Abenomics Peaking for Tocom Means Focus on China, India

Tokyo Commodity Exchange Inc., Japan’s biggest raw materials bourse, plans to attract more trading from investors in China and India to boost volume that’s peaking as the yen’s slide stalls near 100 to the dollar.

“We want to see a further increase in participants from overseas,” President Tadashi Ezaki said in an interview in Tokyo yesterday. “Investors from emerging economies, such as China and India, are particularly welcome.”

Growth in trading volume, which jumped 22 percent in the first eight months of the year, may stop as early as October, according to Ezaki. The yen averaged 98.78 per dollar since reaching a four-year low of 103.74 in May after the Bank of Japan implemented record stimulus as Prime Minister Shinzo Abe sought to lift the economy out of 15 years of deflation. Trading by foreigners on Tocom, as the bourse is known, rose to a record 41 percent of total volume last month.

“I expect the yen will stay around 100 per dollar for a while,” Ezaki said. Uncertainty about when the U.S. Federal Reserve will start tapering stimulus has made Japanese investors cautious and this may also slow trading, he said.

The share of trading by overseas investors expanded from 10 percent when Ezaki, 72, took over four years ago. The former trade ministry official, who advised a research institute and ran a bank after leaving government service in 1999, introduced a high-speed trading system to Tocom and extended opening hours to attract foreigners seeking arbitrage opportunities between the exchange and overseas markets.

Overseas Rankings

Investors from Hong Kong accounted for 58 percent of positions held by foreigners at the end of August, according to Tocom data. Singapore was ranked second with 27 percent, followed by the U.S. on 6 percent.

He’s also seeking partners to share trading systems costs that last year ate 63 percent of revenue. These costs and trading volumes that have slumped to one-third of their peak in 2003 drove the exchange to five years of losses.

Tocom has been in talks with Japan Exchange Group Inc., the operator of the second-biggest stock market, and Chicago-based CME Group Inc., the owner of the world’s largest futures market, for sharing trading systems, Ezaki said.

A five-year contract to use Nasdaq OMX Group Inc.’s trading platform is due for renewal in May.

Tocom has received proposals from CME, JPX and several other exchanges for sharing trading systems and plans to make a decision by the end of this year, Ezaki said, declining to elaborate further.

Fukushima Impact

Japan’s Ministry of Economy, Trade and Industry, which supervises Tocom, wants the bourse to create futures markets for electricity and liquefied natural gas to become a comprehensive energy exchange in the wake of the Fukushima disaster.

The nation is the world’s largest LNG buyer and last year paid 6 trillion yen ($61 billion) for a record 87.3 million metric tons. It’s increasingly dependent on the supercooled fuel after atomic reactors were shut pending safety checks following the March 2011 earthquake and tsunami that caused a meltdown at Tokyo Electric Power Co.’s Fukushima plant.

Futures contracts would allow consumers and producers to hedge against price swings and challenge the current method of linking the cost of LNG to oil, according to Takashi Ishizaki, the director for the commerce policy division at the trade ministry.

LNG Futures

Ezaki said it would take at least two years before LNG futures could be traded.

Tocom offers contracts for gasoline, kerosene, gas oil, crude oil, precious metals and natural rubber. It took over trading of corn, soybeans, raw sugar and azuki beans from the Tokyo Grain Exchange in February as the nation’s second-biggest commodity bourse was dissolved because of losses and low liquidity.

Tocom had a 596.8 million yen operating loss in the 12 months ended March 31, its fifth since a government crackdown to protect individual investors from losses had the unintended consequence of reducing volume.

Ezaki said Tocom is lobbying the government to change rules and allow pension funds, trust banks and other institutional investors to trade commodities.

Gold was the most-actively traded commodity on Tocom this year. Volume jumped 27 percent to 9.51 million contracts in the first eight months from a year earlier as the weaker Japanese currency sent the yen-denominated price to a record 5,081 yen a gram on Feb. 7.

Global Benchmark

Tocom’s rubber futures, the global benchmark, expanded 15 percent to 1.67 million lots over the same period. The price climbed to 337.8 yen a kilogram on Feb. 6, the highest level in almost 11 months.

Tocom accounts for about 99 percent of exchange trade of commodities in Japan, with the remainder handled by the Osaka Dojima Commodity Exchange, which mainly trades rice.

Once the world’s largest commodities bourse after the New York Mercantile Exchange, Tocom had retreated to the 12th place by contracts volume in 2012, according to data provided by the Japanese exchange. It has been surpassed by China’s Shanghai, Zhengzhou and Dalian exchanges, and India’s Multi Commodity Exchange.

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