The Time is Now for Japan and Islamic Finance
By: Camille Paldi
Japan is an emerging Islamic finance powerhouse and East Asian hub for the billion dollar Islamic finance industry. Naoki Nishida, President and CEO of Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad explains the feeling of Japan towards Islamic finance and Asia and states that, “We consider Asia as a potential market, because of the strong connection we feel towards Asia and in terms of Islamic banking and finance, it is as a good way to expand our presence and diversify product offerings” Islamic Banker, Issue 11, 2014.
Japan has traditionally been known as an economic powerhouse and East Asian Tiger and therefore this Islamic finance role is fitting with the image of Japan as an economic and financial giant. In addition, the sword exterior and chrysanthemum interior of Japan (The Sword and the Chrysanthemum) is quite conducive to the soft interior of Islamic finance, which is being played out in an extremely competitive global marketplace. The competition for investments from cash-rich Gulf and Asian investors is fierce. However, with Japan’s discipline and hard work ethic, Japan can become a major player in the Islamic finance industry. In addition to the Japanese government, the Japanese keiretsu, similar to the South Korean Chaebol, are interested in issuing sukuk to raise capital for Japanese businesses and to increase their competitiveness in domestic and global financial markets. Islamic finance is definitely on the horizon of the Land of the Rising Sun.
Japan’s interest in Islamic finance began in 2005 when Japanese financial institutions cooperated with Islamic financial institutions in Malaysia and the UAE as a means of indirect expansion and to attract investment from Islamic investors into Japan. Naoki Nishida, President and CEO of Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad says that “Japanese investors find Malaysia as a stable country in terms of its currency, economy, infrastructure and politics compared to neighboring countries. Due to the decreasing trend of the domestic market in Japan, we believe that there is a high potential and many opportunities for Japanese investors to invest in Malaysia, and at the same time tapping into the Islamic finance industry” Islamic Banker, Issue 11, 2014.
The first sukuk was issued by Aeon Credit Services in Malaysia in 2007. Next, in 2010, Nomura Investment Company issued sukuk in US$. In 2012, Toyota Motor Corp. sold USD$88 Million of sukuk in two offers via its unit Toyota Capital Malaysia Sdn. due for maturity in May 2015. In 2014, Bank of Tokyo-Mitsubishi UFJ (Malaysia) Bhd, a member of the financial group that is part of Japan’s biggest lender by market value, set up a $500 million multi-currency sukuk program and is also considering the world’s first yen denominated sukuk.
Naoki Nishida, President and CEO of Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad describes the obstacles to Islamic finance in Japan while affirming that Islamic finance is in the pipeline. He says, “Currently, only Japanese banks’ subsidiaries are allowed to provide Islamic banking and finance services. And BTMU Malaysia is the only subsidiary representing the BTMU group that provides Islamic banking services; also the customers of Islamic banking are mainly non-Japanese. Having said that, positive movement is noted in Islamic financing activities in Japan. Back in 2012, the Japanese FSA introduced a new tax framework for J-Sukuk to promote sukuk issuance in the Japanese capital market. There is a possibility that the Japanese banking regulator will allow overseas branches of Japanese banks to provide Islamic banking services in the near future. Although I would say that the impact is still limited, the gradual development of Islamic Banking and finance activities can be observed in Japan. It is in the pipeline” Islamic Banker, Issue 11, 2014.
Naoki Nishida, President and CEO of Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad elaborates, “We expanded our business to clients not only in Malaysia, but also in countries in South East Asia and the Middle East. The issuance of sukuk was placed as an objective to secure alternative funding sources for BTMU Malaysia in managing the liquidity to match the increasing and growing exposures to the global Islamic banking business. The reason why we issued our first sukuk in USD and JPY was to diversify our sources of funding by attracting different investors across currencies. For JPY, we want to create more awareness and educate Japanese issuers and investors to consider sukuk as an alternative to their current financing and investment instruments. So, hopefully our entry into the market could trigger more issuance of sukuk by Japanese companies and promote Japanese investors to look at investing in sukuk. Last but not the least, it is also a part of BTMU Malaysia’s effort to support the bilateral financial cooperation between Japan and Malaysia” Islamic Banker, Issue 11, 2014.
In 2007, Japan amended FIEL, which is the Financial Instrument and Exchange Law and in 2008, the Banking and Insurance Business Law was amended enabling subsidiaries of Islamic IFI’s and banks to engage in Islamic financial transactions in Japan including ijarah and murabahah sukuk. In 2009, the rules were changed so that interest income would be tax free when an overseas sovereign fund invested in Japanese bonds or deposits. In addition, in 2011, the Asset Securitization Act was amended so that the ijarah sukuk would be considered as a special bond type beneficial interest issued by SPT or the Specified Purpose Trust. Before this reform, when a Japanese company issued sukuk to foreign investors, the distribution of profits of sukuk were subject to a 15% withholding tax while conventional bonds remained at 0% tax.
Now, tax exemption is given to foreign investors who purchase bond type beneficial interests, which are quasi-bond beneficial interests of a specified purpose trust (SPT). The SPT was established under the Asset Securitization Law, which is the basis for the issuance of sukuk in Japan.
Next in 2011, Japan tailored the tax system to the issuance of special bond type beneficial interest. In 2013, the Sunset Provision was enacted, creating a tax exemption for the distribution amounts of sukuk received by foreign investors and exempting registration tax on the repurchase of the real estate for the same sukuk, thereafter expired on that same day. In sum, Japan allowed the income of foreign investors to be tax exempt and initiated tax reform for the special bond type beneficiary interest; issuance, including exemption of income; withholding tax on profit distributions and gains on redemption, property registration, and acquisition tax. Japan has taken the necessary legislative and regulatory steps to make the East Asian Tiger Islamic finance and sukuk ready.
Japan is a member of the IFSB Islamic finance regulatory body and has agreements with the MIFC or Malaysia International Islamic Financial Centre in Malaysia and through JICA or the Japan International Cooperation Agency with the ICD or Islamic Corporation for the Development of the Private Sector to receive technical assistance in the issuance of sukuk.