The Japan Exchange Group (JPX) is a private holding corporation that facilitates the trading of financial securities in Japan. Authorised by the Financial Instruments and Exchange Act of 2008, the JPX provides exchange-based infrastructure enabling the trade of futures, debt instruments and derivatives. Based in Tokyo, it ranks among the elite exchanges in the world and has a market capitalisation of US$4.48 trillion. This makes the JPX the leading exchange in Asia and third largest globally.
The JPX has three major subsidiaries, each tasked with a specific market function: the Osaka Exchange, Tokyo Stock Exchange and the Japan Exchange Regulation. Under the direction of the JPX, the Osaka Exchange and Tokyo Stock Exchange are commissioned with providing market access to traders and investors, while the Japan Exchange Regulation serves as a self-regulatory body.
The Tokyo Stock Exchange (TSE) functions as Japan's central equities marketplace, and provides the lion's share of total liquidity to the JPX. Four separate equities markets make up the Tokyo Stock Exchange:
- 1st Section,
- 2nd Section,
- Mothers (Market of High Growth and Emerging Stocks)
- and the JASDAQ (Japan Securities Dealers Association).
Specific listing requirements concerning market capitalisation, company history and the company's size are used to decide on which market a company is listed. Established large-cap companies are listed on the 1st Section market, with new startups and emerging companies listed on the Mothers and JASDAQ markets. In total, over 3,500 companies are listed on the TSE, with a volume of nearly 750 million trades conducted annually.
Japan's derivatives market is operated by the Osaka Exchange (OSE). Derivative offerings available on this exchange include volatility indexes, assorted foreign and domestic equities indexes, and interest rate products. The Nikkei 225 mini, Nikkei 225 options and TOPIX (Tokyo Stock Price Index) are the most commonly traded products on the OSE.
The OSE operates as an exclusively digital marketplace providing investors and traders alike with the opportunity to participate in Japan's derivatives markets online. Cutting-edge technology adopted from NASDAQ powers the OSE's trading platform "J-Gate." J-Gate boasts low market latency, instant connectivity and increased market access.
The Japan Exchange Regulation (JPX-R) is commissioned with the regulation of the securities markets. As a part of the JPX, the JPX-R serves as an "independent self-regulating body" serving to uphold integrity within the marketplace. It oversees trading operations on both the Osaka Exchange and the Tokyo Stock Exchange.
The organised trading of financial securities in Japan dates back to the early 18th century with the inception of the Dojima Rice Market. Located in Osaka, the market is widely recognised as being the first modern futures exchange and the birthplace of organised futures trading. The basis for modern futures accounting methods and Japanese candlestick charting techniques were pioneered at Dojima. The market remained in operation until its dissolution in 1939.
The enactment of the Stock Exchange Ordinance of 1878 laid the groundwork for the establishment of the Osaka Stock Exchange and the Tokyo Stock Exchange. Each exchange facilitated the trade of equities, debt instruments and derivatives until their WWII-era closure from 1945-49. In 1949, the Japanese government adopted the Securities and Exchange Law, which was based on the legal framework set forth by United States' Securities and Exchange Act. Japanese markets were directly regulated by the Securities and Exchange Law, and markets were opened in Tokyo, Osaka and Nagoya.
The post-WWII era ushered in a period of sustained economic prosperity in Japan. Driven by a vibrant manufacturing sector and vast international capital investment, robust economic growth defined the Japanese economy for decades. This period of prosperity lasted until the early 1990s and is referred to as the nation's "economic miracle."
Japan's economic prowess was reflected in the valuations of its equities markets, which had become second to none in terms of market capitalisation. For the years 1985-89, the primary Japanese equity index, known as the "Nikkei," experienced explosive growth. The Nikkei tripled in value during that time, and it represented one-third of total global market capitalisation.
After the asset bubble of the 1980s eventually burst, a period of slowed economic growth and inflation took hold. The early 2000s brought on a period of governmental intervention in Japan's market place. Monetary policies centered on quantitative easing were adopted in an attempt to jumpstart growth.
During the fallout from the global credit crisis of 2008-10, the Tokyo Stock Exchange and the Osaka Exchange merged into one. The merger was a direct result of a stagnant Japanese economy, and the country falling behind China in terms of equity market capitalisation. Upon the merger being completed in 2013, the Osaka Exchange and Tokyo Stock Exchange were officially unified, and the "Japan Exchange Group" was born.
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Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…