In Members of Japan's Council on Economic and Fiscal Policy, the country's top economic policy body headed by Prime Minister Shinzo Abe, met last week to discuss combining four exchanges to make the country's markets more competitive internationally.

The officials presented a plan to merge the Tokyo Commodity Exchange, Tokyo Financial Exchange and the Tokyo Grain Exchange into Asia's biggest financial marketplace, the Tokyo Stock Exchange (TSE), in a holding company structure later this year. The council also recommended that Japan dismantle the regulatory wall separating banks and brokerages, as the Gramm-Leach-Bliley Act of 1999 did in the United States.

Still officially at the proposal stage, and not yet encompassing other Japanese trading centers such as the Osaka Securities Exchange, the plan surfaced at a time when waves of consolidation and globalization are sweeping over the financial world. Discussions are active in the U.S. too, through groups such as the Committee on Capital Markets Regulation, on what it will take to maintain global leadership in the changing markets environment. TSE, which has been dealing with internal operational problems in recent years, has opened lines of communications with foreign markets and entered into formal alliances with the New York Stock Exchange and London Stock Exchange that are expected to bring technology and other forms of strategic assistance.

"In Asia, Singapore and Hong Kong have made the competitiveness of the capital markets a topic of national importance," said a working group presentation to the policy board. "Tokyo's position as the financial center of Asia is under threat." A key rationale for consolidation is to promote a common platform that will ease access to the Japanese markets, make them more attractive to foreign players and improve supervision.

The consolidation discussion has only just begun, TSE spokesperson Mitsuo Miwa told Securities Industry News. "Therefore, we would like to keep watching development of the discussion. However, apart from this topic, we appreciate the recent active discussions on a governmental level for strengthening the global competitiveness of the Tokyo capital market."

Commodities in Focus

"We are not mentioned in this theme," Kensuke Morimoto, planning department manager at the Jasdaq Securities Exchange, said. "There are many opinions crossing. So we are confused."

"The aim is not complete market consolidation into a centralized mega-exchange, but rather combining the commodities exchanges with equities," said Neil Katkov, an analyst with research firm Celent who is based in Japan and is a long-time observer of the country's capital markets. "In that sense, it seems to be following the lead of some other exchanges in Asia."

Given the way the consolidation plan has become public, indicating that the preliminaries have already been addressed, Katkov believes it will come to pass, with the corporate merger taking place ahead of more time-consuming systems integration work.

A parallel, he said, is last year's merger of the Australia Stock Exchange with the Sydney Futures Exchange. "In Japan, the Australia Stock Exchange is looked at as very savvy and as promoting policies and practices that promote investment," Katkov said. But he added that combining commodities and stocks on a common platform will not automatically make Tokyo more competitive.

"It does regularize the commodities trading business, which in Japan is shadowy and exists in a different realm from other investments," Katkov said. "It brings it into the mainstream and makes it easier for foreign investors to trade--but it won't automatically mean that these exchanges will start producing hip derivative products."

Hiroko Ota, state minister in charge of economic and fiscal policy, told reporters last Tuesday that there was some discussion in the council about the differences between the asset classes. But, she added, "There was the opinion that it was important to refute this. The commodities business is not advanced compared to the rest of the world."

Japan had 16 commodities exchanges in 1989, and today there are four. In addition, according to the Japan Federation of Commodity Exchanges, turnover has been falling steadily. In 2006 it was 92.7 million contracts, the first time in seven years it fell below 100 million.

Consolidation provides a chance to gain economies of scale, Katkov said, and a higher level of expertise and systems.

TSE, meanwhile, has come up with a number of ideas in recent years to improve and strengthen its business, but "very few of them have panned out," said Katkov. "This proposal may be a little different, in that there's an existing business that they can absorb. It's a matter of how well they can grow that new business."

Financial Services Minister Yuji Yamamoto is currently working on the plan to combine the exchanges, which is expected to be included in Japan's economic policy blueprint in June.