Fintech & Tokyo: Tokyo Government’s drive to create a FinTech Hub

ISI Dentsu of America
Sarara Maeda

There is a FinTech revolution brewing in Tokyo. The Tokyo Government’s April 13th, 2016 presentation at the Japan Society in New York City highlighted their strategy to “Make Tokyo the World’s most Business Friendly City in the World”. Perhaps more ambitiously, Tokyo aims to become Asia’s next top Financial Center surpassing Singapore. One of the pillars in this strategy is to drive a FinTech revolution from the heart of Japan’s Financial center of Tokyo. In order to understand the reasoning behind the Government’s ambitious goal, it is necessary to first understand Tokyo’s financial and demographic context. From there, a broader review of strategies and initiatives will outline the concrete steps the Government has taken so far and where they are headed in the near future.


A: Demographics

Whether it is a blessing or a curse, Japan is an Island nation. This notion has been woven into every aspect of Japanese life including its longstanding, and notably hermetic, immigration policy. However, this year Japan was hit with the news that population has declined by 1 million people since the last census in 2010 and the birth rate has lagged at 1.4 children per woman. By 2060, more than 40% of the citizens will be above 65. In confronting consequences such as these, Japan’s political discourse is beginning to drop many of the injunctions it has traditionally placed on the topic of immigration and recognize the necessity of becoming a nation whose doors are open to the outside.

B: National Economy

On the macroeconomic front, the Japanese economy has been immobilized in a deflationary spiral for the past 20 years despite the Bank of Japan’s countless attempts at monetary easing policies. This January, in an attempt to stimulate inflation, counteract the effects of falling oil prices and China’s economic slowdown, the Bank of Japan announced it would cut its benchmark interest rate below zero. In half a year since rolling out, this negative interest rate policy has yielded few of its desired outcomes. This has instilled a general sense of urgency for Japanese banks to diversify investments and boost returns by reducing exposure to government bonds. Tokyo Metropolitan Government has begun to take proactive steps toward looking outward to attract Foreign Direct Investment (FDI) and foreign companies, including start-ups, to invest and establish themselves in Tokyo.

C: 2020 Tokyo Olympics

This still leaves the question “why Fintech”? It is a question that can be approached from various angles on a national level. Yet, for the Government of Tokyo, their big push comes from the Summer Olympic Games which they will host in 2020. Tens of thousands of visitors, and the world media’s focus, will converge on Tokyo. With their reputation as a technology leader to uphold, Tokyo needs to ensure that payment systems provide a frictionless experience for their foreign visitors. In a country where there are 75% fewer non-cash transactions than their American counterparts, Japan is a paradoxical cash dominated developed country.(1) (Figure 1) Given the extreme low-crime environment of Japan, cash still accounts for a large percentage of purchases, including high value transactions. (Figure 2) This condition, where technological systems have evolved differently in Japan when compared to the rest of the world, is known as a Galapagos Syndrome. As global payment systems become increasingly unified, The Tokyo Government has realized that the financial impacts of remaining mired within the Galapagos Syndrome will only become significantly more acute.

Figure 1: Annual Non-Cash Transaction per Inhabitant, Japan vs Japan (2008-2012)

Figure 1
Source: Cap Gemini/RBS World Payments Report

Figure 2: Payment Instrument Preference for Ordinary Expenditures by Spend Level, 2012 (in US$)

Figure 2
Source: Japan Central Council for Financial Services Information (2012), Aite


A: Removing Hurdles to Entry:

In the past, Japan has been notorious for placing high barriers to entry on non-Japanese businesses seeking to set-up in the country. To overcome this hurdle, Tokyo Government has established a “Tokyo One stop Business Establishment Center” (TOSBEC ) where foreign businesses may complete the legal business registration process and obtain business related consultation in one location. In Tokyo Area National Strategic Special Zone and Special Zone for Asian Headquarters (both including the Financial Center in Otemachi and life sciences business hub of Nihonbashi), foreign startup resources are able to obtain a special “business manager” residence status with a relaxed requirement and expedited transfer of foreign professionals to Japan. Recently, start-ups designated as being in the National Strategic Special Zones have also been given special tax incentives and depreciation deduction.(2)As a longer term goal, Tokyo is striving towards total English ubiquity like in Singapore, through an emphasis in English education from early childhood and multilingual signage and assistance across the city.

Figure 3: Structure of Tokyo One-Stop Business Establishment Center


B: Supporting Innovation

There are reasons behind Japan’s world top status as the greatest patent holder. Japan, especially in Tokyo, has a vast amount of intellectual accumulation to fuel innovation. It has the highest research funding by percentage of GDP within the G8 with by far the greatest number of researchers per 10,000 people. This along with the fact that Japan has been at the forefront of mobile technology were some of the reasons to compel Tim Cooke from Apple to make the decision to set-up it’s only non-US based R&D center in the Greater Tokyo Area of Yokohama in 2015.

Figure 4: Research Funding by Country and Percentage of GDP (G8 Comparison)

Source: “Survey Result on Science and Technology Research 2015” by Ministry of Internal Affairs and Communication, Japan.

C: Support for FinTech innovation

Tokyo is one of the world’s leading cities in Finance and Technology. Tokyo stock exchange is the second largest in the world by market capitalization and fourth largest by share turnover. However, the regulatory landscape in Japan has impeded FinTech from taking root earlier in the decade. For example, there are banking regulations that restrict financial institutions from taking large stakes in FinTech star-ups. The law currently restricts banks from having units operating in areas that are not directly linked to financial services and the Grey status of FinTech as a hybrid IT and financial services has caused a regulatory conundrum. There are also restrictions on the range of financial products that can be offered by brokerages with a huge barrier placed between them and the banks. The government and banks are feeling pressured that they are falling behind the US and UK in a sweeping FinTech revolution. In 2016, the stage has been set for drastic changes in Japan. In April of 2016, the Financial Services Agency (FSA) established a “Panel of Experts on FinTech Start-ups” to set up a framework in which experts discuss measures to create a Fintech ecosystem and consider impacts on financial services. The panel, consisting of representatives from MIT media lab, FinTech Start-up board members, academic institutions, and FinTech venture capital companies, are recommending legislative changes and are already making headway. Tokyo Government and FSA have been collaborating closely together and actively holding FinTech symposia to find ways for Tokyo to get more closely aligned with the wider global financial system, and shake off of the Galapagos Syndrome.

The 2020 Tokyo Olympics is considered the most promising opportunity to spark Japan’s economic revival. After much of the financial industry’s best talent fled Tokyo following two decades of deflation, the most sustainable way to make Tokyo more competitive as a Global financial center is through innovation and openness. Today, at a moment when Japan remains saddled with a reputation for adopting Isolationist Policies, the indicators for FinTech may seem gloomy. Yet the government is steadily laying the groundwork for a dramatic transformation, and is poised for a revival. Now is the time for the FinTech sector outside of Japan to take full advantage of the changing tides.

(1) Impact Note by Thad Peterson, “Japan: A Payments Paradox report”, Aite Group, July 2015.
(2) Tokyo Metropolitan Government, “Advantages of the Special Economic Zones”, 2016.