April 6 (Bloomberg) -- Declining volume in Japan’s commodity futures markets is likely to drive more brokerages out of business after numbers almost halved in the past five years, according to Yutaka Shoji Co. Chairman Jitsuo Tatara.

A slump in business from retail customers is unlikely to be offset by trading from institutions, said Tatara, 67, a board member of the Tokyo Commodity Exchange, known as Tocom, Japan’s biggest raw materials bourse. Yutaka Shoji is one of the country’s three-biggest listed commodity brokerages.

Stricter rules against soliciting business from retail investors, which had provided most of the liquidity, spurred a drop in brokerage numbers to 53 last year from 97 in March 2004, industry data shows. Exchange volumes plunged by 70 percent. Tocom is seeking to reverse the slump by overhauling its trading systems to attract domestic and overseas institutional investors.

“We have to increase the number of foreign investors and give up the business pattern, which focused more on individual investors and lasted for the past 50 years,” Bob Takai, general manager of financial services at Sumitomo Corp. in Tokyo, said.

Commodity futures volume fell to 46.3 million contracts in the year to March 31, according to the Japan Commodity Exchanges Committee, down from a peak of 155.8 million in fiscal 2003.

Trading Systems

Tocom is improving the speed of its trading systems and extending hours to attract more overseas business, exchange President Masaaki Nangaku said March 26. The Tokyo Grain Exchange plans to list new contracts to build volumes. The bourses, which forecast losses last fiscal year, have rejected merger calls by the Japan Commodity Futures Industry Association.

“I strongly hope foreign investors will use Japanese commodity markets but I doubt they will because the liquidity is so low,” Tatara said in an interview in Tokyo on April 3. “If volumes fall further, domestic commodities traders will find it impossible to do business.” he said. Tatara, who has traded commodities for 40 years, is also a board member of the industry association.

Japan’s 53 commodity brokerages operated 175 branches as of December 2008, compared with 97 brokers with 461 outlets in March 2004, according to data released Feb. 19 by the group.

The number of registered salesmen declined to 4,800 last month from a peak of 17,132 in 2003, according to the Commodity Futures Association of Japan, which represents the brokerage industry in rule setting.

“Japan’s commodity futures industry is now facing an unprecedented crisis following an increase in members who have withdrawn from the sector,” Yuichi Ikemizu, head of commodity trading at Standard Bank Plc in Tokyo said in his daily note on April 1. “Some say this is the process of natural selection.”

Volume dropped after a 2005 law banned phone marketing, causing trading by individual investors, “who used to comprise 90 percent of the market, to fall to about 20 percent,” Norikazu Takei, a Tocom spokesman said.

“The outlook for improvement in the industry is bleak,” TGE Chairman Yoshiaki Watanabe said.

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To contact the reporter on this story: Yasumasa Song in Tokyo at Ysong9@bloomberg.net

Last Updated: April 5, 2009 20:28 EDT