Plan to lure hedge funds to Japan finds reality not so enticing

PUBLISHED : Wednesday, 11 May, 2016, 1:45am
UPDATED : Wednesday, 11 May, 2016, 1:45am

In the heart of Tokyo’s old financial district, a small developer has a big plan to bring investors back to Japan.

Heiwa Real Estate is building two skyscrapers on land near the city’s stock exchange and wants to fill them with hedge funds and other asset managers. On the surface, the project has state support: It is part of the Tokyo Global Financial Centre redevelopment, and in one of Prime Minister Shinzo Abe’s strategic zones, where regulation is lighter.

And yet, the landlord’s top idea for attracting investors – giving them state pension money to oversee – is proving unpalatable. Not only that, lower corporate tax rates in the zone are not likely anytime soon. Heiwa’s headaches underline the challenge Abe faces in reviving the finance industry in a society that is loath to give it special treatment.

“To tell the truth, it’s making me depressed,” said Tomoharu Nakao, a managing officer at Heiwa. “But we just have to keep going.”

Heiwa, which started after the second world war by leasing property to Japan’s equity bourses, is aiming to open the buildings in 2020, the year of the Tokyo Olympic Games. Both have been nominated to be urban development projects within the National Strategic Special Zone, which means planning approval takes less time and regulations on building size are relaxed, allowing Heiwa to offer lower rents to tenants.

That may not be enough. Investment banks including Royal Bank of Scotland Group and Barclays have been cutting staff and operations in Japan, while the number of hedge funds has remained stagnant over the past four years even as it roughly doubled in Hong Kong and Singapore. It is partly down to a corporate tax rate of 33 per cent last fiscal year, compared with 17 per cent in those cities, which also offer less red tape and are closer to China.

The centrepiece of Heiwa’s plan, attracting start-up fund-management firms from home and abroad by offering them seed money from pension funds, is not gaining any traction. Japan’s giant retirement managers, such as the US$1.3 trillion Government Pension Investment Fund, understand the logic of a programme to foster new investors, according to Nakao. It may help their own returns in an era of negative interest rates. But even if they want to stump up cash, there are several reasons why they cannot, he says.

The first is rules. While GPIF decided in October 2014 to allocate as much as 5 per cent of holdings to alternative assets, its investment committee has said this only applies to private equity, real estate and infrastructure, the fund’s president, Norihiro Takahashi, said in an interview.

“Hedge funds are one step beyond what we’re doing in alternatives,” Takahashi said. “I completely get the purpose, but it’s difficult for us right now.”

The second is perceptions. Japan’s state pensions are already under fire for posting losses after they cut bonds and replaced them with stocks. Getting public support for the idea of investing in hedge funds is not easy, Nakao said. That is especially true because people see the financial industry as for the rich and somewhat fraudulent, he said.

Third, the idea of giving pension money to up-and-coming hedge funds is foreign in Japan, unlike in the US, where retirement managers have been doing this for years. The New York State Common Retirement Fund, for instance, has been allocating funds to emerging-manager programmes since 1994. Temasek Holdings, Singapore’s state-owned investment company, also finances such seeding.

Japan’s retirement funds “aren’t accustomed to placing money with small managers they’ve never heard of,” Nakao said. “Even if they’re thinking about it, there’s also the aspect that the environment around them wouldn’t allow it.”

To tell the truth, it’s making me depressed
Tomoharu Nakao, Heiwa

Many people overseas ask whether the corporate tax rate will be reduced in the special zone, according to Nakao, who said there is opposition to giving financial firms preferential treatment.

The finance ministry is also against cutting levies because of the size of the nation’s budget deficit, according to Tomoaki Iwakura, a senior manager of development planning at Heiwa. It wants to see evidence that any cut in taxes would have an economic effect, he said. The ministry declined to comment.

“In a direct contest with Hong Kong and Singapore, you can’t avoid the tax issue,” Nakao said. “At this stage there’s no prospect of the tax being cut. We have no intention of giving up. We are trying, so I don’t want to say we can’t do it, but it doesn’t look like we can.”

Faced with these obstacles, Heiwa is talking up other plans to make the buildings attractive. As well as providing lower rents, it is in discussions with officials on making it easier for hedge funds to get licences in Japan. It can currently take years, as opposed to months in other markets, Nakao said. Funds also need more people on the ground to set up in Japan, because the law is unclear about whether they can outsource middle-office functions.

Nakao says Heiwa is trying to get that changed.

Meanwhile, the Tokyo government is moving to make the planned new financial centre easier for non-Japanese speakers to navigate. In New York this month, Tokyo governor Yoichi Masuzoe said he was planning a concierge service to help firms apply for licences and go through the process with regulators.

Still, Nakao says the ability to offer fund seeding will be key, and his team is frantically trying to come up with potential backers. More broadly, he says, people need to realise how grave the hollowing out of Japanese finance is before anything will change.

“When we make the comparison with Singapore and Hong Kong to various people, many say Japan is different,” Nakao said. “They say Japan has actual domestic industries. But foreign companies are rapidly downsizing their Japanese operations. People need a bit more of a sense of crisis. The society has to become more aware. Without that we’ll never overcome these obstacles.”