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Developments at the Japanese exchanges

Date 29/10/2008

Prof Ruth Taplin, University of Leicester

Although attempts to reform the Japanese securities exchange pre-date the Koizumi government, the former Prime Minister of Japan had a passion for structural reform that has surpassed any Japanese politician in recent history and provided much needed impetus to make the economy and the Tokyo Stock Exchange globally competitive.

Reform in the securities exchanges and the SME sector

Dynamic growth in Europe, and especially the UK, derives from the SME sector which is creating thousands of new companies that wish to list on bespoke exchanges that cater to their particular financial requirements. In Japan, nothing exists which accommodates the smaller companies and spin outs that are the drivers of innovation in Europe. Mechanisms have been created to produce innovative spin-outs such as the Technical Licensing Organisations at the universities and organisations such as the National Institute of Advanced Industrial Science and Technology (AIST) that consolidate ideas in incubation and commercialise them, but there is no market like London’s AIM for these companies to list and grow. The Tokyo Stock Exchange’s MOTHERS market should accommodate such small companies and innovative spin-outs. However, it will not accept companies under a certain size and, given its structure and the past problems and obstacles presented to small companies wishing to list, the only alternative is an adjunct or completely new exchange that caters for Japanese SMEs, no matter how small. This can only be done by involving the institutions in Japan that deal with and sustain SME companies. These include the government, universities, businesses and banking and insurance groups. A new feeder mechanism is being created that channels the most appropriate companies into a new growth market that caters to their needs and which the large financial institutions have no interest in blocking.

Mr Saito Atsushi, President and CEO of the Tokyo Stock Exchange, states that the success of the LSE’s AIM can be replicated in Japan;

“Last October, the Tokyo Stock Exchange announced our intentions to jointly build a new market in Japan for professionals with the London Stock Exchange that targets emerging companies both domestic and abroad, particularly those located in Asia.

I am confident that an enhanced Japanese capital market backed by an enormous amount of Japanese financial assets will bring about a more effective redistribution of risk money throughout the Asian region and to other parts of the world.”

Japan, contrary to popular belief, is not just an economy based on the massive sogo shosha (general trading companies) and keiretsu (business groups) but has many SME companies. The Koizumi government (2001-6)with its emphasis on innovation, added value and intellectual property rights encouraged a dynamic innovative sector that is serving to turn around a decade of economic stagnation. MOTHERS has been the Japanese market for listing SME companies. However, the Tokyo Stock Exchange has realised that MOTHERS has been geared towards companies that are not strictly SME in size according to market capitalisation at the time of IPO, amount of funds raised or current profits.

Plans for a new AIM-like market

The basic problem for SME companies in Japan relates to listing possibilities. The LSE and TSE intend to rectify this situation by working together and transferring some of the success of AIM to the Japanese markets to make them more globally competitive.

AIM is the most successful growth market in the world today, and its success as a market has been that its companies have succeeded in attracting long-term institutional investment. Institutional investors now hold GBP55bn of the market, up GBP12bn on 2006. Further issues account for over 40% of the GBP52.6bn raised by AIM companies to date – a testament to the quality of the companies on the market.

It is clear from talking to market participants that there is a funding gap currently in existence in Japan for SMEs looking to gain access to early stage risk capital. The LSE has tested its philosophy regarding exporting knowledge from its experience with AIM with market participants who are keen to work with the TSE and LSE to take this forward. People are impressed with the collective vision which the LSE and the TSE share. The exchanges have made good progress with their goal of finding a set of competent specialists so that the key stakeholders understand their plans. They are all keen to be involved in building a community that will support the new market and companies seeking to raise finance through this new route to market.

In the last year AIM generated over GBP1bn in revenues for advisors which has been a key driver of economic growth in the UK. The LSE therefore expects there to be a similar accelerator effect in the Japanese economy when the new market is launched. AIM in the UK has been successful because the relationship between advisors and AIM companies has been and continues to be mutually beneficial and has delivered real economic and business value for the participants involved.

The main candidates for the new market will be SMEs and emerging companies that are confronting a funding gap in the current market – companies who had historically relied upon personal and bank loans, or who are not yet sufficiently developed for other public markets. The exchanges expect the initial candidates to be emerging Japanese companies, that are at the growth stage but are perhaps not yet sufficiently established to be listed on MOTHERS.

It is their view that the introduction of the new market will stimulate venture capital investment and other investment in SMEs and emerging companies in Japan by providing another possible exit route, one which has simply not existed in the past in Japan for VC firms or entrepreneurs looking to grow their businesses. AIM has developed a distinct identity in the UK and there now exists a community of AIM companies that are benefiting from being arguably on the world's most successful SME market. Other fast growing companies aspire to a flotation on AIM as it can deliver real economic value to their business. It can also act as a stamp of approval for their business and deliver a profile that they can leverage in their business relationships (i.e. with suppliers and peers). The LSE expects the new market to deliver the same benefits to Japanese companies.

The LSE experience with AIM proves that it is possible to create a market structure that attracts quality smaller companies and allows them to gain capital early in their growth cycle, providing investors with exposure to some exciting companies at the steepest part of their growth curve. The LSE expects that this will be an attractive opportunity for international investors from around the region. In common with institutional investors globally, Japanese institutions are increasingly aware of the need to diversify their holdings, which is something that this market can help them to achieve. Educating investors about the new market will be an important part of its development, and this is something that TSE, LSE, and the advisory community involved with the new market will make a priority.

The new market will be a clearly delineated risk capital based market, and as such it is likely to be attractive to companies that are not as well established as those on MOTHERS. Such companies may not yet be ready to meet MOTHERS’ specific requirements which are more geared to the requirements of Japanese retail investors. The LSE and TSE are discussing the details of this, but for example they anticipate that the new market may be excluded from the J-SOX rules and may not demand quarterly financial reporting in Japanese GAAP and in the Japanese language.

Improving the listing system for the TSE and MOTHERS

In addition to the implementation of the new market, the Tokyo Stock Exchange has embarked on a programme to make the listing system for its existing markets more transparent and user friendly. This is being done through a number of measures which are at various stages of completion.

Basic practical policies are to be addressed including;

  • While corporations can carry out their activities freely, in cases where this involves the hindrance of timely disclosure of information, impairs the certainty of stock price formation and leads to unfair transactions, the TSE will be proactively involved.
  • Improvements will be made to the criteria for the listing examination, more in-depth descriptions of the items to be disclosed, confirmation of the system to improve disclosures after listing, the grouping of stock issues in their attributes and the issuance of warnings from the view point of protecting investors.
  • The TSE is considering extending the types of enforcement actions available with regard to exit from the market.
  • In the case of foreign listed companies that are primarily traded on the TSE market, various measures corresponding to their forms and operations will be taken, while respecting the market policies or legal systems of their home countries.

Actual implementation to date of improvements in listing

The TSE/MOTHERS is attempting to raise awareness of listed companies and create an environment in which investors can more easily use corporate information.

Part of this improvement is greater disclosure of information on MSCBs, for example, and capital increases through the allotment of shares to third parties.

The adoption of the quarterly report system under the Financial Instruments and and Exchange Law (including the integration of the semi-annual report system into the quarterly report system which becomes effective in April 2008) means that the TSE will take necessary measures such as the integration of the interim earnings digest system and the quarterly financial and performance disclosure system.

The TSE is making preparations to provide account settlement information in the form of XBRL, which is an accounting tool to promote sophisticated use of financial settlement data through the renovation of the Timely Disclosure Network.

On 1 November 2007, the TSE amended its listing rules to require listed companies to take appropriate corporate activity measures for the purpose of protection of shareholders and investors and proper market operation. The changes include:

  • Improvements in the exercise of voting rights at general shareholders meetings including the diversification of dates of general shareholders meetings, early mailing and distribution of convocation notices and their posting on websites, and preparation of materials in English.
  • The general rules for listed companies will now state that the listed company should respect the functions of the secondary markets and the rights of shareholders and investors.
  • The Corporate Code of Conduct will include fundamental issues related to corporate governance to enhance the quality of companies listed on the market for emerging companies.
  • Listed companies will be required to establish an audit committee, the accounting auditor system and the internal control system stipulated by the Corporation Law.
  • Any listed company with less than 1000 shareholders will also be required to deliver shareholder meeting reference documents (or any reference documents for the grant of proxy rights) to all of its shareholders.

Improvements to the listing systems especially for MOTHERS

The TSE has abolished the listing rules regarding reassignment from the First or Second section market to MOTHERS.

The TSE has also abolished the listing examination criteria related to sales. It will not delist a company on grounds of its sales for five years from the time of the listing in order to promote the listing of companies with high growth potential.

The listing system has been improved to enhance liquidity when companies are initially listed on MOTHERS. The TSE will review the listing examination criteria relating to share distribution and require a certain ration level for shares held by the special few at the initial listing of the company.

The TSE is holding seminars for directors/officers of companies listed on MOTHERS to deepen their understanding of their responsibilities as managers of publicly traded companies.

Under discussion at present, but with no plans for immediate implementation, is whether the TSE should ask listed companies which fail to grow after a certain period to exit voluntarily to MOTHERS.

Professor Ruth Taplin has been editor of the Journal of Interdisciplinary Economics for 12 years. She is currently a Research Fellow at Birkbeck College, University of London and the University of Leicester.