Wall Street East Should Be on Less Shaky Ground: William Pesek

There’s something bizarre about the planned combination of stock exchanges in Tokyo and Osaka.

In Frankfurt, London, New York, Singapore and Sydney the talk is of international linkages. And Japan is merging with, well, itself. Nice idea, creating a Wall Street East. It’s just a decade or two too late. Yet there’s a way to give this marriage some larger relevance: Put it in Osaka, not Tokyo.

This sounds like a non-starter. Tokyo, it’s often said, is Japan and Japan is Tokyo. There’s a growing realization, though, that the March 11 earthquake in northeastern Japan wasn’t the big one for which Tokyo has braced, as it was along a different fault line. It’s raised fresh questions about the wisdom of concentrating so many corporate headquarters in one city.

The sanctity of Tokyo’s place in Japan has become a sensitive issue of late. Atsushi Saito, president of Tokyo Stock Exchange Group Inc., labeled foreign investors “selfish” in calling for his market to close following the quake. “The foreign firms have called for a shutdown because they wanted to run away,” Saito told the Wall Street Journal.

Normally, we foreigners in Japan are called “gaijin.” These days, we’re jokingly being called “fly-jin” or “bye-jin” for how quickly many of us zoomed out of Tokyo. Many of those so-called runners dashed to Osaka to get farther away from the Fukushima nuclear reactors and leaking radiation.

Exodus from Tokyo

The sudden influx of Tokyoites to Japan’s second city has no doubt been a boon to the local economy, where demand for hotel rooms and temporary office space is off the charts. The Osaka Securities Exchange Co. must be loving it. Yet the exodus is worth exploring. It should become official policy of Prime Minister Naoto Kan to diversify Japan’s economic infrastructure.

Kan is getting an earful on this from Takayoshi Igarashi, a professor at Hosei University in Tokyo. Just two days before the quake, Kan appointed Igarashi as a Cabinet adviser to brainstorm on reversing Japan’s population decline and rural decay. After the quake, Igarashi wasted no time in counseling Kan to begin a “nationwide dispersal” process.

“We have no idea when the big one’s going to hit Tokyo, but when it does, it’s going to annihilate the entire country because everything is here,” Igarashi told Bloomberg last week.

The idea is that the U.S. has Chicago, Detroit, Houston, Los Angeles, New York, Philadelphia, Seattle, Washington D.C. and many other vital cities to ensure economic continuity if one were knocked out by a disaster. Hence the rationale to rebalance Japan away from Tokyo a bit.

Tax Hikes

It won’t be popular, and Tokyo Governor Shintaro Ishihara won’t be amused. Nor will many Japanese citizens. Igarashi favors tax increases over debt sales to finance any redistribution of corporate Japan or government jobs.

More likely, Japan’s rebuilding will require both increased taxes and bond issuance. Tax incentives also would come into play to encourage, say, Mizuho Financial Group Inc. or Sony Corp. to move big chunks of staff to Fukuoka, Kyoto, Nagoya, Osaka or Sapporo.

Japan should consider doing just that. The prominence of greater Tokyo, a region that also encompasses three neighboring prefectures, has grown steadily in recent decades. In 1955, it generated 24 percent of the nation’s wealth. By 2007, the region’s gross domestic product made up a third of Japan’s economy, was larger than India’s entire GDP and three times the size of Sweden’s.

Tokyo Address

Tokyo-ization has accelerated since then. Challenges coming from globalization and China’s rise put a bigger premium than ever on a Tokyo address. Japan’s government likes to pick its champions and the politicians who decide are in Nagatacho, Tokyo’s answer to Capitol Hill. A cultural preference for face-to-face meetings -- and late night drinking -- only added to Tokyo’s allure in a tough global environment.

The earthquake and nuclear crisis demand a major rethink. That will require considerable political will on Kan’s part.

“In Japan, I think that it would be desirable to spread the wealth around, so to speak, but I do not see it as an inevitable development,” says Marcus Noland, deputy director of the Peterson Institute for International Economics in Washington, who has written extensively on the issue. “The economics of agglomeration are complex.”

It’s a balancing act, and a careful one at that. Political systems with high degrees of centralization tend to see business, finance and government gravitating toward a single center. Some governments have introduced regional-development policies to offset this tendency. Japan could do with more separation between government and business, and geography might help.

Tokyo will always be the world-class Mecca of all things cosmopolitan that it is. It will remain a magnet for Japan’s most powerful and ambitious personalities and international talent. Just as it’s bad for investors to put all their money in one place, though, it’s risky for a nation to do so on a much bigger scale.

As Japan rebuilds from the quake, it should spread economic power around. When the big one does hit Tokyo, this nation of 127 million people and global investors will be glad it did.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

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