[Awakening Japan] ⑤ 1,400 Global Investors Gather in Tokyo... "Expectations for Structural Transformation"

Rising Alternative Sites Amid Hong Kong Contraction
Attracting Overseas Investors with 'Sustainable Investment' Motto
Commercial Real Estate Stable Unlike US and Europe

"Amid the situation where overseas financial institutions are downsizing in Hong Kong, Asia's international financial hub due to issues with China, Tokyo is emerging as a key alternative location. Japan has long been preparing a financial hub to replace Hong Kong, aiming to establish a 'sustainable financial hub.'"

On October 3rd, over 1,400 institutional investors from 52 countries and 700 institutions gathered in Tokyo, Japan. Global institutional investors attending the annual conference of the UN Principles for Responsible Investment (PRI in Person 2023), a network promoting ESG (Environmental, Social, and Governance) investment, reaffirmed their commitment to improving governance structures after hearing about the Japanese government's active stock market stimulus measures. In his keynote speech, Prime Minister Kishida stated, "We will ensure that Japan's large personal savings assets lead to investment in the capital markets," and attracted attention by announcing, "We are preparing an investment promotion regulatory package to encourage companies to create social value and promote sustainable investment."

What makes this event special is that it attracted global institutional investors' attention as the Japanese stock market recorded the world's best rally this year, while the Japanese government implemented various systems to attract overseas investors. Amid increasing investments in Japan due to US-China conflicts, the need to reorganize supply chains highlighted by the Ukraine invasion, and the alliance between the US and Japan, Japan is steadily implementing measures to revitalize its capital markets, gaining momentum in building a 'sustainable financial ecosystem.'

Choi Jin-ah, ESG analyst at Mirae Asset Securities who attended the event, said, "The Japanese government has been promoting the catchphrase 'from savings to investment,' and household savings assets are enormous. If these are channeled into investments, overseas asset managers will create related products, leading to a virtuous cycle throughout the capital market. The Japanese government is appealing this and appears to be concretizing its vision to make Tokyo a hub for asset management."

In particular, 'governance issues' are becoming a new investment decision factor in the Japanese market among overseas investors concerning Japan's governance reforms. The demand in March for measures against companies with a price-to-book ratio (PBR) below 1 by the Japan Exchange Group (JPX) is regarded as the 'first attempt' to implement sustainable finance in Japan. Analyst Choi explained, "Many Japanese companies have inefficient assets. Since the government cannot intervene directly, it is fostering a free atmosphere so activist funds can enter low-PBR companies and work to enhance corporate value." Researcher Eun Kyung-wan of Shinhan Investment Corp. said, "Since the beginning of the year, about 600 companies have been targets of global activist campaigns, with Japan accounting for 82 companies, about 14%. This ranks Japan second globally after the US, which traditionally records the most activism, explaining why Japan is receiving focused attention in Asian activism."

Institutional changes to increase overseas investors' investments are also ongoing. In April last year, the Tokyo Stock Exchange reorganized its existing listing markets into 'Prime' for large companies, 'Standard' for mid-sized companies, and 'Growth' for emerging companies' fundraising purposes. The establishment of the Prime market, composed of large companies targeted by overseas and large institutional investors, and the significant enhancement of English disclosures are interpreted as efforts to improve accessibility for overseas investors and recover global competitiveness, which has fallen from first place in the 1980s to fifth today. The Tokyo Exchange urged listed companies to consider not only profits but also stock prices and, in July, released a new stock index called 'JPX Prime 150' as part of corporate governance reform activities.

Lee Ji-pyeong, Special Professor at the Convergence Japan Studies Department, Hankuk University of Foreign Studies, analyzed, "The recovery of Japanese stock prices this year is partly due to the relative stability of the Japanese financial market amid instability in US and European financial markets, US-China friction, and China's economic slowdown. Additionally, expectations for structural transformation have expanded thanks to the Kishida Cabinet's new capitalism policies, digital transformation support measures, and green innovation investment policies."

Overseas Investors Eye Japanese Commercial Real Estate

The long-stagnant Japanese real estate market is also gaining momentum by attracting overseas investors. This is due to the yen depreciation effect lowering asset prices and ultra-low interest rate policies reducing financing costs, alongside economic recovery.

According to a recent Financial Times report, real estate service company JLL released a report stating that global investment in Japanese real estate reached 513 billion yen in the first half of 2023 alone, 1.4 times the 362.1 billion yen recorded in the same period last year. The report indicates a growing focus of global institutional investors, sovereign wealth funds, private equity funds, and corporations on Japan.

Especially, the transaction volume of commercial real estate is sharply increasing. According to real estate consulting firm Knight Frank, Japan's commercial real estate (CRE) transaction volume reached $4.76 billion in the first half of this year, marking the highest half-year figure in 20 years. This is more than double the amount from the same period a year ago. Unlike the US and Europe, Japan's commercial real estate market remains stable, supported by expectations of continued monetary easing by the Bank of Japan (BOJ).

According to the Korea Institute of Finance, Japanese commercial real estate prices rose 2.6% year-on-year in the first quarter of this year. The office vacancy rate in the five central wards of Tokyo (Chiyoda, Chuo, Minato, Shinjuku, Shibuya) rose to 6.5% as of June, showing an upward trend. Lee Byung-kwan, Deputy Director of the Finance Research Institute, said, "Hybrid work combining office attendance and telecommuting is settling in Japan, but the tendency to attend offices is stronger than in the US, so the commercial real estate market is less likely to shrink sharply. Japan's real estate market is expected to continue a moderate upward trend as monetary easing policies persist and global investment inflows expand."

Henry Chin, Head of Asia-Pacific Research at commercial real estate consulting firm CBRE, recently told CNBC, "While the global economy is in a tightening cycle, Japan benefits from its ultra-low interest rate policy," diagnosing, "The 70% loan-to-value (LTV) ratio and mortgage interest rates in the 1% range further fuel the boom in the Japanese real estate market."

Professor Lee Chang-min of the Convergence Japan Studies Department at Hankuk University of Foreign Studies said, "This is not yet a nationwide phenomenon in Japan, but recently, global investment has particularly increased in central Tokyo. The positive sentiment about Japan's economic recovery, including the stock market, seems to be spreading to real estate." He explained that the real estate market, which had been undervalued after a long-term slump, is reviving. According to Professor Lee, in residential real estate, newly built condominiums in major cities including Tokyo are noticeably rising. He added, "There have been several instances of rising real estate prices in the Tokyo area in the past, but these did not spread throughout Japan. However, this year, the average price of newly built apartments in Tokyo's 23 wards exceeded 100 million yen in the first half, showing an unusual rate of increase, suggesting the upward trend is likely to continue for some time."