I made my first trip to Japan in 1997. I was just two years into the industry, setting up the first stock-lending programme in Asean for DBS. Yet, I was invited to speak at a securities-lending conference in Tokyo to espouse the wonders of what these financial instruments offer — only to hear Dr Mahathir refer to them as tools wielded by the likes of George Soros during the Asian Financial Crisis to create havoc in the very same markets I was promoting.
Up till today, I stand by my belief that instruments like derivatives, options and convertible bond arbitrage make markets more efficient and enable additional liquidity by facilitating individual stocks and index-basket hedging. For investors who are sceptical about the stratospheric valuations of small-cap cornered stocks — including many Bursa-listed ones — these are perfect shorting instruments.
Japan was then suffering its own hangover: the Nikkei which peaked at 38,915.87 points in 1987 had collapsed by two-thirds to around 14,000 points. Yet, the Japan I recall from that 1997 trip carried vestiges of merry times all around. With the yen 50% stronger than the Singdollar then, my trip to Akihabara was confined to window shopping. An amazing robatayaki (barbecue) dinner for conference speakers at Roppongi cost a princely US$500 a head. The total tab for the evening busted expense accounts, compelling co-organisers Goldman Sachs and Daiwa to split the bill.
After 1997, the Nikkei was to drop even further, as it too proved vulnerable to events ranging from the bursting of the 2001 tech bubble and 2003 Sars to the roller-coaster ride of the 2008–2009 Global Financial Crisis and the tectonic shifts of the 2011 Tohoku earthquake.
In each of these cycles, investors, brokers and their business models were flushed out of the market. The collapse of Yamaichi Securities in November 1997 on its 100th anniversary was a shock. This after it was exposed by the Toyo Keizai weekly to have moved JPY200 billion in losses off the balance sheet and run a literal fraudulent Tobashi (flying away) scheme by hiding losses in Zurich and Australia.
The routine confessions of corporate malfeasance in the decades that followed, from Olympus to Toshiba, showed the need to save “face” and exposed the companies as not as transparent as they should have been. Unlike Korean chaebols which always seem to have a slush fund issue, Japanese corporations for years found it hard to give investors real bad news. The litany of long-running governance issues ranged from cross-shareholdings to friendly boardrooms to insider trading breaches. It was the cultural norm, no matter what the rule book said.
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Back in 2011, the Tokyo Stock Exchange (before the merger with Osaka Exchange in 2013) had a stake of just under 5% in the Singapore Exchange (but no board seat). When SGX made its bid for the Australian Securities Exchange, the TSE CEO then, Atushi Saito, was asked for his response just as Magnus Bocker and Rob Elstone, the CEOs of SGX and ASX respectively, were announcing the merger in Sydney.
We were all incredulous as without a sense of irony, Saito’s spontaneous response to the proposed merger was a negative “we were not informed of it prior to”. He subsequently had to walk back his remarks, after we made the scheduled call to key investors once the deal was public.
Today, the Nikkei, the dark horse for the year, is now back at some 31,000 points, up 20% year to date and at a 33-year high. How was the Nikkei able to gain close to the bubble top in 1989? What precipitated this almost secular rebound, tripling from 10,000 points in 2013, forcing the industry of brokers and traders and indeed market participants to take a completely opposite view from what was held in the 1990s and 2000s?
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Godzilla
Rising from the sea and wrecking the city, Godzilla is almost similar to Commodore Matthew Perry in 1854, sailing into Tokyo Bay with four gunboats rudely pointing at the city, forcing the Tokugawa Shogunate to open the doors for trade — except that Godzilla left in its wake a legacy of destruction and rebirth.
During the 1980s bubble economy and market, the Nikkei was up sixfold to a record. Japanese securities houses of Daiwa, Nomura and Yamaichi and those backed by banks such as Sumitomo and Tokai Tokyo dominated domestic coverage, access and distribution. Broking branches were set up around the country and legions of equities salesmen farmed out to woo “Mrs Watanabe” which refers to Japanese housewives who controlled household finances. They helped to move shares of not merely the traditional industrial conglomerates, but also IPOs of private enterprises. Despite so, the penetration rate and the breadth of investors were limited as most households prefer to squirrel away in savings accounts.
As the market prices eased in the 1990s, Western firms like Merrill Lynch, Lehman Brothers, Credit Suisse, Bear Sterns and BNP took up pricey space in mid-town Tokyo, lured by high volatility and liquidity in the mysterious market.
Convertible warrants and bonds were all the rage then. Globalising Japanese corporates provided lots of lucrative investment banking deals. International traders descended on Tokyo although Japanese traders still commanded an edge due to a local information asymmetry with manual “point and click” versus the electronification of cash and futures execution from the late 90s. This mix contributed to rising liquidity.
The French were particularly good at pricing for volatility and options and thrived even as options markets, initially OTC, became traded on an exchange. There was a thriving arbitrage market between Osaka Exchange, SIMEX and Chicago Mercantile Exchange for Nikkei Futures — SGX and CME being the first to start. This added liquidity to the top 200 stocks covered by the Nikkei and some via the Topix broader-based index. Years later, during my time in SGX from 2007, we were leading product innovation. I recall hosting a “30 years of SGX Nikkei Futures” celebration in Marunouchi in 2016 where we gathered many partners, customers and supporters in one place. Many had by then left Tokyo.
In the wake of the 2011 earthquake, the gaijin trading community left their posts in bigger numbers. With China rising, Asian trading desks and corporate finance activity clustered in Hong Kong. The big Japanese securities houses still covered the more domestic-focused clients even if large privatisations of the public sector like Japan Post still needed international distribution. Mrs Watanabe had moved on to forex futures and options from stocks. This in part as SBI and Rakuten ate into the lunch of the suitcase salesman or voice broker, with consumer-driven apps that attracted traditional stock investors as well as otaku day traders, who had a fascination with Ichimoku technical charts. The platforms more than replaced them. Still, retail traders made up a small percentage of the overall market, which was dependent on domestic asset managers and international institutions. Online trading and gamification of speculative trading eventually drew this segment into crypto. Bitcoin founder, Satoshi Nakamoto, was purportedly a Japanese after all.
Retail confidence in the domestic stock market and traditional broking models were in terminal decline. The local proprietary trading houses which used to have addresses in the posh Ginza and Otemachi districts relocated to the suburbs in Tokyo, as their budgets fell through competition with algorithms. Our 2016 celebration, saw those who made the trip to central Tokyo, lament about the good old days.
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Seven Samurai
In Akira Kurosawa’s Seven Samurai, the 1954 classic movie tells the story of a samurai answering a village’s request for protection. He gathers six others to help teach the villagers how to band together, coupled with some ingenuity, successfully defended themselves against the storm.
Are there parallels that led to Japan’s market tripling since 2013, along with rising liquidity and volumes? Traditional full-service brokers were replaced by online platforms that forced investors to do their own research. Corporate finance houses struggled to do deals on Hercules and Mothers, the small-cap boards for TSE. Coincidently the 2013 merger of TSE and OSE to form the Japan Exchange Group (JPX) lifted liquidity for both derivative and cash markets.
First, the sheer size of the population domestically can explain why they have a larger daily turnover. SGX’s $1.2 billion and JPX’s at some 50 times bigger in 2013, is roughly equivalent to the ratio of Japan’s population to Singapore. That Japanese institutions and domestic asset and wealth managers have a significant home bias also helps. There is less trickle-out when it comes to equities, although there is competition for the retail wallet from other asset classes including forex and crypto.
It may perhaps have helped that Nomura (after failing to digest Lehman Brothers internationally) and Daiwa withdrew to focus more on their domestic franchise from their overseas expansion in the 2000s — filling in gaps as foreigners withdrew. On my recent visit, I learnt that a point-and-click Japanese proprietary trading shop is relocating from Tokyo suburbs to Fukuoka to lower cost, they continue to grow new traders and try to be competitive.
The real game-changer however took place in 2014. Under pressure from then Prime Minister Shinzo Abe, the Government Pension Investment Fund — the world’s largest, with US$1.7 trillion in assets — increased its investment in riskier assets — particularly domestic equities. The signal to increase holdings of domestic stocks to 25% from 12%, initially through external managers and eventually, increasing to direct allocations had been the hinge factor. It has provided capital to outsourced asset managers to support IPOs and fuel business growth for the industry. The psychological impact and the additional liquidity this engendered have helped retain domestic institutional and retail confidence. The tolerance for higher volatility (in GPIF’s performance) as well as among investors and regulators of the stock market moves, has attracted international investors and speculators.
It is true that transparency and governance standards of Japanese listed companies, driven in part by the JPX, have improved. The market discipline required by international investors played a part too.
However, this cannot explain why liquidity is now above US$65 billion ($88 billion) a day, outstripping the demographic excuse for the Singapore market. That Fidelity International declared that “traditionally unpopular” Japanese equities, at a 33-year high (Issue 1088, The Edge Singapore), are still set to outperform, is a testament to an inconvenient truth.
To attract global investors, we need domestic investors of all sizes, shapes and colours to first have confidence and belief and allocate to our own market. When liquidity grows, so come investors, traders and speculators. Some may well be bandits but banding together like samurais is the way for us to thrive.
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
