Japan offers valuable lessons in building healthy market ecosystems

JAPAN’S recent stock market reforms have marked a significant turning point for its economy, offering valuable lessons for Singapore.

After decades of economic stagnation and deflation, Japan implemented a series of strategic reforms that have revitalised its stock market and positioned it as a model of success.

As a leading Asian market-maker in Singapore and Japan, founded by floor traders on the old Singapore stock exchange, our own experience mirrors the challenges facing Singapore growth firms on the journey to public listing.

Our industry, like many others, has been transformed by technology.

The reality is that the cost of trading, with ever faster and more powerful technology, combined with global almost-instantaneous connectivity, has raised the table stakes for trading.

Once referred to as “locals”, we are one of the few Asian market-makers of size left. At one time the lifeblood of national stock exchanges, “locals” have been squeezed out by a shrinking number of global giants, mainly from the United States and Europe.

Competing requires capital. In our case, we have consistently invested in our own proprietary trading technology and more recently have taken in private capital to expand beyond the seven markets in five countries that we currently trade in.

We have transformed from a proprietary trading firm to a technology platform and an asset manager.

Without a healthy initial public offering market, however, the exit path for investors in a company like ours is not clear.

The Japanese example

As Singapore seeks to elevate its financial market, it is worthwhile looking at what others have done to reinvigorate their market ecosystems.

Japan’s patient multi-faceted approach to market reform has been instrumental in overcoming its prolonged deflationary period.

Key among these reforms was the restructuring of market categorisations, which required listed companies to meet stringent criteria or face downgrades.

This has helped weed out “zombie” companies and ensure that only robust and high-performing firms remain in the top tiers, enhancing investor confidence and market stability.

Another critical reform is the increase in free float, which improved liquidity and market depth. At the same time, Japan has enhanced protections for smaller investors, creating a safer and more attractive market environment.

These measures collectively contributed to a rejuvenated stock market, attracting both local and international investors.

Creating a balanced ecosystem

Japan’s success can be attributed to its ability to create a balanced ecosystem that caters to retail investors, market makers and institutional investors alike.

Efficient cost structures for market makers allow them to participate actively in price discovery, ensuring that the market remains liquid and transparent.

Optimised tick sizes facilitate smoother trading, particularly for higher-priced stocks, making the market more accessible and appealing.

Additionally, Japan’s inclusion of a broader-based index such as Topix, which better represents the overall economy, has been crucial.

This inclusivity has attracted a diverse range of investors, contributing to a more dynamic and resilient market. Moreover, allowing a greater percentage of retirement funds to be invested in the stock market has bolstered liquidity and long-term stability.

The role of government support in Japan’s market reforms cannot be overstated.

The Bank of Japan’s substantial investment in Japanese exchange-traded funds, covering indices like Nikkei and Topix, has provided a significant boost to market liquidity and investor confidence.

This strategic intervention highlights the importance of timely and effective government support in stabilising and growing the stock market.

Narrowing the gap

Singapore’s financial market, while robust, faces challenges that need to be addressed to bridge the gap and achieve similar success.

Comparatively high costs and lower volatility have deterred broader participation, particularly from retail investors, many of whom are simply choosing to invest in more liquid and accessible markets such as the US using online platforms with virtually no transaction cost.

The listing of major South-east Asian companies like Sea and Grab in the US complicates index arbitrage strategies, which are essential for providing liquidity and price discovery of major stocks.

Strategic solutions for Singapore

The Singapore government, through agencies like EnterpriseSG, has built an enviable startup ecosystem.

However, the tendency for late-stage companies to be acquired by external competitors, or list overseas, often results in these firms losing their Singaporean identity.

This underscores the case for a more conducive environment for Singapore companies to list and grow domestically.

Adopting a multi-pronged approach similar to Japan’s reforms can significantly enhance Singapore’s financial market.

Restructuring market categorisations, increasing free float, and enhancing regulatory oversight will create a safer and more attractive environment for investors.

Creating an inclusive ecosystem that caters to retail investors, market makers and institutional investors will ensure market liquidity and resilience.

Efficient cost structures for market makers and optimised tick sizes will facilitate smoother trading, making the market more accessible.

A broader-based index that better represents Singapore’s economy will attract a diverse range of investors. Additionally, allowing a greater percentage of retirement funds to be invested in the stock market can bolster liquidity and long-term stability.

Transforming Singapore into the “Nasdaq of Asia” is a complex challenge requiring coordination and collaboration among various stakeholders. However, the potential rewards are immense, given the wealth the country has already attracted.

By adopting a comprehensive approach similar to Japan’s reforms, Singapore can create a dynamic, inclusive and resilient stock market.

The writer is CEO of Grasshopper Asia, a technology platform and asset manager