Hong Kong’s ‘Mainlandization’ Offers Japan Chance to Be Asia’s Financial Center

‘The most important thing to become an international financial center is trust from the United States,’ Takafumi Maki, a Japanese financial professional, wrote.

People pass next to Hokan-ji Temple (also known as Yasaka Pagoda) in Kyoto, Japan, on Oct. 14, 2021. Carl Court/Getty Images

Since Hong Kong passed the National Security Law and Article 23 legislation, its position as an international center has been rapidly replaced by other cities. Japan, once known as the “Asian financial center” in the 1980s, sees the current situation as a great opportunity to reclaim the title.

Hong Kong, an international financial center for years, used to attract investors from all over the world. However, after the National Security Law was introduced in 2020, foreign investors started to withdraw, worrying about its impact on the city’s business environment. Starting in 2022, Singapore replaced Hong Kong as the third largest international financial center after New York City and London.

Article 23 Worries Foreign Companies

In 2023, the Hong Kong stock market was bleak with a cumulative decline of over 14 percent, making it the worst-performing market in the Asia-Pacific region.

This marked the fourth consecutive year of decline for the Hong Kong stock market. Since reaching its peak in 2021, the market value of the Hong Kong stock market has fallen by over $6 trillion. At the beginning of 2024, its Hang Seng Index fell to the lowest level in 19 years.

On March 19, the Hong Kong Legislative Council passed the National Security Law Amendment Bill (also known as Article 23 legislation), which came into effect on March 23. It took only 11 days from the publication of the draft to the third reading and voting of the bill in the Legislative Council.

The new legislation, passed at an astonishing speed, grants authorities more power: they can arbitrarily retaliate against opponents of the Chinese Communist Party (CCP) and Hong Kong’s authorities, and political crimes with vaguely defined terms such as treason can be punished with life imprisonment.

Article 23 also combats crimes defined as treason, sedition, theft of state secrets, espionage, and foreign interference. This means that even in Hong Kong, staff from foreign companies, such as Japanese firms, could be detained on suspicion of “espionage,” posing a risk to the operations of multinational companies.

Tokyo Stock Market Quietly Rising

The Tokyo stock market continued to rise in 2023, with the Nikkei Index rising by nearly 28 percent for the year, marking its best performance in the past 33 years.

After the passing of the Article 23 legislation in Hong Kong, Japan appears to have recognized the opportunity to regain its position as Asia’s financial center.

Yoichi Takahashi, a Japanese economist and professor at Kaetsu University, wrote on March 30 that “with the passage of Article 23, Hong Kong is accelerating its ‘mainlandization,’ and cannot be expected to maintain its status as a financial center. Who will replace it? For Japan, it is a great opportunity.”

Mr. Takahashi, who served as an adviser to the Japanese Cabinet Office and former prime minister, suggested that the Japanese government should actively embrace Hong Kong exiles.

Taiwan’s acceptance of Hong Kong exiles is not very proactive, and many Hongkongers have gone to Europe and the United States, he said. Japan should, he said, conduct rigorous screening of exiles from Hong Kong and actively accept them, as this is strategically significant for replacing Hong Kong’s financial status.

In 2020, the CCP forcibly enacted the National Security Law to suppress the anti-extradition movement in Hong Kong. Following this, global financial institutions such as Vanguard, the world’s second-largest asset management company, withdrew from Hong Kong.

In May 2020, Japan’s then-Prime Minister Yoshihide Suga said, “Gather talents, funds, and information from all over the world and make Japan a center for finance and investment.”

He further emphasized the “speed” in doing so, saying, “Tokyo, where many financial institutions are concentrated, is a city highly anticipated.” At the time, Osaka and Fukuoka also joined the ranks in conducting analyses on the international financial center.

Japan's then-Prime Minister Yoshihide Suga attends a news conference at his official residence in Tokyo, Japan, on June 17, 2021. Issei Kato/POOL/Getty Images

In the 2020 Global Financial Center Index, released by the British think tank Z/Yen, Tokyo ranked fourth after New York City, London, and Shanghai, with Hong Kong fifth and Singapore sixth.

However, by this year, Singapore ranked third, Hong Kong fourth, yet Japan plummeted to 19th place. In the competition for financial status in Asia, Japan unexpectedly and significantly retreated.

There are three reasons behind this, according to a report by the Japan Research Institute Limited under the Sumitomo Mitsui Financial Group on Sept. 14, 2023.

First, compared with its competitor Singapore, Tokyo’s implementation of relevant measures is too slow. For example, in promoting financial technology development through subsidies and measures to attract high-end financial talent, Tokyo’s progress is not as advanced as Singapore’s.

Second, improvements to the business environment are insufficient, especially since Tokyo’s ranking in attracting highly skilled financial talent lags behind its competitors.

Third, Japan’s recognition and influence as a financial center are relatively low.

Financial Giant BlackRock Fully Invests in Japan

Japan’s economic recovery has accelerated over the past year, with significant influxes of foreign capital into the Japanese stock market, particularly from countries such as China. Coupled with the ’mainlandization' of Hong Kong, the Japanese government sees a renewed opportunity to reposition itself.

According to Nikkei Asia, Japan will compete with Singapore this time. If Japan’s government policies are appropriate, the capital fleeing Hong Kong will become Tokyo’s gain.

The report believes that while Hong Kong and Singapore have been competing for investment funds and family office establishment from wealthy families in China, Hong Kong has lost in terms of policies.

After Japanese Prime Minister Fumio Kishida realized that Tokyo had the opportunity to compete with Singapore and replace Hong Kong, he announced new policies to expand the investment channels for individual investors, hoping to attract wealthy Chinese funds to flow into Japan.

While visiting New York City in September 2023, Mr. Kishida said that to encourage foreign asset management companies to enter Japan, his government will expand tax protection for investments and establish special business districts where administrative procedures can be completed in English.

Japan's Prime Minister Fumio Kishida speaks during a joint press conference with President Joe Biden at the Rose Garden of the White House, on April 10, 2024. Madalina Vasiliu/The Epoch Times

As tensions between the United States and China escalate, global financial giants have begun to withdraw from China. Viewing Japan as the most powerful investment destination, they started interacting with the Japanese government. American asset management giant BlackRock is one of them.

BlackRock CEO Larry Fink took the lead in opening up the Japanese market. He visited Japan twice in 2023 and talked with Mr. Kishida about Japan’s financial policies.

On Oct. 5, 2023, Mr. Kishida attended a dinner hosted by BlackRock for global investment institutions and talked with top executives from about 20 domestic and foreign financial institutions, including Mr. Fink.

Mr. Kishida introduced reforms in Japan such as corporate governance and called for investment in the country. Senior executives from the attending investment institutions said that compared with other global markets, the prospects for Japan are promising and that Japan has been viewed positively for decades.

An official from Japan’s Ministry of Economy, Trade and Industry revealed that BlackRock currently sees Japan as a “country for further expansion.”

“In the past, BlackRock has been committed to expanding the Chinese market. However, with the deterioration of U.S.-China relations, activities on the mainland have been restricted in various ways. Therefore, they have turned their attention to the Japanese market,” the official said.

“Meanwhile, Japan is also a promising candidate to replace Hong Kong as the new financial center of Asia. International financial institutions have begun to fully invest in Japan.”

It is reported that Japan has up to 110 trillion yen (about $7.24 trillion) in household savings, which is extremely attractive to international financial institutions such as BlackRock.

Takafumi Maki, a Japanese financial media professional, previously wrote that whoever can replace Hong Kong’s financial center status will have a huge influence on geopolitical factors related to confrontations with the CCP.

“Singapore, a financial [sic] advanced country, seems to have great potential, but the most important thing to become an international financial center is trust from the United States. As Singapore is influenced by the Chinese government to varying degrees, [it] has not participated in U.S. sanctions against Beijing,” he wrote.

Mr. Maki believes that based on the above reason, Japan, as the closest ally of the United States in Asia, has a high possibility of replacing Hong Kong as the Asian financial center.