Will Japan PM Suga's latest moves help Tokyo take Hong Kong's finance crown?

One of the Asia-Pacific's leading recruitment agencies began to receive the first, tentative inquiries about opportunities in Tokyo in the early months of the year, as international corporations with their regional headquarters in Hong Kong felt out the alternatives.

Already spooked by the unrest that has plagued Hong Kong in the last couple of years, companies were further concerned about the controversial national security law - that went into effect on June 30 - and the implications of Beijing tightening its control over a city that has long enjoyed broad freedoms.

The coronavirus pandemic abruptly shut down the initial inquiries about Japan, said Vijay Deol, the Tokyo-based managing director of En World, as companies prioritised staying solvent ahead of relocating their operations. But Deol expects the approaches to start again as soon as the health crisis has been brought under control and restrictions on travel are lifted.

Get the latest insights and analysis from our Global Impact newsletter on the big stories originating in China.

"We heard the rumblings out of Hong Kong back at the start of the year, with companies and executives worried about the changes there and the restrictions being imposed on freedoms," Deol told This Week in Asia.

"Things were just about getting to boiling point when the coronavirus broke out," he said. "The virus means that relocating a major business is not feasible now as many companies are in survival mode, but this is definitely something that is going to come up again in boardrooms when the crisis is over."

This will be music to the ears of the government of Japan and the city authorities of Tokyo, both of which have grand ambitions to turn the Japanese capital into the financial hub of the Asia-Pacific region and put it on a par with London and New York.

Within days of being elected prime minister in late September, Yoshihide Suga ordered the creation of a panel of experts to devise ways to attract overseas financial institutions and more foreign finance professionals, as well as top executives from major multinationals.

The government has identified a number of areas that require attention and legal revisions if the plan is to come to fruition, and the authorities will be aware that two previous efforts to appeal to foreign executives fell short because not all the changes could be implemented.

The biggest challenge is related to corporate and personal taxes, with performance-based executive compensation paid by asset management companies not treated as deductible in Japan, for example. That has discouraged the highest echelon of executives from basing themselves in Tokyo, while companies are also dissuaded because they are unable to reduce their taxable income and therefore face a higher corporate tax burden.

Japanese Prime Minister Yoshihide Suga said this week that the government would consider plans to change the tax code to attract multinationals. Photo: Kyodo alt=Japanese Prime Minister Yoshihide Suga said this week that the government would consider plans to change the tax code to attract multinationals. Photo: Kyodo

The government panel intends to look at ways to solve this issue, with one possibility an "offshore" status that would be separate from Japan's existing taxation system.

Foreign professionals are also very wary of Japan's inheritance tax, which is up to 55 per cent of their assets - and also covers a person's overseas assets if they have lived in Japan for 10 of the previous 15 years.

The joke among many long-term expatriates is that while Japan may be a great place to live, it's a terribly expensive place to die. As a consequence, the government is now considering making overseas assets that were held before a person arrived in Japan exempt of inheritance taxes.

The government is calling for changes to both the corporate and personal taxes to be incorporated into law for fiscal 2021, which starts in April next year.

On Monday, Suga confirmed that the government was planning such a move and would promote diversity in boardrooms to draw foreign talent. It would also address issues relating to "residency requirements and administrative support in English" to attract top financial and other foreign talent, The Nikkei newspaper reported.

The government panel will also consider a series of initiatives that date from the government of former Prime Minister Shinzo Abe, who declared in June that Japan would continue to welcome "foreign talent with specialised and technical abilities, including from Hong Kong."

In the 2019 Upper House election, the governing Liberal Democratic Party made a point of calling for Tokyo to evolve into an international financial hub. At the time, the party set up an economic growth strategy group and drew up a list of recommendations, which included relaxing existing banking regulations, improving governance and putting a greater focus on environmental and social issues.

Procedures to licence asset management companies and other businesses are presently carried out in Japanese, so the proposals include additional funding for bilingual legal experts, while the supervision and inspection of foreign financial institutions could switch to being conducted in English before the end of this financial year.

The proposals also include the introduction of new working styles, such as telecommuting, as a result of the coronavirus pandemic, as well as a fast-track and simplified system for permanent residency, tax breaks, reduced corporate rents and the adoption of fifth-generation wireless technology.

To appeal to families, more international schools will be given opportunities to set up campuses in Tokyo, while additional support will be drawn up for visas for assistant staff.

The combination of a push caused by uncertainties in Hong Kong and the pull of incentives on offer in Tokyo may be sufficient to convince some firms to make the jump.

"There is serious concern over the possible unknowns right now, for sure," said one senior executive of a global financial company that has its regional headquarters in Hong Kong.

"If the CCP does not soften its approach then there could ultimately be serious effects and businesses migrating away from Hong Kong" over the next decade or so, he added, referring to the Chinese Communist Party.

Doug Tucker, the Hong Kong-based regional manager for financial advisers DeVere Group, believes it is "too early to say" what the impact of recent developments in the city will mean for international companies, but if his head office does decide the time has come to relocate its Asia-Pacific headquarters, then he hopes Tokyo will be his next destination.

"Tokyo has high-quality and educated employees, it is a clean and safe city and it has a decent legal system," he said. And that, he said, is sufficient to give it the edge over both Seoul and Singapore, even though the city state has the advantage of English being widely spoken.

Yet questions still remain over whether Japan will this time be able to progress beyond proposals to concrete changes in its system.

"This is Japan's third shot at this after they fell short in the 'bubble era' of the 1990s and then again around 2000," said Martin Schulz, chief policy economist for Fujitsu Ltd's Global Market Intelligence Unit. "But to do it, they have to internationalise and digitise at lighting speed," he said.

"They have to be absolutely laser-focused if they want to get international finance into Tokyo," he added. "And Japan in general needs to be more flexible and open to foreigners."

This article originally appeared on the South China Morning Post (SCMP).

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.