Japan benefited enormously from the European financial markets, 120 years ago. At that time, in order to secure imports of necessary goods and maintain the gold standard, the procurement of hard foreign currency was a pressing issue for Japan. The greatest contribution to this breakthrough was the success of raising funds through the issuance of public bonds in Europe. This was due to not only vigorous negotiations in London by Korekiyo Takahashi, then Deputy Governor of the Bank of Japan, but also the support of underwriters and investors in Europe including London and Paris, as well as in the United States (US), who appreciated the strength and potential of Japan as an emerging economy.
Over the more than 100 years since then, the relationship between Japan and Europe (EU and the United Kingdom, UK) has expanded and deepened through various twists and turns. Currently, Europe accounts for more than 10% of Japan’s trade in both exports and imports, 24.9% of outward direct investment, and 37.8% of inward direct investment; and about 7,500 of the approximately 79,300 overseas business bases of Japanese companies are located in Europe. Taking a look at securities investment figures in Japan, Europe accounts for 22.8% of the outstanding balance of outward portfolio investment and 37% of that of inward portfolio investment (all the data mentioned above are during or at the end of 2022). At the Japan Securities Dealers Association (JSDA)1, of which I serve as chairman, in addition to the US, Europe serves as an essential business destination for our member firms that operate overseas.
Learning from Europe
As investment and financial transactions expand, Japan has gained a great deal of knowledge and experience from the European financial markets. Below are two recent examples of insights that have been brought from Europe to Japan.
The first is the Nippon Individual Savings Account (NISA). As the name suggests, the system was designed based on the UK’s Individual Savings Account (ISA). In the UK, ISA was introduced in 1999 with the aim of increasing the savings rate of UK citizens. Since then, the annual contribution limit has been increased and the system has been expanded and improved. Now, almost half of the adult population in the UK has an ISA account, which is widely recognized and used as a means of asset building.
Japan’s NISA was introduced in 2014 and the scheme has been expanded gradually. As of the end of June 2023, more than 19 million NISA accounts have been opened (data from Japan Financial Services Agency). In addition, the fiscal 2023 tax reform made the system permanent, with the scheme expected to be significantly expanded from next year.
As of the end of June 2023, Japan has approximately 2,115 trillion yen (approximately EUR 13 trillion) of personal financial assets, the majority of which are held in cash and deposits. In Japan, whose population is rapidly aging, there is an urgent need to promote efficient asset formation through the self-reliant efforts of each individual and to support life in old age. With this in mind, Japan’s current administration is pursuing a plan to double asset-based income. NISA has now become the most important policy tool for Japan to respond to the aging population and promote Japan as a leading asset management center.
The second is Europe’s advanced initiatives for environmental protection and pioneering development of principles and frameworks for sustainable finance. In Europe, in order to develop sustainable finance in a fair and transparent manner, the International Capital Market Association (ICMA) and other relevant organizations have vigorously discussed and formulated foundational rules and guidelines such as the Green Bond Principles. ICMA’s principles and guidelines are now widely used around the world as standards for sustainable finance. The European Commission, the EU’s policy enforcement body, has also promoted the establishment of a sustainable finance framework and the development of the European sustainable finance market through the publication of the European Green Deal, a roadmap for decarbonization, as well as the formulation of taxonomies and sustainability-related disclosure standards to judge sustainability in investment and financial products.
Taking into consideration these advanced European initiatives, the JSDA has issued its Declaration in Support of SDGs and is promoting the development of sustainable finance throughout the securities industry. In addition, the JSDA has signed a memorandum of understanding with the ICMA, and under this framework for collaboration, the ICMA and JSDA jointly host the Sustainable Bond Conference every year in Tokyo to promote the dissemination of principles on sustainable finance in Japan and Asia, as well as information sharing with Europe. The introduction of knowledge and experience from Europe through these activities has greatly contributed to the establishment, development and vitalization of the sustainable finance market in Japan.
JSDA’s Outreach to Europe
In Europe, there are a number of international financial centers such as Paris, London, Frankfurt, Luxembourg and Amsterdam. In Japan, Tokyo and Osaka are aiming to enhance their functions and status as international financial centers. In order for such cities to continue to function efficiently as international financial centers in a competitive environment and aim for further development, it is essential to further improve the domestic market environment and to expand cooperation and coordination with overseas financial centers while maintaining a global perspective. Europlace in Paris, which shares this philosophy, holds annual events in the world’s major financial centers, including Tokyo, to promote mutual information sharing.
Based on the same way of thinking, the JSDA is also working to strengthen overseas public relations for Japan’s securities market and cooperation with overseas financial markets. As a core initiative, the Japan Securities Summit has been held around the world since 2008. In Europe, the event has taken place several times in London (co-hosted with the ICMA) since its first iteration (in 2008), and promotional events have also been organized in Berlin (2015) and Luxembourg (2017).
On Wednesday, March 6, 2024, the JSDA plans to hold the next Japan Securities Summit at the Mansion House in London, inviting financial market participants and experts from Japan and Europe as speakers. We hope that many stakeholders, including European institutional investors and financial institutions, will attend.
Prospects
As mentioned earlier, Europe is home to important counterparties for Japanese companies, financial institutions and investors, as well as serves as their essential place for business and investment. Financial markets are the vital infrastructure that supports business and investment – whether international or domestic. As seven years have passed after the Brexit referendum, there are concerns that deviation between the EU and UK financial regulations beyond a reasonable range could have a negative impact not only on financial transactions, but also on business and investment in general. Concerned parties in Japan, who have forged a close partnership with the EU and UK, hope that the regulation of both parties will be optimized whilst still maintaining the necessary convergence.
On the other hand, in the world at present, as movements to disturb the international order and armed conflicts become more serious, it is becoming an urgent task to address social issues including human rights, in addition to climate change and environmental problems. Financial markets and industries are expected to play a major role in addressing these global challenges through effective financing. In order to meet this expectation, as partners sharing the ideals of democracy, the JSDA and Japanese securities industry will continue to strengthen and expand cooperation and linkages with the European financial markets and industries. Specifically, we would like to cooperate with the relevant European institutions and stakeholders in the formulation of international standards for sustainability-related disclosures and assurances, which are currently being considered by various fora; the discussion of global standards regarding the securities market and investor protection at IOSCO and other bodies; and the aforementioned collaboration to promote the further development of international financial centers.
