The sword exterior and chrysanthemum interior of Japan is quite conducive to the soft interior of Islamic finance
Camille Paldi
March 9, 2015: 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. He states, “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 a good way to expand our presence and diversify product offerings” (Islamic Banker, Issue 11, 2014).
Noripah Kamso, author of Investing in Islamic Funds, explains that the Islamic asset management industry, which is parallel to the Islamic finance industry, has grown immensely in many countries, including Malaysia, Brunei, Singapore, Japan, South Korea, China and Indonesia. As of October 2012, there were around 750 funds with assets under management totaling $65 billion. About 55% are dominated by Malaysia and Saudi Arabia (Noripah Kamso, Investing in Islamic Funds, p. 29).
Noripah says, “In the Asia-Pacific ex-Japan region, the industry is burgeoning in a dynamic, prohibited manner, with growing awareness and investor acceptance around the world. This is also the region with the greatest number of shari’ah compliant investment opportunities” (Noripah Kamso, Investing in Islamic Funds, p. 27).
Japan has traditionally been known as an economic powerhouse and an East Asian Tiger. Therefore, this Islamic finance role is fitting with its image as a financial giant. In addition, the sword exterior and chrysanthemum interior of Japan 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 its discipline and hard work ethic, Japan can become a major player in the Islamic finance industry. In addition to the government, the Japanese keiretsu, similar to the South Korean chaebol, are interested in issuing sukuk to raise capital for Japanese businesses and 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 its 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. In this regard, it has displayed a keen interest in competing in the international sukuk market, which, according to Ernst and Young, is expected to grow to $900 billion in 2017.
The first sukuk in Malaysia was issued by Aeon Credit Services in 2007. Next, in 2010, Nomura Investment Company issued sukuk in US dollars. In 2012, Toyota Motor Corp. sold $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.
Japan amended the Financial Instrument and Exchange Law in 2007 and the Banking and Insurance Business Law in 2008, enabling subsidiaries of Islamic IFIs 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 Specified Purpose Trust (SPT). 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 SPT.
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 ready for Islamic finance and sukuk. It is a member of the Islamic Financial Services Board (IFSB) and has agreements with the Malaysia International Islamic Financial Centre and, through Japan International Cooperation Agency, with the Islamic Corporation for the Development of the Private Sector to receive technical assistance in the issuance of sukuk.
“Whilst Japan itself has ample liquidity, its involvement in Islamic finance is to show the world that the Japanese remain relevant and innovative and are able to grant value to investors in the latest investment trend” (Noripah Kamso, Investing in Islamic Funds, p. 15).
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