Plan Called Ideal Opportunity for Big Foreign Investors : Japan Markets Will Add Stock Index Futures

As part of a wave of liberalization in Japan’s financial markets, the Tokyo and Osaka stock exchanges are to launch stock index futures trading starting Saturday.

Exchange officials say the index futures market is likely to exceed the size of the regular stock market within a few years and affect the investment patterns of Japanese institutional investors.

They also say it is an ideal opportunity for foreign investment firms, which are more experienced in futures trading than their Japanese counterparts, to penetrate Japanese financial markets.

“We are hoping the new index futures trading will also promote the growth of the equity market as the futures market attracts more money to stock markets,” said Keiichi Okada, head of the Tokyo Stock Exchange’s futures trading department. “I expect the index futures market will exceed the size of the cash market within a few years.”

Index futures contracts allow speculative investors to bet on the direction of an entire set of stocks rather than putting their money into stocks of individual companies. More cautious investors can use index futures contracts as hedges to offset positions in the stock market.

Index futures contracts would also permit various forms of program trading, including index arbitrage, which some critics blame for exacerbating the instability of prices on Wall Street.

Eager to Hedge

Both exchanges said they will allow foreign non-member securities firms to participate in index futures trading.

“Foreign securities companies are more experienced in futures trading than their Japanese counterparts,” Okada said. “They will have an edge over their Japanese competitors. At the same time, Japanese securities companies can learn from them.”

The inauguration of index futures trading in Japan has been long awaited by investors eager to hedge against possible fluctuations of share prices in the equity markets. While major stock exchanges around the world offer a broad range of financial futures trading, Japan has offered only 10-year government bond futures. Trading in them began in 1985.

As pressure mounts to make the Japanese money market more open and internationalized, Japanese exchanges and the securities industry have been gradually launching new services to keep up with rapidly changing and diversifying demands.

The Tokyo exchange will use the Tokyo Stock Exchange price index, or Topix, an index of all 1,100 shares on the exchange’s first section weighted toward the bigger companies, while the Osaka’s futures market will be based on the more popular Nikkei 225-share average.

Not as Vulnerable

Analysts and exchange officials say TOPIX is a more accurate indicator of overall market trends, but the Nikkei index is more responsive to the mood of the market.

“TOPIX is not as vulnerable to the fluctuation of high priced, small-capital shares like the Nikkei index is, but Nikkei is by far the best-known index,” said Okada.

Institutional investors generally welcome the new system, which can protect them from day-to-day price fluctuations in their stocks. But some are concerned that the index futures market may have a negative impact on the equity market.

“When the futures market is on a downturn, most investors will assume the spot market also will be heading downward shortly and withdraw their funds from the spot market,” said a securities dealer at a major brokerage in Tokyo, speaking on condition of anonymity. “It will cause a further decline in share prices.”