Japan Securities Summit 216 Tokyo as a Global Financial Center March 216 Yusuke Kawamura Deputy Chairman of the Institute Daiwa Institute of Research Ltd. This handout is not intended as a solicitation for investment. Content herein is based on reliable information available at the time the handout was prepared and may be amended or otherwise changed in the future without notice. We make no representations as to accuracy or completeness. Daiwa Securities Group is the parent of Daiwa Institute of Research Holdings (parent of Daiwa Institute of Research) and Daiwa Securities. Daiwa Institute of Research retains all rights related to the content of this handout, which may not be redistributed or otherwise transmitted without prior consent.
Tokyo s Ranking as a Global Financial Center (rank) 1 2 3 4 5 6 7 Global Financial Centers Changes in the rankings of five key cities "The Global Financial Centres Index" - Industry Sector Sub-Indices Ranking Rank Investment Management Banking Government & regulatory "Global Power City Index" - Function-Specific Ranking Insurance Professional services 1 London London London New York London 2 New York New York New York London New York 3 Hong Kong Hong Kong Hong Kong Singapore Singapore 4 Singapore Singapore Singapore Busan Hong Kong 5 Toronto Tokyo Tokyo Hong Kong Washington DC 6 Tokyo Chicago Seoul Chicago San Francisco 7 Chicago Zurich Chicago Seoul Chicago 8 San Francisco Shanghai Sydney Washington DC Boston 9 Boston Seoul Toronto San Francisco Tokyo 1 Zurich San Francisco Zurich Tokyo Zurich Source: Z/Yen Group "The Global Financial Centres Index 18", September 215 8 9 (15) 1 Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- 27 28 29 21 211 212 213 214 London New York Hong Kong Singapore Tokyo Source: Z/Yen Group "The Global Financial Centres Index" Mar- 215 Rank Economy R&D Cultural Interaction Livability Environment Accessibility 1 Tokyo New York London Paris Geneva Paris 2 London Tokyo New York Berlin Frankfurt London 3 New York London Paris Vancouver Stockholm Amsterdam 4 Beijing Los Angels Singapore Vienna Zurich Singapore 5 Hong Kong Paris Tokyo Barcelona Vienna Hong Kong 6 Singapore Seoul Beijing Geneva Singapore Frankfurt 7 Zurich Boston Berlin Toronto Vancouver Shanghai 8 Seoul Singapore Sydney Zurich London New York 9 Shanghai San Francisco Vienna Amsterdam Berlin Seoul 1 Stockholm Chicago Los Angels Madrid Copenhagen Istanbul 11 Geneva Hong Kong Istanbul Copenhagen Amsterdam Tokyo 12 Copenhagen Osaka Brussels Milan Washington, D.C. Kuala Lumpur 13 Paris Berlin Barcelona Stockholm Tokyo Brussels 14 Sydney Sydney Seoul Frankfurt Madrid Barcelona 15 Washington, D.C. Washington, D.C. Amsterdam Tokyo Sydney Milan Source: The Mori Memorial Foundation's Institute for Urban Strategies "Global Power City Index 215" 1
Equity Markets: Major Presence in Domestic Markets ($ trillion) 35 Value of Share Trading in Major Stock Exchanges (Domestic & Foreign) NYSE Euronext (US) 3 Japan Exchange Group Shanghai SE 25 London SE Group Hong Kong Exchanges 2 Singapore Exchange 15 1 5 (%) 6 5 4 3 2 1 Foreign investor shareholding ratios by country 55. UK 31.7 Japan 16.2 US 199 1993 1996 1999 22 25 28 211 214 (Year) Source: World Federation of Exchanges, London Stock Exchange Group 1997 1999 21 23 25 27 29 211 213 (Year) Sources: Tokyo Stock Exchange (Japan), Federal Reserve Board (US), Office for National Statistics (UK) Note: Japanese ratio relates to listed companies; US and UK ratios include unlisted companies. 2
Equity Markets: Steep Decline in Foreign Company Listings (Companies) 14 12 1 8 6 4 Total corporate listings on TSE and foreign companies listed on TSE 127 Foreign company listing Total company listing (right scale) (Companies) 4, 3,5 3, 2,5 2, 2 198 1985 199 1995 2 25 21 215 Source: Tokyo Stock Exchange Note: Osaka Stock Exchange included as of 213. 9 (Year-end) 1,5 1, 3
Bond Markets: Problems with Diversification Debt securities outstanding by sector of issuer (as of end-june 215, in billions of US dollars) Japan (total 1,985) United States (total 36,278) 2,143 (19%) 615 (6%) 15,694 (43%) 14,976 (42%) 8,227 (75%) 5,389 (15%) Financial corporations Non-financial corporations General government China (total 6,776) United Kingdom (total 6,263) 1,98 (29%) 2,72 (4%) 2,725 (44%) 2,964 (47%) 2,75 (31%) 571 (9%) Source: Bank for International Settlements 4
Comparison between Tokyo, New York, London, Hong Kong and Singapore as Global Financial Centers 1 Tax system Tokyo New York London Hong Kong Singapore Corporation tax: 23.9% Individual income tax: 45.95% (top rate) VAT: 8% (consumption tax) Corporate tax: 39% (top rate) Individual income tax: 39.6%(top rate) VAT: 8.875% Corporate tax: 2% Individual income tax: 45%(top rate) VAT: 2% Corporation tax: 16.5% Individual income tax: 17% (top rate) VAT: % Corporation tax: 17% Individual income tax: 2% (top rate) VAT: 7% Approach to establishme nt as global financial center The aim of plans to establish Tokyo as a global financial center is to make fund raising easier for both domestic and overseas investors and companies. Company start-ups: Onestop administration service as of April 215. Six consultation languages available. Development of the financial market in light of economic growth & status of USD mother market Deregulation of the financial sector and connection of finance using IT Company start-ups: partly introduced Internet based company registration service Deregulation of the financial market as a result of The Big bang in the 198s. (Abolishment of restriction on non-member investment in stock exchange members) Company start-ups: partly introduced Internet based company registration service Offshore RMB business promotion in light of internationalization of RMB. Securing position as world s biggest offshore RMB market. Company start-ups: Internet-based one-stop company/business registration service available from 211 (English / Chinese) Income and other financial sector tax incentives introduced to attract overseas financial institutions. Company start-ups: Internet-based one-stop administration service available since 199s. (English) Equity market capitalizatio n (end-214) $4.4 trillion (% of GDP: 95%) $19.4 trillion (% of GDP: 112%) $4. trillion (% of GDP: 134%) $3.2 trillion (% of GDP: 1111%) $.8 trillion ($ of GDP: 245%) bonds outstanding (end-214) $11. trillion (% of GDP: 24%) $35.8 trillion (% of GDP: 26%) $6.2 trillion (% of GDP: 26%) $.4 trillion (% of GDP: 122%) $.3 trillion (% of GDP: 114%) Banks assets (end- 214) $15.2 trillion (% of GDP: 33%) $21.2 trillion (% of GDP: 122%) $16.8 trillion (% of GDP: 561%) $2.4 trillion ($ of GDP: 817%) $1.8 trillion (% of GDP: 582%) Source: DIR (based on World Federation of Exchanges, Bank for international Settlements, JETRO, and Haver Analytics data) 5
Japan, All Tokyo US, All New York UK, All London Hong Kong Singapore Comparison between Tokyo, New York, London, Hong Kong and Singapore as Global Financial Centers 2 GDP of Countries by Sector (214) 1% 8% 4.4% 9.6% 7.9% 2.8% 7.1% 18.9% 16.6% 12.5% Agriculture, fisheries, mining 6% 4% 69.6% 79.1% 71.6% 69.7% 79.% 72.2% 77.8% 63.9% Finance Services (excl. finance) Manufacturing 2% % 24.8% 11.2% 15.8% 9.2% 2.3% 7.3% 5.5% 23.5% Source: DIR (based on Tokyo Metropolitan Government, U.S. Bureau of Economic Analysis, The Office for National Statics, Haver Analytics data) 6
Features and Problems of Tokyo s Markets as a Financial Center Equity market Bond market Derivative market High liquidity a strength; highly visible foreign investor presence a key feature. Very few foreign company listings compared with overseas markets. PTS trading in doldrums; domestic inter-market competition limited. HFT and algorithmic trading provide high levels of liquidity. Huge government bond issuance, 95% held by domestic Japanese investors. Corporate bond issuance limited compared with US; issues for the most part by companies thought particularly creditworthy. Corporate bonds held mostly by Japanese banks rather than foreign investors, thereby effectively limiting secondary market liquidity. Listed derivative trading smallscale by comparison with equity market. Around 7% of investors foreign; domestic investors play only a very minor role. Tendency for actively traded products to be equity indexoriented. Commodity-related and financerelated markets separate. Asset management business Japan the main center for Japanese share trading; Asian shares traded primarily in Hong Kong and Singapore. Following the financial crisis, however, Japanese share trading has also started to gravitate overseas. There are also investment companies that the Japan office is positioned as a sales office. Top-flight fund managers trading Japanese and/or Asian shares tend to move out of Japan. Business, living environment, other considerations Corporation and income tax high compared with other cities (Hong Kong, Singapore). English language business environment less favorable than other cities. Foreigner-friendly life-style infrastructure (schools, maids, nannies, English-language medical services) lacking compared with other cities Tokyo s systems and infrastructure are domestic marketoriented and settlement infrastructure and the like are not in conformity with global specifications. Source: Compiled by DIR (based on publications such as the Japan Securities Dealers Association Report of the Council for Tokyo Global Financial Center Promotional Activities) 7
Derivative Markets Largest Exchanges Largest Derivatives Exchange Futures and options volume traded and/or cleared. Rank Exchange Country Number of contracts (214) in millions 1 CME Group United States 3,443 2 Intercontinental Exchange United States 2,276 3 Eurex Germany 2,98 4 National Stock Exchange of India India 1,88 5 BM&F Bovespa Brazil 1,418 6 Moscow Exchange Russia 1,413 7 CBOE Holdings United States 1,325 8 Nasdaq OMX United States 1,127 9 Shanghai Futures Exchange China 842 1 Dalian Commodity Exchange China 77 11 BSE India 726 12 Korea Exchange Korea 678 13 Zhengzhou Commodity Exchange China 676 14 Hong Kong Exchanges & Clearing Hong Kong 32 15 Japan Exchange Japan 31 Tokyo total Japan Exchange + Tokyo Financial Exchange + Tokyo Commodity Exchange Source: Futures Industry Association Japan 372 8
Mezzanine Finance International Comparisons: Issuance Trends ($ Bil) 4 Japan UK France Germany US 3 2 33 15 1 112 25 26 27 28 29 21 211 212 213 214 215 (Year) Source: DIR (based on Bloomberg and Haver Analytics data) Note: SUM of CB and Subordinated Debt Issuance by country of issuance. 9
27 28 29 21 211 212 213 214 27 28 29 21 211 212 213 214 215 27 28 29 21 211 212 213 214 215 ABS Markets International Comparisons: Issuance Trends Japan US Europe ($ Bil) 4 3 MBS (Japan Housing Finance Agency) MBS (Institutions other than the Japan Housing Finance Agency) Other securitized products ($ Bil) MBS (Agency securities) 2,5 2, MBS (Other issuers) Other securitized products ($ Bil) MBS 1,4 1,2 1, Securitized products other than MBS 2 1,5 1, 8 6 1 5 4 2 (FY) (Year) (Year) Source: DIR (based on JBA, SIFMA, and Haver Analytics data) Note: US agency bonds include CMO (collateralized mortgage obligations). 1
1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 24 25 26 27 28 29 21 211 212 213 214 215 21 22 23 24 25 26 27 28 29 21 211 212 212 213 214 215 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 Japan s Corporate Competitiveness Return on Equity (ROE) (%) 25 Nikkei 225 S&P5 FTSE1 DAX 2 15 1 5-5 (% of GDP) 5 4 3 2 1 Gross Domestic expenditures on R&D CANADA JAPAN GERMANY ITALY FRANCE UK US CHINA (Year) (Year) (%) 5 4 3 2 1 Capital Adequacy Ratio April-March Business-Term Listed Companies Manufacturing All Industries(excluding financials) Non-Manufacturing (JPY tril) 15. 12.5 1. 7.5 5. 2.5. Japan's Outbound M&A Transaction value Number of transactions (No.) 1,2 1, 8 6 4 2 (FY) Source: DIR (based on Japan Exchange Group, IMF, Bloomberg) Note: Listed companies are composed of TSE 1 st & 2 nd sections, Mothers and JASDAQ (FY214 only) markets. (Year) 11
Japan Revitalization Strategy (Growth Strategy) 215 Principal measures Revolution in productivity by investment in the future Encouraging corporate behavior to improve earning power Further enhancement of growth-oriented corporate governance Promotion of innovation and venture business International expansion to growing markets including Asia Accelerating proactive actions to challenge a new era 4th Industrial Revolution caused by the development of IoT, Big data, A.I. Full utilization of ITC, with reinforcement of cyber security measures Developing personal capabilities and knowledge Improvement of labor quality through addressing long-working hours practices, further promotion of women, elderly persons etc. Development of capabilities of human resources in the era of great transformation of the society Promotion of Local Abenomics Enhance earning power of mid-ranking companies, SMEs and micro enterprises Vitalize services industry and enhance its productivity Transform primary industry/ health care industry/ tourism into key industries Implementation of leading projects for 22 Automatic travelling vehicles, hydrogen society, advanced robots, tourism, FDI etc. Source: DIR (based on Cabinet secretariat) 12
Mezzanine Investor Presence of Public-Private Investment Funds Specific areas <Resource procurement> <Infrastructure> <Overseas expansion> Shoko Chukin Bank [industrial investment finance] PFI Promotion Corporation of Japan [industrial investment finance] JBIC Overseas Development Aid Investment Facility [industrial investment finance] Japan Finance Corporation (subordinated loan) [industrial investment finance] Japan Oil, Gas and Metals National Corporation [industrial investment finance] Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development [industrial investment finance] Cool Japan Fund [industrial investment finance] Amount of funds and loans (As of end Sept 215) Public:642.4 bil yen Private:54.3 bil yen Government-guaranteed: 3,216.4 bil yen <6 th level industrializaion> Agriculture, Forestry and Fisheries Fund Corporation for Innovation, Value-chain and Expansion Japan [industrial investment finance and loans] Company size DBJ DBJ Competition Promotion Fund [industrial investment loans] (small and medium) Early Private sector financial institutions Japan Finance Corporation Japan Finance Corporation (subordinated capital loans) [industrial investment finance and loans] The Innovation Network Corporation of Japan [industrial investment finance] Venture Early General areas Small Source: Ministry of Finance Japan Senior loans Mezzanine (subordinated loans, preferred shares) Equity (ordinary shares) Large Financial method risk 13
Current Situation for RMB Business and Offshore Bonds Monthly RMB turnover in the Tokyo and London Forex markets ($ Bil ) 1, Offshore RMB debt security outstanding by country (RMB Bil ) 7 9 8 7 798.1 864. Oct-214 Apr-215 6 5 584.9 6 4 5 4 3 Share 1.3 % Share 1.7 % 3 2 2 1 London market ($-RMB) 7.2 Share.8 % Share.16% Tokyo market (JPY-RMB) 12.3 1 Hong Kong 215/6 5. Singapore 215/3 23.5 21.7 UK 215/9 Germany 215/3.7 Japan 215/6 Source: DIR (based on Tokyo Foreign Exchange Market Committee, Hong Kong Monetary Authority, Foreign Exchange Joint Standing Committee, Monetary Authority of Singapore, London Stock Exchange, Deutsche Bundesbank data) Note: Share is the percentage of each market s forex business accounted for by the RMB. 14
What is the Japan Global Asset Management Center? Tokyo s Kabuto-cho will be redefined as a global asset management center boasting state of the art connectivity and infrastructure, necessary in todays modern markets Location Situated between the Tokyo Stock Exchange, the Japan Securities Clearing Corporation and the Japan Securities Dealers Association Walking distance to Tokyo metropolitan railway terminal the central business district Photos courtesy of Japan Exchange Group, Inc. Community Finance professionals and IT service providers The historical heart of the financial district Milestones 216~ : Satellite office space for funds & start-ups established 216~ : Incentive programs initiated (tbc) 217~ : Introductory office & business suite services offered 218~ : Special incentive scheme, first phase executed (tbc) 22~ : JGAM center launched Source: Heiwa Real Estate mid-term plan and PwC Analysis Japan Global Asset Management Center (JGAM) - a special economic zone in Kabuto-cho, Tokyo 15
Tokyo Financial Street Otemachi Area Bank of Japan Daiwa Securities Nihombashi Area Kabutcho Area Merrill Lynch Nomura Securities Japan Securities Depository Center -1- Copyright 216 Daiwa Japan Institute Securities of Research Ltd. All rights reserved. Dealers Association Tokyo Stock Exchange 16
Overview of the JGAM Illustrative Services aligned to your business allow you to focus on what matters; implementation of key components of your value chain are our top priority Investors Commercial Bank Insurance Pension / Endowment Sovereign Wealth Fund Family Office High Net Worth / Wealth Managers 1 2 3 4 5 Asset Managers HF PE Real Estate JGAM s Launch Pad One-Stop Professional Services for Licensing Business Matchmaking Corporate Functions Offices & Conference Rooms ICT Platform JGAM Prime Broker Fund Admin/ Transfer Agent Custodian Business Servicer Mass Retail Investors Governmental Agencies Regulators IT System Vendor Japan Global Asset Management Center (JGAM) - a special economic zone in Kabuto-cho, Tokyo 17
Market Entry- Challenge and Response Not Exhaustive Challenges to entering the Japanese market exist. Government agencies and private sector service providers provide solutions to these challenges Perceived Challenge Reality 1 One-Stop Professional Services for Licensing Cost of Doing Business and Living in Japan Expensive professional services (e.g., legal, tax, translation) Monopoly of back office systems and custody service providers High rent (office and residential) High labor cost High tax rate Rent cost cheaper compared to other financial centers Contenders exist at varying degrees of coverage for back office systems and custodian services Concierge service (e.g., housing, visa, office setup) Reasonable office rent (c. $5 per sqm per month) Subsidies for business operations Language Insufficient English language environment Most regulatory documentation in Japanese Most understand English (English education starts at age of 7) English largely accepted by government agencies Professional interpreters and translators (available 24/7) Regulation Registration and licensing Stringent regulatory inspection process Complex regulatory and reporting obligations Straight-forward registration process Clear interpretations of Japanese regulations available Global standardization of regulations promoted Advice on regulatory compliance Registration support Regulatory advisory Regulatory reporting automation engine Source: Interviews with Japan based foreign asset managers, Japan Financial Services Agency and PwC Analysis Japan Global Asset Management Center (JGAM) - a special economic zone in Kabuto-cho, Tokyo 18
Business Implementation- Benefits of being in the JGAM Not Exhaustive JGAM will provide promising growth opportunities and risk control 2 3 Business Matchmaki ng Corporate Functions 4 Offices & Conference Rooms 5 ICT Platform Examples of JGAM s benefits Business matchmaking & networking Physical site (conference rooms) Sponsored events Online services (e.g., search engine / secure & compliant chat system) Japanese governmental agency programs Outsourcing of operations and/or compliance and other corporate functions to service providers Sharing of insights & tools for legal, compliance, regulatory matters (e.g., templates / guidelines) Complimentary use of temporary office & conference rooms Organization & coordination of meetings and events by dedicated staff Low cost media broadcast facilities for investors relation State-of-the-art front office systems (e.g., OMS / EMS) and secured dealing Analytical tools & reports for decision making Compliant low cost middle / back office systems Co-location and connectivity with major system and market data vendors Regulatory compliant data center Back-up center for business continuity Business Growth Type of Benefit Cost Productiv ity Risk Control - - - - - - - - - - - - - - - - - - - - - - - - Japan Global Asset Management Center (JGAM) - a special economic zone in Kabuto-cho, Tokyo 19
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