No Go in Tokyo

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.