The amazing success of the City of London stands in stark contrast to the unfulfilled promise of Tokyo as a financial center. The City is, without question, the financial capital of Europe and soon, perhaps, the world. It is booming, with financial services now accounting for a full 25% of Britain's gross domestic product. Tokyo remains stuck and stagnant. Twelve years ago, Prime Minister Margaret Thatcher deregulated the City with a Big Bang. Today, Tokyo is poised for its own Big Bang.

There are lessons to be learned. The most important is that in order to grow, Tokyo may have to give up ownership and allow foreign investment to thrive. Competition and an open window on the world are the best ways to bring new ideas and technologies to the fore. The City's innovative financing techniques will help European corporations raise capital more cheaply as they struggle to compete more effectively in the new environment of a single currency. The City will also help a generation of European consumers wean themselves from bankrupt state retirement systems and onto private pensions and mutual funds, thus providing new pools of capital to promote economic growth.

The City's success is based on a foundation of open regulation, low taxes, tremendous talent, and deep liquidity. Being in an opportune time zone doesn't hurt, but the tax factor may be even more important. Britain's tax system actually favors expatriates and encourages the best and the brightest to live and work in the City. Its legal system is more protective of shareholders than the Continent's and has proven to be flexible, transparent, and supportive of innovation.

Tokyo doesn't have London's history as a centuries-old financial trading center, but it has strengths of its own, including Pacific Rim geography. In addition, Japanese savers are looking for higher returns than the post office or domestic banks offer. If the Big Bang truly opens Tokyo to foreign investment and ideas, Japan may share in the kind of prosperity now sweeping Britain.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE