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Opinion

Japan's 'idiotic' investment restrictions are blow to global status

Stopping foreign banks from buying domestic companies hurts Tokyo's reputation

Japan's credibility as a top market economy hangs in the balance. (Photo by Kaori Yuzawa)

In his sales pitch to become Japan's longest-serving prime minister, Shinzo Abe claimed that only he and his reform plans could win the attention of foreign investors. Little did we know, as Tokyo now aims to clamp down on overseas investment, it would end up being negative attention.

In September 2013, Abe even took his Japan-is-open-for-business tour to the floor of the New York Stock Exchange. Abe's pitch that day: "Three words: buy my Abenomics! Wall Street is always ahead of the curve. In light of that, now is your chance."

Not so much, six years on. Not with Abe's Finance Ministry rolling out plans to tighten reporting requirements for foreigners buying shares in certain industries. Today, overseas investors must report when they intend to buy a 10% stake in a defense, nuclear power, telecom or utility company. Soon, the threshold may be lowered to 1%.

Akira Kiyota, head of the Tokyo Stock Exchange, spoke for many when he called the idea "absolutely idiotic." As he told the Financial Times, "Japan would lose [the] trust of the rest of the world."

Protectionism does not happen in a vacuum. Donald Trump's U.S. has embraced Chinese tactics -- tariffs, state subsidies, extreme opacity -- in its effort to contain Beijing's economy. But the U.S. does not have the baggage that Japan, historically insular, carries into 2020.

Shinzo Abe gives a speech at the New York Stock Exchange in September 2013: his pitch was "buy my Abenomics."    © Getty Images

Think of the stereotypes which financiers in New York, London and Hong Kong often toss Japan's way. Asia's second-biggest economy is too bureaucratic, too protective of local interests, too resistant to foreign ownership, too afraid of failure, too rigid, too quick to circle the corporate wagons.

Well done, Finance Minister Taro Aso. With one policy proposal, Tokyo just owned many of these gripes. With this measure, Tokyo would surely lose any chance it had to re-establish itself as a global financial center.

Hopefully, Abe's team will think better of it. Kiyota, for one, says: "I doubt it will ever happen." Whether both houses of parliament will go along remains an open question. Banks and investors are already lobbying Tokyo to reconsider.

Finance Ministry officials did not mention China. The bill claims to be about strengthening monitoring of national security-related industries. But read between the lines and you see President Xi Jinping's ascendant economy: Japanese government officials make no secret of their concerns about Chinese investment.

Here, Tokyo can claim it is only following Trump's lead. The E.U. also has increased scrutiny of Chinese capital.

Yet Japan's move surprised many who were convinced Abe was committed to internationalizing capital markets.

Domestic liquidity and fundraising are sure to take hits. At the moment, Japan's bourses depend on foreign investors for around 70% of trades. Though perhaps unintended, the risks for Abe's structural reform ambitions cannot be exaggerated. What is the point of strengthening corporate investors if the whales among them cannot deal efficiently trade Japanese companies?

The TOPIX Index, Japan's broadest, already trades at a hefty discount to America's S&P 500: 13 times forward earnings compared with 20 times. The idea of Tokyo limiting access to several of Japan's biggest sectors could widen the gulf.

Regulators may think now is the time to help the home team. The Bank of Japan's negative interest rates and its cornering of the bond market made life -- and profits -- difficult for the nation's biggest financial institutions and its smallest rural lenders.

Yet Japan's credibility as a top market economy hangs in the balance. Consider the logistical uncertainties alone. Finance officials hint that exemptions might be made for -- subjectively defined -- "portfolio investors." Under the new 1% rule, foreign banks would have a difficult time gauging the true size and nature of the Japan-related trading activities of offices around the globe in real time.

That puts the market-making and block-trading functions of local banks at a huge advantage over foreign rivals. The same goes for concerns about a convoluted pre-notification process of still unspecified duration. Two days? Four days? Tokyo is not saying.

On the one hand, the lag exposes foreign entities to greater market risk and compliance costs. On the other, it makes it impossible for non-Japanese traders to pounce when investment models flag opportunities. And foreign businesses, let us face it, already feel under the Financial Services Agency's microscope in ways domestic players do not.

I am not alleging a direct cause and effect, but on Abe's watch since 2012 Bank of America Merrill Lynch, Citibank, HSBC, Royal Bank of Scotland, Societe Generale and others either exited or scaled back Japan operations. Odd, perhaps, considering Abe strengthened corporate governance and produced Japan's longest expansion since the 1980s.

Japan still has many people to convince before it can turn Tokyo into a global financial mecca -- all of which makes this latest move to curb foreign investment a real head-scratcher.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

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