ôHaving a more developed financial services environments would help boost capital, labour and technology,ö says Takatoshi Ito, professor at the University of Tokyo and an adviser to the government on the Council for Economic and Fiscal Policy.
According to the Organization for Economic Cooperation and Development, JapanÆs potential growth rate has fallen from 4% in the 1980s to around 1.5% since 2004, the lowest level among the OECD countries. The OECD estimates that the fall in the working age population knocks one percentage point off the potential annual growth rate. The per capita income gap with the US will widen, since the higher labour utilisation rate in Japan counters the country's labour productivity, which is 30% less than in the US.
Japan is facing a drop in its working population, and Ito believes that moving towards a City of London model could help boost the countryÆs GDP. ôFewer working people represents a substantial constraint on economic growth, so a solution needs to be found,ö he says. Becoming an international financial centre could help Japan capture some of the benefits of non-Japan AsiaÆs dynamic growth. For expample, China on Wednesday announced growth of 10.6% for the first quarter this year, while Japan has been growing at 1.5-2% since 2002 û the countryÆs longest period of economic expansion since 1945.
ôFinancial services can stimulate growth in any country. But it could be especially profitable for Japan to pursue this avenue given that the Japanese have some $15 trillion in household assets. Most of these assets have not been mobilised by our financial services industry,ö he says. Fifty percent of those assets are in bank deposits, paying very low returns.
Another source of inefficiency which Ito would like to remedy lies in the Government Pension Investment Fund. The fund manages $1.5 trillion of assets, which makes it the largest pension fund in the world. By generating higher returns from these assets, Japan could increase household wealth, shore up the pension system, and help fund the governmentÆs budget deficit, says Ito. In a reversal of Western practice, Japanese salary men tend to avoid investing in stocks until they retire. On retirement, employees get a large one-off payment, which is then often used by retirees to play the stockmarket.
The public pension fund disgraced itself in 2004/2005 when it invested in a chain of hotels and resorts and lost 95% of its investment. Ito envisages a public/private hybrid whereby the private sector would actively manage a "small portion" of the funds. Ito says itÆs not clear under the current structure who is accountable for the fundÆs performance, whether itÆs the fund itself, the Diet or the Ministry of Economics, Trade and Industry. Ito also says there was no evidence of modern portfolio theory being applied by the fund to its investments.
In terms of attracting international firms, simple improvements on taxes and visas would be a good start, he adds. For example, many hedge funds currently trade Japanese shares out of Singapore in order to avoid getting "permanent establishment" status in Japan and paying tax. JapanÆs corporate tax rate is 40%.
Ito outlined a scheme that would lead to improvement to "the players, the pitch and the referee", and says the Japanese regulators need to do a better job. The Japanese Financial Services Agency is seen as being too interventionist. Ito says that the regulators were moving towards a more principle-based model, which means the regulators allow companies to list if they meet clear and transparent criteria. A criticism of the regulators is that they often make judgments on the desirability of companies and products instead of allowing the markets to decide.
Ito also says that the grain and commodity exchanges in Japan are backward by international standards and should be merged with the Tokyo Stock Exchange if they donÆt improve. They have unsophisticated trading platforms and simply copy the prices made abroad, instead of making their own prices, he says. As a sign of their backwardness, Ito says Osaka merchants were able to trade rice futures in the 1730s. Today, thatÆs not possible, as rice is a government controlled product.
The Council for Economic and Fiscal Policy has been advising the government for almost two years and yesterday's comments by Ito related to its latest proposals. Some bankers donÆt seem convinced that its plans will take off, though. ôRemoving the current separation between the commercial banking and securities side has been discussed for at least 10 years, but there has been no real progress,ö says one Japanese banker.
Foreign companies appear to be shunning the Tokyo Stock Exchange in favour of Hong Kong, Singapore or New York. The number of foreign company de-listings outnumbers the number of new listings by a factor of three to four times, according to Tokyo Stock Exchange data.