The creation of the Japan Exchange Group (JPX) from the merger of the Tokyo Stock Exchange (TSE) and Osaka Securities Exchange (OSE) is a move in the right direction, but does not itself bring about the kind of “disruptive innovation” required to reform Japanese markets, according to Celent’s Eiichiro Yanagawa, author of a report on the impact of the new exchange.
In the report, ‘Capital Market Trends in Japan, Part 1: Birth of a New Exchange’, Yanagawa, a senior analyst at Celent in Tokyo, suggests more needs to be done to keep Japan globally competitive in a rapidly evolving trading landscape.
“The expansion of the derivatives market is the key for the next stage for JPX. In Asia, the frontrunner is Korea, while in Singapore there is a very good synergy between cash and derivatives; those models should be the targets for JPX,” Yanagawa told theTRADEews.com “Derivatives are really just a shadow of the cash business transactions, and it’s very important to create new products or asset classes to expand that side of the business.”
The moving of the cash and derivatives sides on to a single JPX platform will be very important not only for trading efficiencies, but also for reducing costs for the venue, believes Yanagawa. “Bringing together the personnel who operate the systems is almost as crucial as merging the technology, in terms of creating a smooth operating environment,” he says.
Mercantile mentality
The traditionally more mercantile mentality of Osaka, as compared to a more established and perhaps staid Tokyo, will be vital in growing both the derivatives side of the business and reforming the markets overall, according to Yanagawa.
“Osaka has always been more aggressive in its approach, and the people there are less concerned with titles or organisations, and more with trading and doing real business,” he says.
Yanagawa also believes that the merged exchange will also see an increase in opportunities for high-frequency trading and arbitrage activity, despite opposition from some quarters.
“Some of the traditional buy-side, and other participants, don’t like the high-frequency trading style, including some forms of major arbitrage, but it’s an important element of efficient markets,” says Yanagawa.
At a macroeconomic level, a reduction in corporate tax rates would help stem the flow of international players to Japan’s Asian rivals, according to Yanagawa.
“Nearly all of the global trading firms have already moved their regional headquarters from Tokyo to Hong Kong, and some to Singapore. The reason for this is simply tax, and we need the government to address this,” he suggests. “We have good technology in Tokyo and now the merged exchange and a lot of trading opportunities. But without tax reform, we will continue to lose competitiveness.”
Riding the ‘Abenomics’ wave
Japan’s capital markets have, in recent months, been enjoying their most buoyant period in years. Since the election of Prime Minister Shinzo Abe in December, there have been high hopes that his government’s policies will pull the nation out of the economic doldrums through weakening the yen and ending deflation. Christened ‘Abenomics’ by the local media, the programme has so far brought a wave of optimism on which stock indices have been riding high.
Creating an environment that will further increase participation by retail investors – who have recently returned after years of sitting on the sidelines – is crucial to the long-term strength of the capital markets, believes Yanagawa.
“This is a chance now that has to be taken, with the current rise in the markets, to improve the trading environment overall, or Tokyo will be left behind and the major players will continue shifting traders and operations to other exchanges in Asia,” says Yanagawa.
The second part of Celent’s report on Japanese capital markets, which is due to be released in approximately a month’s time, will examine issues including changes in market structure, best execution, margin trading and proprietary trading systems.