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Tuesday, April 3, 2012
Reorganizing Japan's exchanges
The Noda Cabinet in early March submitted to the Diet a bill to help establish a unified exchange that will integrate stock, commodity and other exchanges. But even if the Diet passes the bill to revise the financial instruments exchanges law, the envisaged system will not guarantee automatic integration of the exchanges. Political leaders should exercise leadership to break turf wars between different government bodies to ensure true integration, which will help market participants reduce the costs of dealing with various regulations and controls.
Currently financial instruments exchanges are under the control of the Financial Services Agency while commodities exchanges are under the control of the farm ministry and the trade and industry ministry. Outside Japan, the general trend is to trade different financial instruments and commodities at an integrated exchange. In view of this, it is important for Japan to set up a unified exchange to help improve its global competitiveness in this area.
Under the bill, if various exchanges are integrated into one unified exchange in or after 2013, it will come under the control and oversight by the FSA. But the bill has no power to force such integration. The Tokyo Stock Exchange Group and the Osaka Securities Exchange are scheduled to merge to form the Japan Exchange Group by January 2013. For the integration of exchanges to proceed, for example, both the Tokyo Grain Exchange under the jurisdiction of the farm ministry and the Tokyo Commodity Exchange under the jurisdiction of the trade and industry ministry must agree to transfer their operations to or to merge with the Japan Exchange Group.
If commodity exchanges and financial instruments exchanges come under the wing of a holding company as a form of integration, their future functions will continue to be under the oversight of different government bodies. There remains another loophole. Rice exchanges are to remain in something like a sanctuary under the farm ministry's jurisdiction.
Major exchanges abroad are seeking to integrate their management and operations in an attempt to save on management costs. Japan's commodities futures markets have been in the doldrums and its seven markets were combined in 2004 and reduced to three. Unless political leaders exercise proper leadership, the worst case scenario could happen: a disappearance of trading markets from Japan.