TOKYO -- Wealthy investors and healthy liquidity are drawing global investment banks to Japan's commodity markets, raising hopes the market will finally tap into a global commodities trading boom.
In contrast to other U.S. or European commodity markets, which have benefited from sky-high prices, turnover in Japan fell this year as the sector struggled to shrug off a negative public image.
Despite this, Japan is still the most active commodities futures marketplace in the Asian time zone, and foreign investment banks see it offering the best chance of making a profit in Asia and to hedge their risks.
"Foreigners are having a lot of influence on the Japanese commodities market, clearly making the market more liquid," said Tatsuo Kageyama, an analyst at Kanetsu Asset Management, a unit of Japan's leading commodities trading merchant, Kanetsu Shojo Co. Ltd.
Last year foreigners accounted for 15 percent of the trades done on behalf of customer accounts on the Tokyo Commodity Exchange, up from just 5 percent five years ago.
Story Continues Below
In August, the volume of TOCOM trade by foreigners hit a record high of 961,883 lots, although it fell back to 716,014 lots as of October against the backdrop of falling turnover overall.
Players such as U.S. financial giants Goldman Sachs , Morgan Stanley and Lehman Brothers are gaining recognition in the energy and precious metals trading on TOCOM.
In addition, Credit Suisse was admitted as a member of the TOCOM in October, returning to the market for the first time in a decade.
Credit Suisse will be taking part in brokerage activities and will also be trading on its own account.
"In the past, retail investors and trading houses were the main players, but since the entry of foreigners the power balance of the market has changed," said Shuji Sugata, an assistant manager at Mitsubishi Corp. Futures and Securities Ltd.
"Foreigners are active in oil trading and metals trading in Japanese markets and many domestic brokerages are watching how they are trading," Sugata said. "They have a great influence."
OPEN TO FOREIGNERS
Japan's commodities exchanges have missed out on a global boom as they struggle to improve their public image and deal with a law that restricts high-pressure sales tactics, such as traders repeatedly calling customers to get them to trade.
According to data released on Thursday by the Japan Federation of Commodity Exchanges Inc., the total turnover of all six exchanges from January to November was down about 15 percent from the same period last year.
TOCOM, which is Japan's top commodities exchange, lagged China's Dalian Commodity Exchange, which trades such items as soybean and corn futures. Falling turnover is likely to cut the number of Japanese commodity exchanges to four next year, from seven at the start of 2006.
But foreigners need to use TOCOM and other Japanese exchanges as Chinese futures exchanges are not open to foreign players.
The formation of a clearing house in Japan last year has also been a factor in attracting more foreign players to the market.
"More foreign players are trading as Japanese commodities markets are still very liquid, which make it easy for foreigners to hedge as one reason," said a manager at an European investment bank in Tokyo.
"Foreigners with ample funds in their hands also see Japanese commodities market as an important place of opportunity to raise profits by dealing commodities because prices are moving in wide ranges," he said.
Foreign investment banks are also looking into the Japanese commodities market as a good place to reach retail investors as the market is still heavily dominated by them.
Japanese individuals have a combined 1,500 trillion yen in savings and the institutions are looking at ways to attract those funds.
"Foreigners are entering the Japanese commodities market because it's one way to reach retail players who hold massive funds. They simply cannot disregard this," Kanetsu's Kageyama said.
"We've witnessed foreigners playing an active role in the Tokyo Stock Exchange after many overseas institutions got membership several years ago and then became key players. This can happen in the commodities market too," Kageyama said.
Copyright Reuters 2006. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.
Editor's note:
Make 25% - 35% Profits With One Trade A Week - Click Here Now
Trade options like the pros - without giving up your day job
Multiply Your Profits and Cut Risk Down to Size – Go Here Now
