May 24 (Bloomberg) -- Japan has to open up its financial markets over the next three years even if that means attracting companies that put domestic banks and brokerages out of business, said Kotaro Tamura, the vice minister for financial services.

Japan will lose further ground as a global financial center if it fails to attract hedge funds, private equity, Islamic funds and other investors, Tamura, 43, said in an interview yesterday. The government and the regulatory Financial Services Agency are discussing measures to attract such investors regardless of where they come from, he said.

``Nationality doesn't matter as long as such investors can contribute to Japan's interests,'' he said. ``We must carry out reforms in three years, otherwise we'll fail'' to compete with rivals such as Hong Kong and Singapore.

Tamura's comments echo those of Yuji Yamamoto, Minister for the Financial Services Agency, who said this week that Japan needs to protect the growth of the nation's markets, not protect Japanese companies. Japan may merge its securities and commodity exchanges and ease rules separating banks and brokerages to win ground lost to Hong Kong and Singapore as Asia's financial hub.

Japanese companies in the finance industry with local management teams may fail in competition against international firms such as Goldman Sachs Group Inc., Tamura said. ``Nevertheless, we're prepared for that.''

The most pressing issue is reform of the Tokyo Stock Exchange, said Tamura. ``We simply don't have the market in which a variety of new financial products can be traded.''

Consolidation of Tokyo's exchanges, extension of trading hours, timely disclosures in English, alliances with overseas markets and finding overseas companies to trade their shares in Japan are all needed, he said.

Coming Up

An FSA advisory panel said last month Japan's regulators should translate their rules into English, expand dialogue with markets and improve analysis of new financial products to attract more non-Japanese financial companies.

The panel said Japan should also encourage self-regulation in the industry and introduction of securities similar to American depositary receipts, or ADRs, to enable trading of overseas equities on domestic markets.

Some non-Japanese companies are seeking local banking licenses for faster expansion. Citigroup Inc., the world's biggest financial services company, said in January it plans to incorporate its Japanese bank by July.

The local structure allows the bank to open more branches and gives more flexibility in distribution of products, Douglas Peterson, the bank's Japan chief executive officer said at that time. Citigroup plans to double the number of its retail banking outlets in Japan to 50 from 25 over several years.

Tokyo Stock Exchange

The Tokyo Stock Exchange, the world's second-biggest bourse, is competing with bigger rival NYSE Group and other exchanges to attract more trading and profit.

In March, the TSE named Atsushi Saito, former head of Japan's corporate bailout agency, as its next president. Saito, 67, a career investment banker at Nomura Holdings Inc., has a mission to promote alliance talks with bourses in London and New York as he leads the TSE toward a planned initial public offering in 2009.

Credit Suisse Group and Citigroup are proposing private firms help Japan's financial regulator more quickly analyze new products and services.

A private industry body could aid in attracting more hedge funds and other financial firms to Japan's markets by enhancing the consistency and transparency of rules, Paul Kuo, chairman of International Bankers Association in Japan and head of Credit Suisse's investment banking arm in Tokyo, said in March.

Hedge Funds

Private firms can offer expertise and promote more dialogue between inspectors and the markets, Kuo said. Attracting the hedge fund industry can also gather banks, lawyers and other institutions, generating jobs and bolstering the economy, he said.

Opening of financial markets will be a centerpiece of a June economic reform paper, Yamamoto said this week. One plan announced is to replicate London's Canary Wharf in Tokyo to encourage more overseas financial institutions to locate in Tokyo.

Construction rules may be eased for the area along the Sumida River in Tokyo near the Tokyo Stock Exchange, Tamura said. New telecommunications infrastructure and better transport links to airports may be established to enhance services for people who work across different time-zones.

To contact the reporter on this story: Mariko Yasu in Tokyo at at myasu@bloomberg.net.

Last Updated: May 24, 2007 03:55 EDT