the competitiveness of cities with regard to the financial services industry. The GFCI assigns ratings to financial centres by using Z/Yen’s proprietary statistical prediction engine PropheZy, a software package that uses support vector mathematics to identify patterns and analyse large statistical datasets. There are two main inputs that the software utilises for the GFCI: ♦ Instrumental factors – objective city or country assessments developed by a number of world

renown reputable organisations. These assessments are used to quantify various city characteristics, which are determined as important factors of competitiveness. The instrumental factors are split into five broad categories:

o Business Environment – includes measures such as ‘Government Effectiveness’ developed by the World Bank, the ‘Ease of Doing Business’ also from the World Bank, ‘Corruption Perceptions Index’ by Transparency International; ‘Regulatory Enforcement’ by the World Justice Project, the ‘Rule of Law’ by the World Bank and the ‘Business Environment Rankings’ by the Economist Intelligence Unit;

2 The Council comprises the Japan Securities Dealers Association (JSDA), Japan Exchange Group, Inc. (JPX), The Investment Trusts Association, Japan (JITA), and Japan Investment Advisers Association (JIAA). 3 Report of the Council for Tokyo Global Financial Promotional Activities. (2015, September 9). Retrieved from http://www.jsda.or.jp/en/activities/meetings/files/Report.pdf

http://www.zyen.com/

http://www.longfinance.net/global-financial-centre-index-19/992-gfci-19.html

http://www.jsda.or.jp/en/activities/meetings/files/Report.pdf


o Financial Sector Development – includes a number of stock exchange measures updated monthly by the World Federation of Stock Exchanges (WEF), ‘Domestic Credit Provided by Banking Sector’ provided by the World Bank and Capitalisation of Stock Exchanges also provided by WEF;

o Infrastructure – includes measure such as ‘Office Space’ by Cushman & Wakefield, ‘Network Readiness’ by WEF and ‘Roads and Railways per Land Area’ by the CIA;

o Human Capital – includes measures such as the ‘World Talent Rankings’ by the IMD World Competitiveness Center, the ‘Global Talent Index’ by the Economist Intelligence Unit, the ‘Human Development Index’ by the United Nations and ‘Quality of Living’ by Mercer HR;

o Reputation – includes broader measures like the ‘Global Cities’ Index by AT Kearney, ‘Innovation Cities Global Index’ by 2thinknow Innovation Cities Project, and ‘FDI Inflows’ by the United Nations.

These are just a few examples; the entire set of instrumental factors for the GFCI 19 comprises a total of 102 factors. ♦ Financial centres assessments – the other main input in the statistical model is a range of

centre assessments, on a scale of one to ten, provided by a number of international financial services professionals within the last 24 months. The questionnaire is updated every quarter and assessments are discounted with a log model that puts more weight on more recent assessments. For GFCI 19 a total of 29,226 assessments from 3,246 respondents were used. The respondents are categorised into five broad sub-industries: investment management, banking, insurance, government/regulatory and professional services and are split geographically:

44%

29%

14%

7%

3% 3% Western Europe

Asia/Pacific

North America




Geographical spread respondents of GFCI 19


The financial services industry forms a vital part of every modern economy. We do not consider a country to be ‘developed’ if it doesn’t have a competitive and efficient financial services sector that serves to channel investment where it adds most value and to allocate capital to its most productive use. The financial centres of the world serve to facilitate long term sustainable development through capital formation, which transfers into economic growth, innovation and a better standard of living. The top 20 centres of the 86 in GFCI 19 are as follows4:

Using clustering and correlation analysis we have identified three key measures (axes) that determine a financial centre’s profile along different dimensions of competitiveness:

‘Connectivity’ – the extent to which a centre is well known around the world, and how much non-resident professionals believe it is connected to other financial centres. Respondents are asked to assess only those centres with which they are personally familiar. A centre’s connectivity is assessed using a combination of ‘inbound’ assessment locations (the number of locations from which a particular centre receives assessments) and ‘outbound’ assessment locations (the number of other centres assessed by respondents from a particular centre).

4 The largest movement in the top 20 is that of Seoul. We do not believe that this indicates the start of a significant long-term decline, rather a short-term reversal in its long-term growth caused by a reduced number of assessments being received.

CityGFCI 19

RankGFCI 19 Rating

GFCI 18 Rank

GFCI 18 Rating

Change in Rank

Change in Rating

London 1 800 1 796 - ▲4New York 2 792 2 788 - ▲4Singapore 3 755 4 750 ▲1 ▲5Hong Kong 4 753 3 755 ▼1 ▼2Tokyo 5 728 5 725 - ▲3Zurich 6 714 7 715 ▲1 ▼1Washington DC 7 712 10 711 ▲3 ▲1San Francisco 8 711 9 712 ▲1 ▼1Boston 9 709 12 709 ▲3 -Toronto 10 707 8 714 ▼2 ▼7Chicago 11 706 11 710 - ▼4Seoul 12 705 6 724 ▼6 ▼19Dubai 13 699 16 704 ▲3 ▼5Luxembourg 14 698 19 700 ▲5 ▼2Geneva 15 694 13 707 ▼2 ▼13Shanghai 16 693 21 698 ▲5 ▼5Sydney 17 692 15 705 ▼2 ▼13Frankfurt 18 689 14 706 ▼4 ▼17Shenzhen 19 688 23 694 ▲4 ▼6Osaka 20 687 20 699 - ▼12

Connectivity

Diversity

Speciality


If the weighted assessments5 for a centre are provided by over 70% of other centres, this centre is deemed to be ‘Global’. If the ratings are provided by between 55% and 70% of other centres, this centre is deemed to be ‘Transnational’. ‘Diversity’– the breadth of financial industry sectors that flourish in a financial centre. We consider this sector ‘richness’ to be measurable in a similar way to that of the natural environment and therefore, use a combination of biodiversity to assess a centre’s diversity.6 ‘Speciality’ - the depth within a financial centre of the following industry sectors: investment management, banking, insurance, professional services and government and regulatory.7 In the table below, ‘Diversity’ (Breadth) and ‘Speciality’ (Depth) are combined into four groups (on the horizontal axis to create a two dimensional table of financial centre profiles. The 82 centres are assigned a profile on the basis of a set of rules for the three measures: how well connected a centre is, how broad its services are and how specialised it is:

5 Assessments are weighted by age with more recent assessments given full weighting and earlier responses are given a reduced weighting on a log scale - http://www.longfinance.net/programmes/financial-centre-futures/fcf-gfci/methodology.html 6 Using a combination of three widely respected biodiversity indices (Shannon, Simpson and Gini) calculated on the instrumental factors. We calculate each centre’s score in each index and take an average ranking. A high score means that a centre is well diversified; a low diversity score reflects a less rich business environment. We assess a centre as diverse if it achieves an average rank in the top 40 GFCI centres. 7 A centre’s “speciality” performance is calculated from the difference between the GFCI rating and the industry sector ratings.

Broad & Deep Relatively Broad Relatively Deep EmergingGlobal Leaders Global Diversified Global Specialists Global Contenders

Amsterdam Brussels Beijing JerseyDublin Shanghai Dubai

Frankfurt LuxembourgGeneva Moscow

Hong KongLondon

New YorkParis

SingaporeTorontoZurich

Established Transnational Transnational Diversified Transnational Specialists Transnational ContendersBoston Copenhagen British Virgin Islands Abu DhabiChicago Edinburgh Casablanca AlmatyIstanbul Kuala Lumpur Cayman Islands BangkokMadrid Lisbon Doha Bahamas

Montreal Los Angeles Guernsey DalianMunich Prague Mauritius Gibraltar

San Francisco ShenzhenSeoul

StockholmSydneyTokyo

VancouverWashington DC

Established Players Local Diversified Local Specialists Evolving CentresTel Aviv Budapest Panama AthensWarsaw Busan Qingdao Bahrain

Calgary Riga CyprusGlasgow Rio de Janeiro BermudaHelsinki Sao Paulo Isle of Man

Melbourne Taipei JakartaMexico City Tallinn Johannesburg

Milan LiechtensteinOsaka MaltaOslo Manila

Rome MonacoVienna Mumbai

ReykjavikRiyadh

St Petersburg

Global

Transnational

Local

http://www.longfinance.net/programmes/financial-centre-futures/fcf-gfci/methodology.html

http://www.longfinance.net/programmes/financial-centre-futures/fcf-gfci/methodology.html


Despite being in 5th place overall, Tokyo is an ‘Established Transnational’ centre rather than a Global Leader. This is because it receives assessments from fewer other centres than the leaders (please see above). In the GFCI model, we look at reputation by examining the difference between the weighted average assessment given to a centre and its overall rating. The first measure reflects the average score a centre receives from financial professionals across the world, adjusted for time with more recent assessments having more weight. The second measure is the GFCI score itself, which represents the average assessment adjusted to reflect the instrumental factors. The GFCI 19 model allows for analysis of the financial centres with the most volatile competitiveness. The chart below contrasts the ‘spread’ or variance of the individual assessments given to each of the top 40 centres with the sensitivity to changes in the instrumental factors8: There are three bands of financial centres. The ‘unpredictable’ centres in the top right of the chart have a high sensitivity to changes in the instrumental factors and a high variance of assessments. These centres have the highest potential volatility of the top GFCI centres. The ‘stable’ centres in the bottom left of the chart (including the top five centres) have a relatively low sensitivity to changes in the instrumental factors and a low variance of assessments. These centres are likely to exhibit the lowest volatility in future GFCI ratings:

8 The variance of the instrumental factors is a measure of the performance of each centre in all the factors – if a centre displays a similar performance in many factors its variance will be lower and its ‘stability’ higher. The standard deviation (measured by R2) of the assessments that a centre receives measures the ‘spread’ of the assessments. If a centre has a small deviation then the assessments are more similar to each other and its ‘stability’ is higher.

New YorkLondon

Hong KongSingapore

Tokyo

Zurich

Seoul

San Francisco

Chicago

BostonToronto

Washington DCGeneva

Riyadh

Vancouver

Shanghai

LuxembourgMontreal

Frankfurt

Doha

Sydney

Shenzhen

Dubai

Busan

Taipei

Abu Dhabi

Tel Aviv

Melbourne

Beijing

Munich

Osaka

Johannesburg

Calgary

British Virgin Islands

Vienna

Stockholm

Paris

Kuala Lumpur

Cayman Islands

Amsterdam

Varia

nce

of In

stru

men

tal F

acto

rs

Standard Deviation of Assessments


5. TOKYO AND ITS PEER GROUP This report reviews Tokyo and its peers of London, New York, Singapore, Hong Kong, Seoul and Shanghai. In GFCI 19 Tokyo remains in 5th place with a rating of 728 (up three points since GFCI 18):

The progress of the peer group over time is shown here:

The ratings and rankings in the GFCI sub-indices by area of competitiveness are as follows:

Centre GFCI19 Business Environment

Rank Rating Rank Rating London 1 800 1 779 New York 2 792 2 770 Hong Kong 4 753 3 757 Singapore 3 755 4 750 Tokyo 5 728 7 710 Shanghai 16 693 26 664 Seoul 12 705 52 639

CityGFCI 19

RankGFCI 19 Rating

GFCI 18 Rank

GFCI 18 Rating

Change in Rank

Change in Rating

London 1 800 1 796 - ▲4New York 2 792 2 788 - ▲4Singapore 3 755 4 750 ▲1 ▲5Hong Kong 4 753 3 755 ▼1 ▼2Tokyo 5 728 5 725 - ▲3Seoul 12 705 6 724 ▼6 ▼19Shanghai 16 693 21 698 ▲5 ▼5

400

450

500

550

600

650

700

750

800

850

Tokyo

London

New York

Hong Kong

Singapore

Seoul

Shanghai


Centre GFCI19 Financial Sector

Development Rank Rating Rank Rating

London 1 800 1 779 New York 2 792 2 763 Hong Kong 4 753 3 733 Singapore 3 755 4 729 Tokyo 5 728 5 708 Seoul 12 705 20 685 Shanghai 16 693 23 683

Centre GFCI19 Human Capital

Rank Rating Rank Rating London 1 800 1 781 New York 2 792 2 775 Singapore 3 755 3 741 Hong Kong 4 753 4 740 Tokyo 5 728 6 712 Shanghai 16 693 18 684 Seoul 12 705 37 652

Centre GFCI19 Infrastructure

Rank Rating Rank Rating London 1 800 1 785 New York 2 792 2 773 Hong Kong 4 753 3 737 Singapore 3 755 4 730 Tokyo 5 728 5 710 Seoul 12 705 8 692 Shanghai 16 693 11 683

Centre GFCI19 Reputational & General

Rank Rating Rank Rating London 1 800 1 781 New York 2 792 2 771 Hong Kong 4 753 3 748 Singapore 3 755 4 742 Tokyo 5 728 12 697 Shanghai 16 693 12 697 Seoul 12 705 22 680

Tokyo remains in fifth position in the peer group in all areas of competitiveness. In the overall GFCI Tokyo is 72 points behind London. It is 84 points behind in terms of reputation.


The ratings and rankings in the GFCI sub-indices by area of competitiveness are as follows:

Centre GFCI19 Investment Management

Rank Rating Rank Rating New York 2 792 1 807 London 1 800 2 798 Hong Kong 4 753 3 770

Singapore 3 755 4 753 Tokyo 5 728 5 752 Shanghai 16 693 23 702 Seoul 12 705 26 697

Centre GFCI19 Banking

Rank Rating Rank Rating London 1 800 1 791 New York 2 792 2 785 Hong Kong 4 753 3 759

Singapore 3 755 4 758 Tokyo 5 728 5 731 Shanghai 16 693 10 716 Seoul 12 705 13 714

Centre GFCI19 Government & Regulatory

Rank Rating Rank Rating London 1 800 1 801 New York 2 792 2 796 Singapore 3 755 3 780 Hong Kong 4 753 4 757

Tokyo 5 728 6 741 Seoul 12 705 11 726 Shanghai 16 693 25 691

Centre GFCI19 Professional Services

Rank Rating Rank Rating London 1 800 1 824 New York 2 792 2 782 Singapore 3 755 3 748 Hong Kong 4 753 4 732

Tokyo 5 728 6 711 Shanghai 16 693 22 680 Seoul 12 705 40 635


Centre GFCI19 Insurance

Rank Rating Rank Rating New York 2 792 1 830 London 1 800 2 820 Singapore 3 755 3 809 Hong Kong 4 753 4 779

Tokyo 5 728 5 767 Shanghai 16 693 16 726 Seoul 12 705 35 667

Again, Tokyo remains in fifth position in the peer group in all business sectors. This is to be expected as the ‘big five’ global centres have very well-developed offerings in most business sectors. In the overall GFCI Tokyo is 72 points behind leading centre London. It is 113 points behind London in terms professional services and approximately 60 points behind in the other sectors. The number of assessments over the past 24 months, along with the mean and standard deviation, of the peer group centres is shown below. In terms of the mean of the assessments, Tokyo is in fifth place as in the GFCI itself: The breakdown of the assessments received by Tokyo split by region is shown below:

Tokyo Region Number Mean % Asia/Pacific 160 811 35.6% Eastern Europe & Central Asia 22 777 4.9% Latin America & the Caribbean 7 857 1.6% Middle East & Africa 24 817 5.3% North America 65 808 14.4% Western Europe 156 758 34.7% Other / Not Identified 16 875 3.6% Total 450 794 100.0%

Centre Number Mean St DevLondon 1166 839 162New York 1035 835 176Singapore 673 827 148Hong Kong 815 805 149Tokyo 450 794 163Seoul 229 735 172Shanghai 441 726 164

Assessments


In terms of the assessments given to financial centres by industry professionals, it is interesting to note that assessments from Western Europe are significantly lower than assessments from other regions. The chart below shows that the mean of assessments from Western Europe is 36 points lower than the overall mean and that the mean of assessments from Asia is 17 points higher than the overall mean:

The assessments of the other peer group centres are shown below:

London Region Number Mean % Asia/Pacific 285 830 24.4% Eastern Europe & Central Asia 49 878 4.2% Latin America & the Caribbean 31 810 2.7% Middle East & Africa 111 861 9.5% North America 183 863 15.7% Western Europe 461 826 39.5% Other / Not Identified 46 854 3.9% Total 1166 839 100.0%

New York

Region Number Mean % Asia/Pacific 277 856 26.8% Eastern Europe & Central Asia 40 853 3.9% Latin America & the Caribbean 31 858 3.0% Middle East & Africa 82 863 7.9% North America 86 856 8.3% Western Europe 479 807 46.3% Other / Not Identified 40 893 3.9% Total 1035 835 100.0%

-150 -100 -50 0 50 100 150

Asia/Pacific




North America

Western Europe

Mean of Assessments by Region


Singapore Region Number Mean % Asia/Pacific 197 847 29.3% Eastern Europe & Central Asia 23 822 3.4% Latin America & the Caribbean 15 827 2.2% Middle East & Africa 42 855 6.2% North America 75 873 11.1% Western Europe 299 797 44.4% Other / Not Identified 22 841 3.3% Total 673 827 100.0%

Hong Kong


Seoul Region Number Mean % Asia/Pacific 125 711 54.6% Eastern Europe & Central Asia 13 769 5.7% Latin America & the Caribbean 3 767 1.3% Middle East & Africa 9 733 3.9% North America 27 796 11.8% Western Europe 45 742 19.7% Other / Not Identified 7 800 3.1% Total 229 735 100.0%

Shanghai


The Asian centres with the exception of Seoul all suffer from a less positive perception in Western Europe. The difference in most cases is about 30 points on a scale of 1,000 – worth acknowledging but possibly putting down to Europeans’ lack of knowledge about Asian centres.


6. INSTRUMENTAL FACTORS Shown below is the full list of instrumental factors used to compute GFCI 19, shown in order of correlation with the GFCI itself:

Instrumental Factors Source R-SqIF01 Office Occupancy Costs Cushman & Wakefield (merged with DTZ) 0.5034BE16 OECD Country Risk Classification OECD 0.4966RF11 Price Levels UBS 0.4934RF14 Innovation Cities Global Index 2ThinkNow Innovation Cities 0.4010RF12 Global Cities Index AT Kearney 0.4008RF01 World Competitiveness Scoreboard IMD 0.3971BE18 Financial Secrecy Index Tax Justice Network 0.3795IF17 Logistics Performance Index The World Bank 0.3766RF02 Global Competitiveness Index World Economic Forum 0.3520RF22 IESE cities in motion index IESE 0.3289HC17 Cost of Living City Rankings Mercer 0.3230BE01 Business Environment Rankings EIU 0.3180IF02 Office Space Around the World Cushman & Wakefield 0.3111RF17 Global Enabling Trade Report World Economic Forum 0.3085BE14 Banking Industry Country Risk Assessments Standard & Poors 0.3005RF21 City Initiatives for Technology, Innovation and CITIE 0.2877HC08 Top Tourism Destinations Euromonitor 0.2524BE20 City GDP Figures The Brookings Institution 0.2459IF08 Quality of Roads World Economic Forum 0.2447RF05 FDI Confidence Index AT Kearney 0.2402IF13 Metro Network Length Metro Bits 0.2383RF13 Number of international association meetingsWorld Economic Forum 0.2343HC11 Global Talent Index EIU 0.2317HC05 Citizens Domestic Purchasing Power UBS 0.2306IF03 IPD Global Property Index Investment Property Databank 0.2302IF11 Networked Readiness Index World Economic Forum 0.2301RF04 Foreign Direct Investment Inflows UNCTAD 0.2251IF07 Quality of Domestic Transport Network World Economic Forum 0.2245BE07 Wage Comparison Index UBS 0.2239FS08 Total Net Assets of Mutual Funds Investment Company Institute 0.2228FS01 Capitalisation of Stock Exchanges The World Federation of Stock Exchanges 0.2218FS12 Liner Shipping Connectivity Index The World Bank 0.2207BE19 Government Effectiveness The World Bank 0.2160HC10 Quality of Living City Rankings Mercer 0.2026RF08 Global Innovation Index INSEAD 0.2011FS02 Value of Share Trading The World Federation of Stock Exchanges 0.1935RF07 GDP per Person Employed The World Bank 0.1803BE22 Regulatory Enforcement World Justice Project 0.1798HC06 Number of High Net Worth Individuals Capgemini 0.1781RF20 Legatum Prosperity Index Legatum Institute 0.1776HC16 World Talent Rankings IMD 0.1767FS10 Net External Positions of Banks The Bank for International Settlements 0.1719


Instrumental Factors Source R-SqFS03 Volume of Share Trading The World Federation of Stock Exchanges 0.1610IF04 JLL Real Estate Transparency Index Jones Lang LaSalle 0.1581BE02 Ease of Doing Business Index The World Bank 0.1564BE28 Rule of Law The World Bank 0.1538FS06 Domestic Credit Provided by Banking Sector (% The World Bank 0.1491BE08 Corporate Tax Rates PWC 0.1470BE03 Operational Risk Rating EIU 0.1467RF09 Global Intellectual Property Index Taylor Wessing 0.1414BE13 Economic Freedom of the World Fraser Institute 0.1340BE06 Corruption Perception Index Transparency International 0.1307BE24 Currencies Swiss Association for Standardization (SNV) 0.1082BE11 Tax as Percentage of GDP The World Bank 0.1049IF12 Energy Sustainability Index World Energy Council 0.0939FS07 Percentage of Firms Using Banks to Finance InThe World Bank 0.0912HC18 Health Outcomes and Cost EIU 0.0872BE26 Common Law Countries CIA 0.0872RF16 Sustainable Economic Development Boston Consulting Group 0.0844FS13 Global Connectedness Index DHL 0.0780HC04 Human Development Index UN Development Programme 0.0758BE21 Open Government World Justice Project 0.0658BE04 Real Interest Rate The World Bank 0.0635IF14 The Web Index The World Wide Web Foundation 0.0628IF05 ICT Development Index United Nations 0.0546FS09 Islamic Finance Country Index Islamic Banks and Financial Institutions 0.0483IF15 Environmental Performance Yale University 0.0459FS14 City GDP composition (Business/Finance) The Brookings Institution 0.0416BE10 Personal Tax Rates OECD 0.0397FS11 External Positions of Central Banks as a share The Bank for International Settlements 0.0392IF06 Telecommunication Infrastructure Index United Nations 0.0274HC07 Homicide Rates UN Office of Drugs & Crime 0.0234RF19 City Prosperity Index United Nations 0.0209BE27 Inflation, GDP Deflator The World Bank 0.0200RF18 Good Country Index Good Country Party 0.0197HC03 Visa Restrictions Index Henley Partners 0.0184IF10 Railways per Land Area CIA 0.0168HC12 Health Care Index Numbeo 0.0157IF09 Roadways per Land Area CIA 0.0148HC13 Global Skills Index Hays 0.0144HC20 Crime Index Numbeo 0.0130FS05 Value of Bond Trading The World Federation of Stock Exchanges 0.0103RF10 RPI (% change on year ago) The Economist 0.0102


Below we have listed the instrumental factors by the performance of Tokyo against the peer group. The second column shows Tokyo’s position in the peer group. The third to the ninth columns show the position each centre is in related to all centres in the GFCI. This table is sorted by Tokyo’s relative performance and we exclude several factors where Tokyo is not included:

Instrumental Factors Source R-SqHC14 Linguistic Diversity Ethnologue 0.0084BE17 Global Peace Index Institute for Economics & Peace 0.0080HC19 Quality of Life Index Numbeo 0.0072RF03 Business Confidence Index Grant Thornton 0.0072BE05 Global Services Location AT Kearney 0.0072RF23 FDI Inflows to GDP UNCTAD 0.0059IF16 Global Sustainable Competitiveness Index Solability 0.0058BE15 Government Debt as % of GDP CIA 0.0041HC01 Graduates in social Science, Business and Law The World Bank 0.0028FS04 Broad Stock Index Levels The World Federation of Stock Exchanges 0.0026BE12 Bilateral Tax Information Exchange AgreemenOECD 0.0012BE25 Commonwealth Countries The Commonwealth 0.0010RF06 City to Country GDP Ratio The Brookings Institution 0.0009HC15 Global Terrorism Index Institute for Economics & Peace 0.0005HC02 Gross Tertiary Graduation Ratio The World Bank 0.0004BE09 Employee Tax Rates PWC 0.0000HC09 Average precipitation in depth (mm per year) The World Bank 0.0000RF15 Big Mac Index The Economist 0.0000BE23 Press Freedom Index Reporters Without Borders (RSF) 0.0000

Tokyo Position in Peer Group Tokyo London New York Hong Kong Seoul Shanghai Singapore

BE04 Real Interest Rate 1st 1 4 15 21 35 46 55BE11 Tax as Percentage of GDP 1st 10 76 19 36 43 12 40BE14 Banking Industry Country Risk Assessments 1st 3 23 23 3 23 51 3BE17 Global Peace Index 1st 12 40 56 44 67 29RF10 RPI (% change on year ago) 1st 24 31 31 44 53 70 30RF19 City Prosperity Index 1st 6 7 24 20 23IF16 Global Sustainable Competitiveness Index 1st 14 61 51 100 49 29 43HC07 Homicide Rates 1st 2 15 42 4 7 2HC15 Global Terrorism Index 1st 1 70 61 1 77 1BE10 Personal Tax Rates 2nd 11 22 27 3IF07 Quality of Domestic Transport Network 2nd 4 30 23 3 16 45 11IF10 Railways per Land Area 2nd 14 1 34 28 50FS01 Capitalisation of Stock Exchanges 2nd 7 1 16 29 9 37HC06 Number of High Net Worth Individuals 2nd 7 17 1 43 34 11 49HC12 Health Care Index 2nd 8 22 61 21 5 60 34HC13 Global Skills Index 2nd 13 13 1 59 48 48HC14 Linguistic Diversity 2nd 5 24 41 20 2 58 86HC19 Quality of Life Index 2nd 26 50 51 55 21 56 57BE19 Government Effectiveness 3rd 8 22 32 6 42 67 1RF02 Global Competitiveness Index 3rd 14 19 4 16 49 52 3RF11 Price Levels 3rd 50 55 59 54 45 28RF12 Global Cities Index 3rd 4 2 1 5 12 18 9RF15 Big Mac Index 3rd 14 46 61 3 57 36 8RF16 Sustainable Economic Development 3rd 29 32 23 35 37 74 11RF18 Good Country Index 3rd 41 8 33 55 77 44


Tokyo Position in Peer Group Tokyo London New York Hong Kong Seoul Shanghai Singapor

IF06 Telecommunication Infrastructure Index 3rd 33 36 5 12 74 45IF08 Quality of Roads 3rd 11 39 19 8 25 55 7IF09 Roadways per Land Area 3rd 12 1 47 18 40 57 10IF15 Environmental Performance 3rd 35 15 41 54 78 6FS02 Value of Share Trading 3rd 14 1 21 16 8 40FS05 Value of Bond Trading 3rd 34 39 3 8FS08 Total Net Assets of Mutual Funds 3rd 21 12 1 33 23FS10 Net External Positions of Banks 3rd 18 94 1 44 37 8 36FS11 External Positions of Central Banks (% GDP) 3rd 47 19 50 66 36 84FS14 City GDP composition (Business/Finance) 3rd 40 3 1 45 54 60 58HC02 Gross Tertiary Graduation Ratio 3rd 26 18 33 65 16 69HC03 Visa Restrictions Index 3rd 22 1 14 22 94 41HC05 Citizens Domestic Purchasing Power 3rd 16 20 8 9 30 51HC10 Quality of Living City Rankings 3rd 30 26 30 39 40 59 18HC20 Crime Index 3rd 9 68 62 10 1 26 3BE06 Corruption Perception Index 4th 39 14 32 39 55 81 9BE07 Wage Comparison Index 4th 45 48 56 33 31 12BE09 Employee Tax Rates 4th 26 53 66 5 19 28 10BE12 Bilateral Tax Information Exchange Agreement 4th 54 24 12 62 45 71BE18 Financial Secrecy Index 4th 19 22 4 3 66 29 10BE21 Open Government 4th 24 11 16 36 16 63 36BE22 Regulatory Enforcement 4th 22 13 27 24 11 58 1BE23 Press Freedom Index 4th 49 31 39 53 47 83 78RF05 FDI Confidence Index 4th 24 13 1 38 7 37RF06 City to Country GDP Ratio 4th 32 34 54 2 14 49 1RF09 Global Intellectual Property Index 4th 28 1 15 32 50 26RF13 Number of international association meetings 4th 25 10 1 60 33 16 47RF14 Innovation Cities Global Index 4th 8 1 5 15 5 15 8RF17 Global Enabling Trade Report 4th 11 4 19 2 44 55 1RF20 Legatum Prosperity Index 4th 33 27 16 35 42 65 31RF22 IESE cities in motion index 4th 7 1 2 17 3 45 9IF01 Office Occupancy Costs 4th 47 58 57 56 46 30 41IF03 IPD Global Property Index 4th 36 13 3 21IF05 ICT Development Index 4th 22 5 30 20 1 82 39IF11 Networked Readiness Index 4th 18 14 8 28 24 67 1IF14 The Web Index 4th 36 4 11 18 60 40IF17 Logistics Performance Index 4th 19 6 13 29 37 46 9FS03 Volume of Share Trading 4th 16 2 29 14 8HC01 Graduates in Business and Law 4th 67 56 33 49 74BE03 Operational Risk Rating 5th 40 26 19 3 63 76 1BE13 Economic Freedom of the World 5th 46 14 28 1 63 88 2BE20 City GDP Figures 5th 34 13 4 11 47 58 6BE27 Inflation, GDP Deflator 5th 53 55 43 70 21 27 17BE28 Rule of Law 5th 34 18 28 21 48 81 13RF21 City Initiatives - Tech & Innovation 5th 17 1 1 17 9 1IF02 Office Space Around the World 5th 69 70 61 71 14 63 62IF04 JLL Real Estate Transparency Index 5th 43 1 7 30 67 53 29IF12 Energy Sustainability Index 5th 45 5 21 40 66 76 37IF13 Metro Network Length 5th 7 3 4 15 5 1 19HC09 Average precipitation (mm per year) 5th 79 67 48 70 35 88HC16 World Talent Rankings 5th 43 34 21 18 49 57 16HC17 Cost of Living City Rankings 5th 8 9 12 1 7 5 3BE01 Business Environment Rankings 6th 41 33 12 4 39 62 1BE02 Ease of Doing Business Index 6th 46 8 7 6 4 74 1BE08 Corporate Tax Rates 6th 82 27 92 19 44 46 20RF03 Business Confidence Index 6th 57 7 34 56 44 42RF07 GDP per Person Employed 6th 33 22 1 7 29 72 13RF08 Global Innovation Index 6th 37 3 11 22 27 47 18FS04 Broad Stock Index Levels 6th 49 9 7 45 35 42FS13 Global Connectedness Index 6th 56 8 32 18 21 81 3HC04 Human Development Index 6th 42 27 12 24 38 85 23HC11 Global Talent Index 6th 45 19 1 14 38 51 10HC18 Health Outcomes and Cost 6th 87 52 40 66 27 86BE15 Government Debt as % of GDP 7th 88 69 57 28 29 9 81RF01 World Competitiveness Scoreboard 7th 54 31 1 7 51 43 8RF04 Foreign Direct Investment Inflows 7th 77 15 9 8 51 1 18RF23 FDI inward stock as a percentage of GDP 7th 92 21 51 2 77 82 3FS06 Domestic Credit Provided by Banks 7th 86 73 79 71 54 46 27FS12 Liner Shipping Connectivity Index 7th 34 23 13 8 10 1 9HC08 Top Tourism Destinations 7th 22 4 6 1 11 16 2


From this list we are able to derive a list of the most relevant factors that can potentially be influenced by policy makers and are important factors considered by many professionals making location decisions for themselves and their companies:

Instrumental FactorCorrelation with

GFCI Tokyo Position in Peer Group

BE14 Banking Industry Country Risk Assessments 0.3005 1stRF19 City Prosperity Index 0.0209 1stIF16 Global Sustainable Competitiveness Index 0.0058 1stHC07 Homicide Rates 0.0234 1stIF07 Quality of Domestic Transport Network 0.2245 2ndHC06 Number of High Net Worth Individuals 0.1781 2ndHC12 Health Care Index 0.0157 2ndHC13 Global Skills Index 0.0144 2ndHC19 Quality of Life Index 0.0072 2ndBE19 Government Effectiveness 0.2160 3rdRF02 Global Competitiveness Index 0.3520 3rdRF12 Global Cities Index 0.4008 3rdIF06 Telecommunication Infrastructure Index 0.0274 3rdIF15 Environmental Performance 0.0459 3rdHC03 Visa Restrictions Index 0.0184 3rdHC05 Citizens Domestic Purchasing Power 0.2306 3rdHC10 Quality of Living City Rankings 0.2026 3rdHC20 Crime Index 0.0130 3rdBE06 Corruption Perception Index 0.1307 4thBE12 Bilateral Tax Information Exchange Agreements 0.0012 4thBE18 Financial Secrecy Index 0.3795 4thBE21 Open Government 0.0658 4thBE22 Regulatory Enforcement 0.1798 4thRF09 Global Intellectual Property Index 0.1414 4thRF14 Innovation Cities Global Index 0.4010 4thRF17 Global Enabling Trade Report 0.3085 4thIF01 Office Occupancy Costs 0.5034 4thIF03 IPD Global Property Index 0.2302 4thIF11 Networked Readiness Index 0.2301 4thIF17 Logistics Performance Index 0.3766 4thBE03 Operational Risk Rating 0.1467 5thBE13 Economic Freedom of the World 0.1340 5thBE28 Rule of Law 0.1538 5thIF02 Office Space Around the World 0.3111 5thIF04 JLL Real Estate Transparency Index 0.1581 5thHC16 World Talent Rankings 0.1767 5thHC17 Cost of Living City Rankings 0.3230 5thBE01 Business Environment Rankings 0.3180 6thBE02 Ease of Doing Business Index 0.1564 6thRF08 Global Innovation Index 0.2011 6thHC04 Human Development Index 0.0758 6thHC11 Global Talent Index 0.2317 6thRF01 World Competitiveness Scoreboard 0.3971 7thRF04 Foreign Direct Investment Inflows 0.2251 7thHC08 Top Tourism Destinations 0.2524 7th


7. STRENGTHS, WEAKNESSES, OPPORTUNITIES & THREATS

Looking at the instrumental factors in more detail and adding the results from our professional opinions questionnaire and the statistical modelling results, it is possible to draw conclusions regarding Tokyo’s main strengths and weaknesses. In summary:

Strengths

Economic and political stability

Generally, Tokyo is modern and well run. Overall political and economic stability are strong relative to many competitors. Health care, and quality of life are generally good.

Levels of risk

Risk appears to be well managed with Tokyo topping the peer group in Banking Country Risk Assessments. Levels of crime and corruption are also under control.

Overall government effectiveness

The government runs the country better than international perceptions would suggest. In the Government Effectiveness data (World Bank), Tokyo comes third in the peer group behind only Hong Kong and Singapore. Overall prosperity is good (Tokyo is first in the peer group in the City Prosperity Index (United Nations) and infrastructure is better than in many capital cities (6 instrumental factors place Tokyo in the top 3 amongst the peer group).

Business environment

As an advanced economy, the environment that affects businesses is good. Uncertainty is managed and the OECD’s Country Risk Classification is also good.

Weaknesses

International reputation

Tokyo is clearly a better financial services centre than it is assessed to be in certain regions. Europe is where the least positive perceptions endure. This suggests that a marketing / promotional effort in this region is needed.

Ease of doing business

Several instrumental factors point to problems in this area. Japan is 6th in its peer group in the Ease of Doing Business Index by the World Bank (a widely respected and often cited index). Overall, Japan is ranked 34th out of 189 countries. The top four financial centres (London, New York, Singapore and Hong Kong) are within the top 7 out of 189 countries. The index is derived from 10 sub-indices. Japan ranks 36th for protecting minority investors and within its peer group ranks only above China (134th) in this category. It ranks 51st for enforcing contracts, 52nd for cross border trade, 68th for dealing with construction permits, 79th for getting credit and 81st for


starting a business. It is 121st for tax administration.

Attracting international skills and talent

It is hard to form a genuinely global centre without a global workforce. Tokyo is not as welcoming to expats as Hong Kong and Singapore. This is shown in two factors relating to talent: among its peer group, Tokyo ranks 6th in the Global Talent Index (EIU), 5th in the World Talent Rankings (IMD) and 6th in the Human Development Index (UN).

Professional services

Linked to the point above, Tokyo does not seem to attract global professional service firms as well as the centres ranked higher in the GFCI. FDI inflows are relatively low (7th in the peer group) as companies are less willing to open offices in Tokyo than in other peer centres. In the GFCI Professional Services Index Tokyo is 113 points behind top-ranked London - a larger gap than in the other sub-indices.

We have also summarised the opportunities and threats (real and perceived) that face Tokyo:

Opportunities

Higher education

Educational standards in Tokyo are strong at primary and secondary levels but lag those of other centres in developing talent for the financial services industry. The World Bank publishes two measures of graduate level education. In the Tertiary Graduation Levels Japan ranks 4th in the peer group but feedback via the GFCI questionnaire from foreign banks based in Tokyo says that Japanese graduates are less well prepared for financial services than in other leading centres.

Economic growth

With economic growth slowing in many developing Asian countries, Japan has an opportunity to make up some lost ground and outgrow its competitors.

Human development

Tertiary education in Japan is not viewed internationally as preparing graduates for financial services. Many Japanese students study abroad and a substantial number do not return. Having world-class financial services study and training programs are strong opportunities for both Japanese students and international students as well. Japanese financial professionals should be encouraged to enrol in international programs and obtain certifications. Tokyo is 6th in its peer group in the Global Talent Index and 5th in the World Talent Rankings.


Threats

Other Asian centres including Seoul

Many other capital cities in Asia are realising the benefits of having a financial centre and are actively pursuing strategies for development. South Korea is developing Seoul as a leading centre and becoming more international in its outlook. Even Busan is developing as a maritime finance centre. Seoul in particular has risen in the GFCI ratings faster than almost any other centre. The Seoul Metropolitan Government realised about six years ago that the city was unwelcoming to foreign talent, had little to improve expatriates’ quality of life and the standards of healthcare, international schooling and cultural experiences were not comparable to those of more cosmopolitan cities such as Hong Kong and Singapore. The Seoul administration spent significant effort and money to transform the city into a much more modern and multi-cultural place in which to live and do business.

Challenging international outlook

The global economy faces a number of challenges over the next decade. The slowdown of growth, terrorism, wars and political upheavals will all take their toll. Japan is well insulated from some of these threats but not from all. The UK has just voted to leave the European Union and the impact on the competitiveness of London as a financial centre is still hard to assess. If more Western banks choose to expand their presence in Asia, then they need to decide where to be based. Speaking to many senior bankers regularly as Z/Yen does, their first choice in Asia is currently Singapore followed by Hong Kong. Two financial professionals who recently responded to our questionnaire both used the same comment saying that Tokyo was “too Japanese.” This was not meant as an insult but purely that other centres were more cosmopolitan.


8. CONCLUSIONS Reviewing recommendations submitted by different stakeholders to the TMG, three main areas have been identified that need to be developed for Tokyo to become a truly competitive and leading global financial centre: ♦ Tokyo must offer diverse, appealing products in the stock, bond and derivatives markets; ♦ The markets must be attractive to domestic and overseas investors alike; ♦ The asset management industry must become world leading. Our analysis demonstrates that the overall business environment within Tokyo is considered to be a key strength. Tokyo benefits from economic and political stability, well-managed risk, good infrastructure and overall government effectiveness. From these viewpoints, Tokyo is well positioned among its peers to achieve its internationalisation ambition. However, there are areas that need improvement. We believe three critical areas need addressing: Openness The government needs to continue with policies and reforms to open up in a number of areas. It must make it easier to do business in Japan, and in particular more attractive for foreign institutions to enter the market. The relative complications of setting up shop and operating in Japan are a constant source of concern for international organisations. As reported above, Japan is 6th in its peer group in the Ease of Doing Business Index by the World Bank and is ranked 34th out of 189 countries. The top four financial centres (London, New York, Singapore and Hong Kong) are all within the top seven of the 189 countries. The index is derived from 10 sub-indices. Japan ranks 36th for protecting minority investors and within its peer group ranks only above China in this category. It ranks 51st for enforcing contracts, 52nd for cross border trade, 68th for dealing with construction permits, 79th for getting credit and 81st for starting a business. It is 121st for tax administration. A significant improvement in these areas will yield measurable benefits. Above all, Japan must create an open environment that enables overseas financial institutions and asset management firms to participate at a level that is on par and consistent with international best practices and standards, that allows for top domestic and overseas players to compete with each other on a level playing field, and ensures investors feel secure and that their rights are duly protected. At the individual level, more openness is needed as well. In an era where talent is global and human capital fluid, Japan cannot afford to lose out in the war for talent. Yet this is one area where it scores poorly. It is 6th among its peer group in the Global Talent Index by the Economist Intelligence Unit (EIU), which ranked Japan 24th out of 60 countries for 2015. In the specific measure for openness, which examines mobility and relative openness of the labour markets, including the country’s tendency to hire foreign nationals to add diversity to its workforce, Japan ranked near bottom of the index at 57 and is last among its peer group. No doubt the overall lack of openness has sharply affected Japan’s international reputation and attraction to foreign talent. In the IMD World Talent Report 2015, Japan dwindled at the bottom of its peer group, ranking 50th out of 61 countries in the category measuring foreign high-skilled people’s attraction to the country’s business environment. The next best performer among the peer group was South Korea, which was 13 rungs higher at 37. Professionalism Japan has significant catch-up to do in this area. A number of indicators point to the fact that graduates in Japan are simply not equipped to meet the talent needs of the country nor ready to compete in the global economy, and this inadequacy is particularly stark in financial services.

http://www.doingbusiness.org/rankings

http://globaltalentindex.com/

http://www.imd.org/wcc/news-talent-report/


According to the IMD World Talent Report 2015, Japan’s lowest scores were all in criteria related to the readiness of its workforce. It performed worst among its peer group in the areas of the ability of its university education to meet the needs of a competitive economy, management education, availability of senior managers, language skills and international experience of senior managers. In all these areas Japan ranked near or at the bottom of the list of 61 countries. Even in the availability of finance skills, Japan fared only slightly better at 35, ranking just above China in its peer group. Feedback via the GFCI questionnaire from foreign banks based in Tokyo note that Japanese graduates are less well prepared for financial services than in other leading global centres. A world-class financial centre has to be sustained by a ready supply of the right talent possessing the highest standards of professionalism. Clearly, the Tokyo administration needs to improve human capital development, not only in terms of increasing investment but also directing reform measures in the right areas, in particular in the asset management industry which it hopes to develop and in the broader financial sector. Ethical Behaviour A recent study9 by CFA Institute found that investors are expecting higher levels of transparency than ever before and holding their investment managers to the highest ethical standards. Published in February 2016, the global survey of close to 4,000 retail and institutional investors found that among retail investors, the most important actions from an investment firm are that it “fully discloses fees and other costs” and has “reliable security measures, while institutional investors rated “acts in an ethical manner” and “fully discloses fees and other costs” as top attributes. For an aspiring global financial hub that has made attracting investors and developing the asset management industry its top priorities, this growing demand for ethical practices and behaviour merits significant attention and is an area where Tokyo can certainly do better. As evidenced by this report, issues of transparency, corruption and regulatory enforcement, while not dire (Tokyo is 4th among the 7 peer cities), can be improved. The fact that the Japanese government has placed strengthening corporate governance at the heart of its drive to rejuvenate the economy is an encouraging sign. It enacted in quick succession a Stewardship Code10 in February 2014 and a Corporate Governance Code in June 2015. The Stewardship Code, a first in Asia, sets out guidelines for institutional investors in engaging more actively with companies to improve corporate governance and ultimately, protect and enhance shareowner value. While the Corporate Governance Code called for, among others, the appointment of at least two independent external directors, greater diversity in personnel (including active participation of women) and disclosure of basic strategy related to capital policy.11 But relying on regulations and edicts are not enough as there is a real risk that companies and organisations simply pay lip service to these changes, rendering them to a box-ticking exercise. More fundamentally, there needs to a change in mindset and culture. Voluntary adoption of ethical codes coupled with pressure and demand from investors would help foster a true transformation.

9 CFA Institute. (2016, February). From Trust to Loyalty: A Global Survey of What Investors Want. Retrieved from https://www.cfainstitute.org/learning/future/getinvolved/Pages/investor_trust_study.aspx 10 The Principles for Responsible Institutional Investors (“Japan Stewardship Code”) outline “stewardship responsibilities”, defined as “the responsibilities of institutional investors to enhance the medium- to long-term investment return for their clients and beneficiaries by improving and fostering the investee companies’ corporate value and sustainable growth through constructive engagement, or purposeful dialogue, based on in-depth knowledge of the companies and their business environment”. Retrieved from: http://www.fsa.go.jp/en/refer/councils/stewardship/20140407/01.pdf 11 Gopal, Tracy. (2015, March 16). Japan – A Closer Look at Corporate Governance Reform. Retrieved from https://www.issgovernance.com/file/publications/2015-japan-a-closer-look-at-governance-reform.pdf

https://www.cfainstitute.org/learning/future/getinvolved/Pages/investor_trust_study.aspx

http://www.fsa.go.jp/en/refer/councils/stewardship/20140407/01.pdf

http://www.jpx.co.jp/english/equities/listing/cg/tvdivq0000008jdy-att/20150513.pdf

https://www.cfainstitute.org/learning/future/getinvolved/Pages/investor_trust_study.aspx

http://www.fsa.go.jp/en/refer/councils/stewardship/20140407/01.pdf

https://www.issgovernance.com/file/publications/2015-japan-a-closer-look-at-governance-reform.pdf


PROJECT LEADERS Taketsugu Harada, CFA Secretary & Board Director, Advocacy Committee Chair CFA Society Japan

Shuichi Seo, CFA Immediate Past President CFA Society Japan

CONTRIBUTORS Dr. Tony Tan, CFA Head Global Society Advocacy Engagement CFA Institute

Laurel Teo, CFA Director Society Advocacy Engagement, Asia Pacific CFA Institute

This report is based on research by Mark Yeandle of Z/Yen Partners.

Disclaimer This report is presented as a basis for discussion only. Although every effort has been made to ensure the accuracy and completeness of the material in this report, the authors give no warranty in that regard and accept no liability for any loss or damage incurred through the use of or reliance upon, this report or the information contained therein.

Tokyo as an International Financial Centre · tokyo as an international financial centre 7 indices...

Documents

Transcript of Tokyo as an International Financial Centre · tokyo as an international financial centre 7 indices...