The head of a US venture fund calls to say he will be in Japan next month for the first time in years. He needs to get to grips with the spot, and fast. As an American investor, he can’t look at China now and may never again. Tokyo, he believes, is on track to become the “second city of the Western world”.
Both he and others who have made similar predictions in recent weeks have stumbled upon a tantalizing idea. It grows more so with each new bitterness of semiconductor diplomacy between the US and China, and with decisions – such as that of US venture capital fund Sequoia Capital to spin off its Chinese operations – that seem to mark a clear break with the world that we thought we knew. Tokyo, meanwhile, seems unconvinced.
Still, the argument gnaws. The geopolitical and financial assets once concentrated in London and West Berlin respectively during the Cold War of the last century will, of course, converge in the explicitly US-friendly Tokyo in the ‘second city’ thesis as we search for a new. Tokyo’s quest to become a global financial center, meanwhile, will succeed by default as Japan’s “not China” credentials provide firmness in all this flow.
In this theory, it doesn’t matter if you call what happens “decoupling,” or cut corners and call it “de-risking.” Business will be reformed, finance will follow and in historical realignment, following the logic of greed, there is always a historical opportunity.
This kind of conversation plays like sweet music to the promoters of Tokyo’s ambitions as a global financial center: an oddly skeletal and necessarily patient lobby whose fervor has traditionally risen in inverse proportion to serious signals of success. Crucially, this lobby has never been anywhere near what Japan wants or how it sees itself. Many asset owners and managers come to Tokyo; but when the assets tend to not go along, Japan as a whole simply shrugs.
For Tokyo’s superintendents, this may be the long-awaited breakthrough: their case could be won by one or two unexpected twists in geopolitics.
There are three real reasons for optimism. The first revolves around the idea that the global realignment of the chip industry, paralleling the broader “risk reduction” strategies of both Japanese and foreign companies, could lure companies and even regional hubs from China (and Hong Kong) to Tokyo. May’s revelation that South Korean Samsung was seeking a $200 million research and development center in Japan offered a striking optic for the sense that old rules are rapidly crumbling.
The second is that tensions between the US and China are already changing the dynamics of M&A markets. The more proactive Japanese companies are looking for growth outside the shrinking domestic market and will take over to secure it. They have bounced back from the pandemic, M&A advisers say, as some of the most active in the world, and are in markets – especially the US – where they are encouraged by the absence of competition from Chinese buyers.
At the same time, geopolitics helps to stimulate more M&A activities in Japan itself. Companies are under greater pressure from shareholders to sell non-core assets, and in many cases are able to do so thanks to the many private equity firms for whom Japan is a plum market with now rare availability of cheap financing. These companies are armed with large reserves of financial dry powder – funds that have been widely raised for acquisitions in Asia and are now unlikely to be deployed in China.
The third is Sequoia’s decision to split itself up and the symbolic unbundling of one of the most successful US-China investment alliances. There are certainly company-specific reasons why such a move was possible – even desirable. But the conclusion Tokyo has already reached is that Sequoia will be just one of many taking similar routes. Financial firms and investors can be the first. Multinational companies privatizing operations in China will be next: at least some of them will choose Tokyo as their non-Chinese Asia hub.
The problem is that these forces remain, at best, theoretical guarantees of improved financial hub status for Tokyo. On the fringe, the city could spend the next few years gently expanding its financial services in line with demand, even becoming something of a powerhouse for advisory work on US-Japan deals.
But to become the great Asian financial center of a new cold war, Tokyo must actually seek that status. Despite everything that’s going on, it won’t happen by accident.
leo.lewis@ft.com
