Why Tokyo Could Become The Second City in the Western World
The deteriorating relationship between the United States and China has prompted prominent US venture funds to consider Tokyo as their next port of call. These funds are looking to take over Tokyo’s place in the global marketplace, with the view that the city is on its way to becoming the “second city in the Western world.”
With each new turn in US-China semiconductor diplomacy and the recent spate of decisions signalling a sharp break with the world as we know it, Tokyo seems unconvinced. However, when considering the geopolitical and financial weights that were once concentrated in London and West Berlin during the Cold War of the previous century, the “second city” thesis will naturally be anchored in an explicitly US-friendly city like Tokyo.
The Push for Tokyo to Become a Global Financial Hub
Tokyo’s quest to become a global financial hub has been years in the making. Still, it has gained momentum in recent weeks as more US venture funds consider the city instead of China. Here are three reasons driving optimism around Tokyo’s future as a financial hub:
1. The Global Realignment of the Chip Industry: The global realignment of the chip industry, coupled with the broad “risk reduction” strategies of Japanese and foreign companies, could push businesses and even regional hubs away from China and towards Tokyo.
2. US-China Tensions Altering the Dynamics of M&A Markets: Japan’s most proactive companies have returned from the pandemic, among the busiest in the world. They are in markets such as the US, buoyed by competition from an increasing lack of Chinese buyers, looking to acquire to ensure growth outside the shrinking domestic market.
3. Sequoia Capital Spins off its Operations in China: Sequoia’s decision to spin off its operations in China, and the symbolic unbundling of one of the most successful US-China investment alliances, may prompt financial firms to follow suit. This could signal the start of a steady stream of multinationals that spin off operations in China and opt for Tokyo as their non-Chinese Asian hub.
Drawbacks to Tokyo’s Bid as a Financial Hub
The factors that may constrain Tokyo’s rise as a global financial hub are manifold. For one, US investors tend to head to Tokyo, but resources do not necessarily follow. Second, Japan’s zeal to assume this role has remained separate from the core of what Japan wants or how it sees itself. Finally, these drivers of Tokyo’s global financial hub status are far from being guaranteed to pan out.
Conclusion
In conclusion, Tokyo’s emergence as a leading contender for the role of the world’s next financial hub may stem from more prominent factors such as China’s unpredictability and geopolitical tensions. Still, the city’s aspirations to this title are well known in Japan, where it is seeking to become a global financial hub fully. The challenge facing Tokyo’s promoters is turning these theoretical reasons for becoming a financial hub into reality. Tokyo must actively seek global financial hub status for it to happen, and the time for that is now.
Additional Piece: Balancing Financial Access and Trust in Emerging Financial Hubs
As emerging financial hubs like Tokyo and Singapore increase their global clout, a balance must be found between access to financing and trust. Access to financing is essential, yet it must not come at the cost of trust, credibility, or transparency. The push for financial accessibility can lead to systemic risks and destructive behaviors within the financial system if proper regulatory measures are not in place. Therefore, the need for a regulatory framework that ensures financial access while reinforcing transparency and trust has never been so vital.
As emerging financial hubs play an increasingly prominent role in the global economy, they must grapple with new risks, increasing complexity, and significant uncertainties. Addressing these challenges requires strong institutions, regulations that balance financial access with regulation, and transparent governance structures where all stakeholders are represented. Additionally, fostering innovation and risk-taking without undermining financial stability is crucial to maintaining a healthy financial ecosystem.
An example of the balance between risking taking and financial stability is how Singapore has become a global leader in asset management. Singapore has taken a proactive role in shaping its regulatory environment, ensuring that local players enjoy a competitive edge while protecting the interests of all stakeholders. The city-state’s government established the Singapore Asset Management Regulatory framework, which includes risk management guidelines, asset allocation guides, and tax incentives for companies that use Singapore as their base. The regulatory framework has enabled FinTechs and traditional asset management firms to coexist and thrive, ensuring that finance and trust are balanced for Singapore’s financial ecosystem.
Overall, emerging financial hubs must continue to prioritize both access to financing and regulatory frameworks that ensure trust and diligence. Thoughtful regulatory frameworks that balance risk-taking with financial stability, innovation with prudent oversight, and access to capital with transparency and trust can help cities like Tokyo and Singapore succeed in their ambitious goals.
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The head of a US venture fund calls to say he will be in Japan next month for the first time in years. He needs to take over the place, and fast. As an American investor, he cannot look to China right now and may never again. Tokyo, he reckons, is well on its way to becoming the “second city in the Western world.”
Both he and others who have made similar predictions in recent weeks have stumbled upon an enticing idea. It becomes even more so with each new bitterness of US-China semiconductor diplomacy and with decisions, such as that of the US VC fund Sequoia Capital spins off its operations in China — which seem to signal a sharp break with the world we thought we knew. Tokyo, meanwhile, seems unconvinced.
Still, the topic haunts. The geopolitical and financial weights that were once concentrated respectively in London and West Berlin during the Cold War of the previous century, in the “second city” thesis will naturally combine in an explicitly US-friendly Tokyo as we hunker down for a new city. Tokyo’s quest to become a global financial hub, meanwhile, will be successful by default as Japan’s “non-Chinese” credentials offer solidity throughout this stream.
It doesn’t matter, in this theory, whether you call what’s happening “decoupling,” or sanding its edges and calling it “risk reduction.” Business is reshaping, finance will follow, and in the historical realignment, runs the logic of avarice, there is always historical opportunity.
This kind of conversation sounds like sweet music to the promoters of Tokyo’s ambitions as a global financial center: a strangely skeletal and necessarily patient lobby whose zeal has traditionally increased in inverse proportion to any serious sign of success. Critically, this lobby has never been anywhere near the core of what Japan wants or how it sees itself. Many asset owners and managers come to Tokyo; but when resources tend not to come with them, Japan as a whole just shrugs.
For Tokyo’s promoters, now could be the coveted breakthrough: Their case could be won through an unexpected geopolitical twist or two.
There are three real reasons for optimism. The first revolves around the idea that the global realignment of the chip industry, in parallel with the broader “risk reduction” strategies of Japanese and foreign companies, could push businesses and even regional hubs away from China (and Hong Kong). Kong) and towards Tokyo. The revelation in May that South Korea’s Samsung was looking to establish a $200 million research and development center in Japan provided surprising optics for the sense that the old rules are quickly crumbling.
The second is that US-China tensions are already altering the dynamics of the M&A markets. Japan’s most proactive companies are looking for growth outside the shrinking domestic market and will acquire to ensure it. They have returned from the pandemic, M&A advisors say, as among the busiest in the world, and are in markets, particularly the US, where they are buoyed by a lack of competition from Chinese buyers.
At the same time, geopolitics is helping to drive more M&A activity in Japan itself. Companies are under intensified pressure from shareholders to sell non-core assets, and in many cases are able to do so thanks to the many private equity firms for which Japan is a prime market with scarce availability of low-cost financing. These companies are armed with deep reserves of financial dry powder: funds raised largely for acquisitions in Asia that are now unlikely to be used in China.
Third is Sequoia’s decision to split and the symbolic unbundling of one of the most successful US-China investment alliances. Of course, there are company-specific reasons why such a move was possible, even desirable. But the conclusion that Tokyo has already drawn is that Sequoia will be just one of many to take similar paths. Financial firms and investors may be the first. The multinationals that spin off operations in China will be next: some of them, at least, may choose Tokyo as their non-Chinese Asian hub.
The problem is that these forces remain at best theoretical guarantees of greater financial hub status for Tokyo. On the fringes, the city could spend the next few years gradually expanding its financial services in line with demand, and even becoming something of a powerhouse for US-Japan deal advisory work.
But to become the great Asian financial center of a new Cold War, Tokyo must actually seek that status. Despite everything that’s going on, it’s not going to happen by accident.
https://www.ft.com/content/e52ef882-50cc-472d-b55e-db461dc4fc8f
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