When Fidelity announced last May that it is moving its Japanese equities trading desk, which manages U.S.$47 billion of Japanese assets, from Tokyo to Hong Kong, it created a stir among Japanese economic policymakers.
It may have been mere consolidation, since the U.S.-based asset management giant was already running its trades in 10 regional markets from the Chinese territory. However, it was the latest of a series of slights to Tokyo from the global financial community, undermining the promise made by Japan’s current Prime Minister Shinzo Abe when he assumed office last fall to turn Tokyo into a global financial hub.
The Tokyo Stock Exchange has been punching well below its financial weight for decades. During the previous rash of global financial market consolidation in the mid-1990s, the TSE championed a plan to bring together nine stock markets in Europe, North and South America and the Asia-Pacific region into a single Global Equity Market. GEM was supposed to carry round-the-clock trading, creating, like the British Empire of old, “a stock market over which the sun never sets.”
Curiously, the idea foundered in part because the Tokyo bourse used to shut down for a lunch break in the middle of the trading day.
A More Competitive EnvironmentAt the time, many other stock markets around the world had a pretty relaxed attitude as well. Not any more. Stock exchanges used to be mutually owned by their members, clubs of companies who owned seats on them and distributed their profits, if any, to members at the end of the year.
Now, not only have most bourses de-mutualized but they have become publicly traded companies, listed on their own markets. Aggressive ones, too. Major cross-border deals have already been consummated, such as the purchase of the London-based Euronext by the New York Stock Exchange. Other deals are in the works. Nasdaq, for example, having been rebuffed in its bid for the London Stock Exchange, is actively looking for a major international partner. It may even launch a hostile bid.
In this new flurry of activity, Tokyo has been conspicuous by its silence. The Japanese exchange has been working on some alliances, including one with the NYSE. However, the TSE is yet to go public — a step that is currently scheduled for 2009. Until then, it will be difficult for it to do anything more than set up a few lame joint ventures.
To be sure, Tokyo is still a whale of a stock market. Its market capitalization at the end of 2006 was the world’s second largest after the NYSE, at over $4 trillion. Yet, in relative terms, its weight has decreased substantially. Since the 1980s, when its market cap accounted for around 35 percent of the world’s total, it has declined to less than 10 percent. True, the deflation of the Japanese stock price bubble in the early 1990s and the depreciation of the yen reduced its market cap substantially, but the value of shares traded on the exchange has not kept pace with increases posted by other bourses, notably regional rivals Singapore and Hong Kong, not to mention London.
Regulatory RigmaroleProblems dogging Tokyo are manifold. They include a hidebound regulatory environment, shortfalls in financial innovation, a lack of sophisticated derivative products, a bond market dominated by government issues and a limited availability of disclosure information in English. Technology systems are not capable of handling information-age trading surges, which have led to several embarrassing shutdowns, early closings and other problems.
Because the TSE has regulatory functions, listing can take as much as a year, three times as long as in London.
The headache of obtaining and maintaining a TSE listing has led to a steady decline in the number of foreign companies traded in Tokyo. The total has shrunk by over 100, from 127 in 1999 to just 26 listed currently. Such blue chip names as Apple, Proctor & Gamble and Commerzbank de-listed back in 2004, citing low trading volumes.
Only a couple of companies whose business relates to mainland China are listed in Tokyo — compared to a slew of Red Chips actively traded in Hong Kong, London and New York. One of them, Xinhua Finance, has been mired in a series of scandals. Beijing-based Asia Media became the first bona fide mainland company to list in Japan in April, but it might prove an exception that confirms the rule.
Isolation goes both ways. A dispute with Brussels over accounting standards — with the European Union pushing Japanese companies to adopt International Financial Reporting Standards — threatened to shut Japanese companies out of European capital markets earlier this year. The number of Japanese listings in E.U. stock markets has fallen from 80 in 2002 to fewer than 30 now. NEC, Hitachi, Mitsubishi UFJ and Sony have de-listed recently from several European bourses.
Not So BleakBut don’t write Tokyo off just yet.
Japanese investors remain key suppliers of capital to world capital markets. Japanese households are sitting on some $12 trillion in financial assets — nearly the equivalent of the annual GDP of the United States. Domestic interest rates have been low, and much of that money has been looking for investment opportunities in higher yielding financial instruments and in stocks that offer true growth potential.
With its rapidly aging population and steady relocation of industrial production to other parts of Asia, notably China, Japan desperately needs to develop its financial services industry. It is the only way for the country’s economy to provide higher returns on retirement savings while also replacing disappearing manufacturing jobs.
Moreover, some of the world’s leading companies in the consumer electronics, automotive and other industries are still listed in Japan, making Tokyo an indispensable market for international investors, institutional as well as private.
The TSE has a new chief executive, Atsushi Saito, who once headed the state-run agency in charge of rehabilitating some of Japan’s sickest companies. Under his leadership, the exchange has ambitious plans to bring the number of foreign listings back to 125 within five years. It plans to open an investment promotion agency in Beijing and to introduce Japanese Depositary Receipts, emulating American Depositary Receipts traded on Wall Street and Global Depositary Receipts traded in London.
But the exchange will have its work cut out for it, since the Japanese political establishment is notoriously reluctant to make difficult decisions and adopt radical changes.
Moreover, competition among stock exchanges has been fierce, and it is not going to get any easier to attract new listings, especially from foreign companies. The notoriously aggressive Singapore stock exchange, which is now a publicly traded company, has attracted so many foreign listings that they now make up nearly 40 percent of its 738 listed companies. The Shanghai bourse in mainland China has been persistently wooing Red Chips, Chinese companies listed in Hong Kong and elsewhere, to come home. The Mumbai market in India has also been tightening regulations and creating a more accommodating environment for Indian companies to list, and a more protective environment for local investors.
In fact, a number of Japanese real estate investment trusts, notably those run by Babcock and Brown, Galileo, Rubicon and Challenger Kenedix, have been listed in Sydney, Australia; others are rumored to be exploring listing in Singapore. Before the Tokyo market starts attracting foreign listings, it may want to make sure it holds on to domestic entities first.
Alexei Bayer runs KAFAN FX Information Services, an economic consulting firm in New York; reach him at [email protected] His monthly “Global Economy” column in Research has received an excellence award from the New York State Society of Certified Public Accountants for the past four years, 2004-2007.