December 19, 2013 12:00 am JST

Sun sets on Japan's status as Asia's financial center

YASUO OTA, Nikkei senior staff writer

TOKYO -- Despite Prime Minister Shinzo Abe's declaration that "Japan is back," the nation's decline in the global financial markets continues unabated.

     The year 2013 may mark a historic turning point in Asia's financial race, with Japan losing its position as the region's No. 1 foreign currency exchange market to Singapore for the first time.

     In the international financial industry, New York-London-Tokyo was long used as a symbol of global coverage. But it is fast becoming a thing of the past.

     The Japanese government on Dec. 13 unveiled its strategy to revitalize the nation's financial and capital markets. The plan included extension of trading time at the Tokyo Stock Exchange and establishment of a comprehensive bourse that lists both financial products and commodities. The blueprint, however, was nothing new and failed to lay out a clear pathway to revive Japan as a leading market in the world.

     The Bank for International Settlements releases a report based on its survey of forex markets around the world once in every three years. Turnover figures in the report are a good indicator of the growth and decline of individual markets.

Singapore at the fore

According to the latest BIS report, released Dec. 8, the Japanese foreign exchange market's average daily turnover in April stood at $374 billion, under Singapore's $383 billion.

     The first time the report came out, in 1989, Japan was the undisputed leader in Asia. Its $111 billion average daily turnover was more than Singapore and Hong Kong combined. In fact, that amount was only a little behind the U.S. market's $115 billion. Tokyo looked like it was solidifying its status as a key international financial market.

     But a lot has happened since then. With competition intensifying, the makeup of the global financial market has changed dramatically.

     From 1989 to 2013, the London market, which has remained the world's biggest forex market all these years, grew roughly fifteenfold. The New York market expanded by 11 times. The explosion of derivatives trading, in addition to the continued rise in demand for foreign currency exchange, contributed to their growth.

     The period also saw a competition for the position of a global financial hub heat up in Asia. China began developing the Pudong district in Shanghai. Hong Kong built the International Financial Centre in its Central district. Singapore kicked off the large-scale development of Marina Bay.

     Attending the opening ceremony for the Marina Bay Financial Centre earlier this year, Singaporean Prime Minister Lee Hsien Loong said the new business environment will raise the status of Singapore as an international financial hub.

     The city-state has attracted financial businesses by making the most of its location near the center of Asia, as well as its advanced legal system, strict regulatory oversight and superb telecommunications infrastructure. Its forex turnover has grown sevenfold from 1989 to 2013.

     Meanwhile, Tokyo has failed to develop a major international financial market. The collapse of stock and real estate bubbles weakened Japanese banks, which had driven the growth of the forex market in earlier years.

     Failures in regulatory oversight and compliance have not helped either. In the 1990s, scandals involving loans to yakuza crime syndicates by banks and securities firms came to light. This year, it became clear the practice had not ended, with the revelation of Mizuho Bank's lending to yakuza groups.

     Furthermore, participants in the Tokyo market focused entirely on yen-related dealings, and put too little effort into developing an international market for currencies other than the yen.

     Even without this, Japan is not in an advantageous position, since it is located at the edge of Asia, making it difficult to gather information about countries on the other side of the continent, such as India. Many also point out that Japan's troubled relationships with neighboring countries prevent it from becoming a regional hub.

     Since 1989, the Japanese forex market has grown by just 3.5 times. Both Japan and Singapore have sought to shift their industrial economies, driven by manufacturing and exports, into postindustrial economies focusing on financial businesses. Japan has failed; Singapore has succeeded.

     This is also apparent in the number of foreign banks in the two countries. Despite the sharp differences in their populations, Japan has 60 foreign banks, including trust banks, while Singapore has 119.

     Forex trading in Asia is looking increasingly likely to shift further away from Tokyo to Singapore, as the Association of Southeast Asian Nations moves toward the establishment of an economic community.