How Hong Kong’s ‘Mainlandization’ Presents an Opportunity for Japan to Become Asia’s Financial Center
In recent years, Hong Kong’s position as an international financial center has been rapidly declining due to the implementation of the National Security Law and Article 23 legislation. This presents a unique opportunity for Japan to reclaim its status as Asia’s financial center, a title it held in the 1980s.
Hong Kong, once a magnet for investors from around the world, saw a significant withdrawal of foreign investors following the introduction of the National Security Law in 2020. Singapore has since replaced Hong Kong as the third-largest international financial center after New York City and London.
The passing of the Article 23 legislation in Hong Kong has further raised concerns among foreign companies. The Hong Kong stock market has experienced a decline for four consecutive years, with a cumulative decline of over 14 percent in 2023. The market value of the Hong Kong stock market has fallen by over $6 trillion since its peak in 2021. These developments have led many to question Hong Kong’s ability to maintain its status as a financial center.
In contrast, the Tokyo stock market has quietly been on the rise. In 2023, the Nikkei Index saw a nearly 28 percent increase, marking its best performance in the past 33 years. Japanese economist Yoichi Takahashi believes that with Hong Kong’s “mainlandization,” Japan has a great opportunity to replace it as Asia’s financial center.
Takahashi suggests that the Japanese government should actively embrace Hong Kong exiles, as Taiwan’s acceptance of them has been relatively passive. By conducting rigorous screening and actively accepting exiles from Hong Kong, Japan can strategically position itself as a replacement for Hong Kong’s financial status.
Japan’s recognition and influence as a financial center have decreased over the years. In the 2020 Global Financial Center Index, Tokyo ranked fourth after New York City, London, and Shanghai, while Hong Kong ranked fifth and Singapore sixth. However, in this year’s index, Singapore rose to third place, Hong Kong dropped to fourth, and Japan plummeted to 19th place.
According to a report by the Japan Research Institute Limited, there are three key reasons for Japan’s decline. Firstly, Tokyo’s implementation of relevant measures to promote financial technology development and attract high-end financial talent lags behind Singapore. Secondly, improvements to the business environment, particularly in attracting highly skilled financial talent, are insufficient compared to competitors. Lastly, Japan’s recognition and influence as a financial center are relatively low.
Amidst these developments, Japan sees a renewed opportunity to position itself as a financial center. The Japanese government has introduced new policies to expand investment channels for individual investors and attract wealthy Chinese funds to flow into Japan. Prime Minister Fumio Kishida announced tax protection for investments and the establishment of special business districts where administrative procedures can be completed in English.
Foreign capital has been flowing into the Japanese stock market, particularly from countries like China. Global financial giants, including BlackRock, have recognized Japan as a powerful investment destination. BlackRock CEO Larry Fink has visited Japan twice in 2023 and engaged in discussions with Japanese government officials about financial policies.
Prime Minister Kishida attended a dinner hosted by BlackRock for global investment institutions and emphasized reforms in Japan’s corporate governance. Senior executives from attending investment institutions expressed optimism about Japan’s prospects and viewed the country positively for decades.
Japan’s abundant household savings of up to 110 trillion yen (about $7.24 trillion) make it an attractive destination for international financial institutions. Takafumi Maki, a Japanese financial media professional, believes that whoever can replace Hong Kong’s financial center status will have significant geopolitical influence related to confrontations with the Chinese Communist Party (CCP). Maki argues that Japan, as the closest ally of the United States in Asia, has a high possibility of becoming the new Asian financial center due to the trust it enjoys from the United States.
In conclusion, Hong Kong’s decline as an international financial center opens up an opportunity for Japan to reclaim its position. With its stable stock market performance, favorable government policies, and recognition as a trusted ally of the United States, Japan has the potential to become Asia’s financial center once again.
