Japan's Equity Market: Working Mechanism, Participants And Market Capitalisation

Participants and Market capitalisation

Japan has five stock exchanges: Tokyo, Osaka, Nagoya, Fukuoka, and Sapporo, as well as the Jasdaq securities exchange. The Tokyo stock exchange(TSE) is connected to Fukuoka and Sapporo. The Japanese stocks are offered by the Japan Exchange Group, commonly known as JPX, which runs several exchange platforms for shares.It was created on 1 January 2013 by the merging of two different Japanese companies-the Tokyo Stock Exchange and the Osaka Securities Exchange.In 1878, the Osaka Stock Exchange was established. In June 2009, for the first time in 27 years, the number of firms listed on the Osaka Exchange dropped below 1,000.Jasdaq is regarded as a niche capital exchange with limited domestic stocks. Once Sony, Honda and Softbank were classified on it but they moved to the Tokyo Stock Exchange after they got large enough. Some want it to become Japanese Nasdaq. Osaka Stock Exchange serves the biggest startup market. It formed a relationship with U.S. stock exchange Nasdaq in February 2009 and began in Japan in 2000. The Nasdaq Neo market is for start-ups

Japan has Asia’s largest equity market with a capitalization of $4.8 trillion in early 2007. The US is the highest stock sector in the world with a capitalisation of about $16 trillion in early 2007.

Turnover

Japan’s equity market turnover ratio is similar to ‘the sum of all stock exchange transactions / the share sum of all public stocks,’ indicating how competitive Japan’s stock market is. According to the World Bank compilation of growth metrics, collected from officially recognised sources, stock market turnover ratio (percent) in Japan was published at 105 per cent in 2017.

Instruments Traded

JPX runs exchange platforms for financial instruments to establish secure outlets for institutional participants to swap traded stocks and derivatives products. In addition to supplying trading facilities and business info, JPX also offers services for clearance and settlement via a central counterparty and maintains exchange monitoring to protect corporate integrity.We strive to make every attempt to maintain competitive markets and establish greater ease for all business customers when working together as an exchange community to deliver a broad selection of services.

On October 1, 2019, JPX expanded its business into commodity derivatives trading by acquiring Tokyo Commodity Exchange, Inc.[image: ]

Working Mechanism

Sources include the Japanese knowledge tree hedged stock (ticker) EWJ or iShares HEWJ. As the graph above shows, despite the strong correlation, the currency was low while stock returns were large, so netting the yen vulnerability improved returns in the rallying times from 2012 onward. There are also unhedged ETF models, including, for example, EWJ and DXJ.ETFs covering subsets of Japan’s capital exchange often exist among certain investors with more sophisticated equity views. Of course, through a number of mutual funds, investors may obtain exposure to the successful managers ‘views on Japanese stocks.

There are ETFs intended to mimic trading in the yen for investors who are looking to sell or invest on the currency view alone.

Investors will go long yen, short yen and others also provide ‘leverage’ to match double short or double long positions for certain vehicles.

Usually, creditors use foreign or multinational bond funds to enter Japan’s fixed-income market.

Since Japan represents a large part of the foreign debt market due to its vast stock of government debt, it is typically significantly represented in these taxable fixed-income mutual funds, particularly those that follow the common indexes of world government bonds. Although the potential of Japanese bonds to produce much differs, they may give periods of significant return and also diversification. It is hard to see much interest in these bonds at the moment; because all bonds up to 15 years in maturity have negative returns, the only way to earn profits is for the currency to rise, or for returns to go much more low. The change is not impossible; Japanese 10-year government bond yields have continued to shock, as seen in the chart below, by declining more and more over years aside from currency fluctuations, creditors can squeak out a slight positive return if they are able to purchase bonds that maturity about 20 years from now; nevertheless, there is no opportunity at a yield of 0.35 per cent.

Japan 10 Year Government Bond Yields (%) [image: Source: Bloomberg] Source: Bloomberg

In brief, for those involved in aggressive or passive investing, Japan provides distinct investing plays. Given the measurable factors of Japanese stock markets over the last several decades, it is evident that much of the momentum driving returns – whether positive or negative – stems from large macroeconomic patterns and policy measures. Knowing a bit about Japan’s policy dynamics would therefore help the global investor determine patterns for this region. For 2016, Japan’s playbook must stay squarely based on both monetary and fiscal developments; if more is changed, stocks would definitely begin to crash.

Participation Of FPI

As of June 2006, about 25 per cent of Japan’s stock was owned by foreigners. In the 2000s, international buyers pumped a lot of capital into the Japanese stock market, peaking at about 10 trillion yen in net purchasing in 2005. The pattern was reversed in 2008 when global buyers began selling off their assets, with a net sales of 4 trillion yen. International creditors drained trillions of dollars in Japanese securities during the global downturn in 2008 and 2009, leading to the sharp fall of Japanese financial markets.

Companies and banks started unloading their cross-shareholdings in the early 2000s — long-standing agreements under which companies and borrowers kept securities between themselves. This allowed foreigners to obtain a greater share of the action in Japan, causing a series of takeover fights such as the one that Livedoor initiated and enabling businesses to purchase their own stock and rose dividends to fend off hostile takeover bids.

Tips on the financial markets are often disseminated in newspapers through classified advertising. For eg, the harmless note, ‘Ken-san, please call you father,’ was a coded message for buying stocks at Kanematsu trading firm. Prices for the stock leapt 57.7 per cent since the notification was issued.

Throughout Japan, shareholders ‘privileges are a fairly recent idea and often bear no weight even where the owners are major Japanese corporations and banks. That is shifting slightly as more international buyers and internet traders are snapping up securities and tiny shareholders are lining up and expressing their issues at stockholders meetings.

Japanese companies are suspicious of international companies ‘merger efforts to restructure aggressively, lay off many employees and break long-standing supplier partnerships. Steel Partners, an American investment firm owned by Warren Liechtenstein, has been active in many aggressive offers in Japan for takeovers.It tried to take over Bull-Dog Sauce Co, a Japanese condiment manufacturer who’s a successful steak sauce producer but met with strong resistance. During its bid to take away Sapporo malt, it had a common encounter purchasing water-heater-maker Noritz.

Japan has moved from paper to digitalised products. Asset digitization formally fell into force in January 2009 and at that point all paper asset certificates became void.

In recent years, the Tokyo Stock Exchange has been less appealing to international firms as a place to list due to high prices, language differences and the reality that Japanese investors may conveniently find alternative forms to invest in stock in markets outside Japan. In 2007 26 international firms were classified on the Tokyo market, down from 127 in 1991

Impact of Global Crisis and Bubble burst on Japan’s Market

Japan encountered a massive asset bubble in the late 1980s, when the government used fiscal and monetary stimuli to counteract the recession caused by the Japanese yen’s 50% appreciation in the first part of the decade.

It took until 2002 to rescue the banks from the real estate adjustment. It took another 10 years to implement the necessary supply-side and social security reforms. Japan’s stock prices hit a recent high in the summer of 2007 and, with the outbreak

Of the US subprime credit crisis, a gradual but significant downturn started in the fall of 2008. The fall in stock prices has stressed the balance sheet and capital adequacy ratios of commercial banks and, as a result, restricted their ability to lend by the summer of 2008.

The benign impact of the global financial crisis has shown that Japan’s economy has fully adapted to its ‘ new normal ‘ of slow but robust long-term growth.