Hasn't the time come to settle the long-standing issue impacting Japan's financial and capital markets?
Japan Exchange Group, Inc. (JPX), which operates the Tokyo Stock Exchange and other services, and Tokyo Commodity Exchange, Inc. (TOCOM), which deals in commodity futures, are proceeding with discussions over the integration of their operations.
If the plan is realized, it will create a "comprehensive exchange," on which it will be possible to handle trading of not only financial instruments such as stocks but also commodity futures such as precious metals and cereals all in one location.
In order to attract funds from around the world into Japan's markets and to invigorate the economy, its realization should be expedited.
In the world's major markets, comprehensive exchanges on which various listed commodities can be traded in one place are the mainstream.
JPX, Japan's largest operator of exchanges, lags far behind major markets in Europe, the United States and other Asian countries in terms of size and function.
Under the current system, margin required for transactions must be deposited with both JPX and TOCOM. Due to the inconvenience, Japan's markets tend to deter institutional investors across the world. It is essential for Japan's markets to become more convenient to use through the establishment of a comprehensive exchange system.
Invigorate markets
The government's Council for Promotion of Regulatory Reform has described the realization of a comprehensive exchange as a matter of urgency. Behind the move is a slump in transactions of domestic commodity derivatives, which are mainly handled by TOCOM.
The worldwide commodity derivative market size increased about eightfold from 2004 to 2017, while the Japanese commodity derivative market shrank to a fifth of its size.
TOCOM incurred a third consecutive year of net loss in the fiscal year that ended March this year.
If commodities markets keep declining, there is a possibility that the development of fair market prices and the power to hedge risks of commodity trading will be impaired.
Establishing a substantial commodities market commensurate with the scale of Japan's economy and financial and capital markets is required.
If TOCOM joins JPX, the number of trading participants will increase and vitalization of markets could be expected.
One of the reasons why a comprehensive exchange has not been established in the more than a decade since the government proposed the idea has been attributed to the toxic bureaucratic sectionalism in ministries and agencies.
It is imperative for the integration to be realized through close coordination and discussion among the three governmental bodies involved -- the Financial Services Agency, which supervises JPX, and the Economy, Trade and Industry Ministry and the Agriculture, Forestry and Fisheries Ministry, which jointly supervise TOCOM.
If a comprehensive exchange is created, it is thought that its regulation and supervision will be placed under the sole control of the FSA.
To attract many participants, it is necessary to strive for careful supervision for market efficiency and convenience.
JPX and TOCOM must candidly and straightforwardly discuss possible advantages and disadvantages of their integration. It is hoped that they find a way to integrate that will be mutually beneficial.
(From The Yomiuri Shimbun, Dec. 25, 2018)
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