Global Economics

Tokyo Stock Exchange Wants a Makeover


The Japan bourse's tieup with the NYSE and talks with the Chicago Merc signal a push to expand its range in global markets

After one of the grimmest periods in its history, the Tokyo Stock Exchange is hoping that tieups with U.S. exchanges in New York and Chicago can rebuild credibility and fend off Asian rivals. But will that be enough to restore the TSE's waning credibility?

TSE chief executive officer Taizo Nishimuro certainly hopes so. The affable CEO was in New York on Jan. 31, where he and New York Stock Exchange (NYX) chief John A. Thain signed a letter of intent to look into a possible union. The two exchanges promised to explore new opportunities in trading systems and technology, investor and issuer services, investment products, and governance and regulation. A capital alliance could also be in the cards. "I strongly believe that this agreement will be a good starting point for a much stronger tieup with the NYSE," says Nishimuro.

With the ink barely dry on that agreement, Japan's Nihon Keizai daily reported Feb. 1 that Nishimuro will hotfoot it to Chicago to work on an alliance with the Chicago Mercantile Exchange (CME), the largest futures trading market in the U.S. The Nikkei notes that the tieup plan will include a proposal for listing futures contracts on Japanese government bonds on its exchange as a first step.

Open All Night

Nishimura's bout of dealmaking will surprise few in Tokyo. After a series of high-profile blunders, the TSE has come under huge pressure from investors and the Japanese government to improve procedures and systems. A tieup with the NYSE is widely seen as the way forward.

"The NYSE seems to think more of the TSE than it perhaps deserves, so this is a chance the TSE should not miss," Koutaro Tamura, Japan's parliamentary secretary for economic and fiscal policy, said in December. "If it teams up with the NYSE, mutual listing and round-the-clock trading would be possible, enhancing the appeal of the TSE for Asian companies outside Japan."

The road hasn't been smooth for the TSE recently. In October, broker Mizuho Securities sued the bourse for $340 million in compensation for losses incurred as a result of an erroneously placed order in December, 2005. Mizuho had discovered a mistaken order to sell shares in J-Com, a Japanese telecom outsourcing company, but was unable to fix the problem due to a TSE system glitch. In the aftermath, then TSE chief Takuo Tsurushima stepped down and was replaced by Nishimuro, who had been chairman.

Losing Foreign Suitors

The Mizuho disaster wasn't the only problem. In January, 2006, TSE was forced to suspend trading early for several weeks until its systems were improved after a rapid sell-off of shares in Livedoor, an Internet company. As well as highlighting problems with the TSE's systems, the problems further damaged the bourse's international credibility.

The TSE has also been criticized for failing to attract foreign companies, particularly from Asia. The TSE accounts for 90% of trading in Japan, the world's second-biggest economy, but just 25 foreign companies have listings in Tokyo. That number fell by three last year, with only one company—Britain-based Japan Invest—listing and four others leaving the exchange.

"The TSE would like to see itself as the dominant and most influential exchange in the region and, in particular, they want to attract IPOs from China, but they're losing out to other exchanges," says Neil Katkov, group manager for Asia research at Celent in Tokyo. Hong Kong, for example, has attracted several large Chinese IPOs, such as those of China Construction Bank (CICHF) and China Life (LFC).

Good Connections

Small wonder, then, that an alliance with the NYSE is broadly welcomed. Katkov says a tieup with NYSE will benefit both parties. But while the NYSE will benefit primarily from improved access to Asia's biggest capital market, the TSE could also recover credibility around the world and gain market know-how. "The TSE realizes that the only way for them to become a first-class competitive exchange is to learn from other exchanges," says Katkov.

Mitsuru Yoshikawa of the Daiwa Institute of Research in Tokyo adds that the NYSE could also help improve the TSE's systems. Although the TSE is already working on a new trading system for 2009, Yoshikawa reckons it could still be insufficient without international cooperation. "The tieup with NYSE will help the TSE to survive amid rapid competition," he says.

One big concern, though, is that the TSE has a poor record on executing grand plans. Earlier in the decade, a quest to ally with the NYSE on 24-hour trading went nowhere, while Japanese Depository Receipts—a Japanese version of the ADR—have also failed to get off the ground. The worry is that the new talks about alliances will go the same way and enable Asia rivals to close in on the TSE. "It's all about if they can deliver," says Katkov. "But the TSE's track record has not been very good."

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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