Capital market trends in Japan: Drivers of innovation and a market in transition

This paper examines Japan’s capital markets and offers an outlook for the future in light of the tumultuous changes seen in Europe and North America. Rooted in the view that the current trading environment has been enabled by the transformation afoot in the exchange industry, the paper considers best execution-related system innovation and changes in market structure as well as the current state of trading technology innovation before addressing these in terms of Japan’s market. In its review of the merger that created JPX, the Japan Fair Trade Commission (JFTC) noted clearly that the merger cannot be expected to enhance efficiency and considered not only issues of market share but also broader questions of diversity and competition. In other words, the JFTC did not review the merger solely through the lens of the Antimonopoly Act 1947, but rather from the perspective of JPX’s competiveness in global capital markets. As a result, JFTC approved the merger but imposed three measures as conditions: (1) involving outside experts in determining listing-related fees; (2) ensuring the existence of proprietary trading system (PTS) operators; (3) securing international licensed operators in derivatives-related businesses. The paper features information and comments from interviews conducted with multiple market participants. The results all point to the conclusion that Japan’s market has yet to experience ‘big bang’ structural reforms on a par with the European and North American markets or to be subject to the accompanying across-the-board tsunami of technological innovation. At the same time, deregulation of PTS operators and margin trading have rippled through the market, leaving signs that this will significantly affect the new JPX and Japan’s capital markets — a conclusion supported by this study’s results.