With Tokyo posing a challenge to Hong Kong’s financial hub crown, are companies likely to head for Japan? Analysts weigh in

Cheryl Arcibal
·4-min read

Japan is bent on turning Tokyo into Asia’s top finance hub, sensing that rival Hong Kong has been weakened by its political turmoil.

The Japanese government announced this month that a financial services agency will soon be launched to oversee the registration and supervision in English of Hong Kong-based foreign asset managers. It has also set up an office in Hong Kong to advise companies mulling a move to Tokyo.

But will these initiatives have an effect on demand for office properties and prices in the two cities?

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Not so much, if at all, analysts say.

“It will probably attract at most a small percentage of firms out of Hong Kong to Japan,” said Maggie Hu, associate professor of real estate and finance at the Chinese University of Hong Kong.

There are plenty of reasons for Hong Kong’s status as a regional financial centre, while Tokyo primarily caters to its local companies, according to analysts.

Hong Kong’s position as a gateway to China’s huge domestic market is unrivalled at the moment, while its low-tax environment is a perk that firms are unlikely to get in Japan anytime soon. With English more widely used in Hong Kong, the language barrier in Japan is another obstacle that needs to be overcome for Tokyo to pose a serious threat to Hong Kong’s status, say analysts.

“I don’t see Tokyo taking the spot in the way that New York is clearly the leader for the US market and London is clearly the leader for Europe,” said Michael Makdad, Tokyo-based senior equity analyst at global financial services company Morningstar.

Hong Kong’s highly developed capital markets and their liquidity also make it a preferred location for many big firms.

“Foreign companies, for the most part, are in Hong Kong to access the Greater China market,” said Phillip Zhong, Hong Kong-based senior equity analyst at Morningstar. “If foreign companies perceive China as an attractive market, then they will be in Hong Kong.”

More than half of tenants in the city’s offices were foreign firms in the first half of 2020, with those from Europe, the Middle East and Africa comprising 17 per cent, followed by American firms at 16 per cent, according to data from property consultancy CBRE.

The case for Hong Kong is strong. But China’s crackdown on the city, and new limits on overseas workers in Singapore, could still help Japan raise its profile as a global financial hub, according to Japan’s new vice finance minister Kenji Nakanishi.

Beijing’s sweeping security law, imposed in June, has been regularly wielded by the Hong Kong government to prosecute people associated with anti-government protests and to disqualify opposition lawmakers. The law has drawn criticism from governments across the world, who warn of potential repercussions for foreign companies in Hong Kong.

If Tokyo is serious about its ambitions, and pursues reforms to make it a more attractive investment location, it will still take time to see its efforts bear fruit, according to Nai Jia Lee, deputy director, Institute of Real Estate and Urban Studies (IREUS) at the National University of Singapore (NUS).

“There are other factors that work against [Japan] – lack of diversity in board members, lack of innovation in financial markets. Notwithstanding, it seems that the Japanese government is willing to accelerate the reforms, including the setting up of the office to help companies,” said Lee.

“If some of the structural issues are resolved, I think it may help to attract some companies to locate in Japan.”

Singapore is the more likely candidate to wrestle the crown from Hong Kong, according to Sing Tien Foo, director, IREUS at the NUS.

“Firms may choose Singapore over Tokyo as their regional hub, where Singapore has the competitive advantages for the [use of] English and the highly transparent business environment” he said.

While Hong Kong is still living through some uncertainties, recent transactions suggest that investors remain bullish about its financial status, according to Paul Hart, executive director at Knight Frank.

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