From the January 01, 2011 issue of Futures Magazine • Subscribe!

Japan seeks market integration

Come together

Although the Asia-Pacific region has become one of the fastest growing areas of financial interest, very little has been said about recent Japanese propositions to overhaul the country’s exchanges and attract foreign investment.

Government officials have signaled a desire to restore Japan’s position as an important regional financial center. While the Tokyo Commodity Exchange (Tocom) was once the second-largest commodities exchange after the New York Mercantile Exchange, it ranked 11 last year and was surpassed by China’s Shanghai and Dalian exchanges.

“For the first half of 2010, the [Osaka Securities Exchange] (OSE) was ranked 15 in terms of contract volume in the world; Tokyo Financial Exchange was 18. What’s happening is that even though China is closed to foreign traders, they are climbing quickly in terms of volume along with India,” says Paul Rowady, senior analyst at TABB Group.

The growth of numerous geographically close exchanges while interest in Japanese markets stagnates has prompted some in the Japanese government to discuss combining securities, currencies and commodities bourses by 2013 to boost trade and remain competitive.

A number of proponents, including Futures Industry Association (FIA) Japan Vice President Yasuo Mogi, have pointed to the “silo” structure of Japanese market regulation as the biggest detriment to growth. In a Nov. 19 public hearing on the issue he explained that existing laws, regulations and rules currently are separated into regulatory silos. Further, separate regulatory agencies and self-regulating organizations each issue their own reporting requirements based on which regulatory silo they represent. The result is a regulatory quagmire.

In FIA Japan’s November newsletter, Chairman Mitch Fulscher wrote, “The critical issue to be first addressed is the need to break down the silos created by separate laws, separate regulatory agencies and regulations issued by the separate regulators and self-regulatory agenciesÉIt is now apparent that government and the regulators are ready for this bold action.”

A move to a single regulator would solve many of these problems and greatly decrease confusion. “[A single regulator] makes sense. There is some precedent when you look at the European situation where there is a more consolidated regulatory framework in the Eurozone. It would make sense given what is happening in other parts of the world,” Rowady says.

While it historically has been difficult for Japanese markets to attract a lot of international business because of high costs and inefficiencies in market structures, a renewed desire to develop Japan as an international financial derivatives center is causing officials to re-examine their markets and regulations.

“The bottom line is access. Japan is somewhat unique in that it has been the most mature of the Asia-Pacific markets for some time, but has fallen on hard times because of its own economic and fiscal quagmire,” Rowady says.

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