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The Japanese Dimension of HKEx’s Markets


Japan is the world's second largest economy, and second largest stock market. Given their close geographical proximity to Hong Kong, it might be expected that Japanese investors would be major participants in the Hong Kong securities market. In particular, the Mainland China enterprises listed in Hong Kong, with their growth potential, might seem a natural choice for investors from a mature developed country. However, in reality, Japanese investment in the Hong Kong market is far below its potential.

Against the background of Japanese economic development, and utilising the results of recent HKEx surveys and other available data, this article traces Japanese participation in HKEx's securities and derivatives markets. The article also describes Japan's broader financial activities in Hong Kong. Finally, the paper looks at possible reasons for Japan's current participation rate in the Hong Kong market.

Japan's economic background

To understand the evolution of Japanese participation in the Hong Kong markets over time, it is necessary to appreciate the development of the Japanese economy.

Japan experienced a long post-war boom, culminating in a period of economic and financial overheating in the late 1980s - the so-called "Bubble" period. The Nikkei stock index reached a peak of 38,915 in December 1989. Following the bursting of the bubble, Japan saw a long period of low growth and repeated recessions, from which it is not clear that it has yet emerged - see Figure 1 below. The 1990s are accordingly called the "Lost Decade". In March 2003, the Nikkei dipped below 8,000.

Figure 1. Real GDP growth rate of Japan

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For the fiscal years from April of the year to March of the following year.

Figure 2. Nikkei 225 index month-end closings (Jan 1984 - Dec 2004)

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Following the above economic cycle, there was a flurry of Japanese financial activity in Hong Kong in the late 1980s, during the Bubble period, while in more recent years activity has declined. This pattern can be broadly observed in HKEx's markets, as described in the following section.

Japanese activity in HKEx markets

Stock market

HKEx's annual transaction surveys gather information on the aggregate order flow into the markets from various overseas source countries. In 2003/04, as shown in Figure 3 below, in value terms Japan contributed just 3.1% of Hong Kong stock market overseas order flow - minor compared with the UK (28%), the US (25%) and Continental Europe (24%). As a proportion of total trading, the Japanese contribution was just 1%.

In fact, as a proportion of total market order flow, Japan's contribution has halved since the mid-1990s. In 1995/96, Japan contributed 2.5% of total order flow - two-and-a-half times the relative level today.

Figure 3. Turnover value and contribution to HKEx cash market turnover value from Japan (1993/94-2003/04)

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Source: HKEx and Stock Exchange Cash Market Transaction Surveys (study periods were from October to September of the following year)

Derivatives market

In the 1980s, the Hong Kong Futures Exchange (HKFE) saw active trading in soya bean futures, with traders apparently arbitraging against the Japanese market. However, trading in the HKFE declined and the contract was subsequently delisted.

Today, Japan's contribution to HKEx derivatives order flow is lower, relatively, than on the stock side: just 0.5% of total volume in 2003/04, as shown by Figure 4 below. The absolute contribution rose in 2003/04, but the relative contribution declined since total HKEx derivatives volumes rose substantially.

Figure 4. Contract volume and contribution to HKEx derivatives market
from Japan (2000/01 - 2003/04)

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Source: HKEx Derivatives Market Transaction Survey 2000/01 to 2003/04 (study periods were from July to June of the following year)

Issuer dimension

In the 1970s, several Japanese companies were cross-listed in Hong Kong - Hitachi, Kumagai Gumi, Matsushita Electric, Nippon Shinpan and Sony. Some of these stocks traded in Hong Kong, but only modestly, and over the years they were delisted.

In more recent years, a number of Japanese-controlled issuers listed in Hong Kong, for example, the several listed companies in the Yaohan group. However, most of these have since disappeared, possibly relating to the Japanese domestic recession.

As detailed in Table 1 below, HKEx currently lists four Japanese-controlled issuers, two on GEM, the Growth Enterprise Market, and two on the Main Board.

Table 1. Japanese-owned issuers listed on HKEx's markets

  Code Stock name Japanese shareholders (% holding)
1 900 Aeon Credit Service (Asia) Co. Ltd Aeon Co, Ltd (66%)1
2 984 Aeon Stores (Hong Kong) Co., Ltd Aeon Co, Ltd (72%)
3 8075 Rojam Entertainment Holdings Ltd Yoshimoto Kogyo Co, Ltd (29%)
4 8220 Vaso Digital International Holdings Ltd Mr Yasukawa Yoshihiro (70%)2

The Tokyo Stock Exchange (TSE) lists some 30 foreign companies, although these generally do not see much trading. One of the companies is a Hong Kong-listed stock: Henderson Land. The listing date in Tokyo was 5 February 1997. Although Henderson was traded actively in Tokyo at first, recent trading there has been minimal.

In October 2004, the TSE listed one China-related stock, Xinhua Financial, on its emerging market board, Mothers. Initial trading in Tokyo was active, eg $66 million-equivalent on 11 November 2004.

Exchange participant dimension

According to HKEx's internal records, there are currently seven Japanese-controlled Stock Exchange Participants, including Daiwa and Nomura. There were previously a larger number. By the end of the 1980s, ie following the Japanese Bubble period, it is believed that more than 30 Japanese stockbrokers were active in Hong Kong, although not all were Exchange members.

In the year ended September 2004, over 40 brokers reported Japan-sourced stock order flow. Most of the Japan order flow came through non-Japanese brokers. In the derivatives market, in the year to June 2004 about 10 brokers reported trading on behalf of Japanese clients. The leading Exchange Participants channelling Japanese order flow into the Hong Kong derivatives market were mainly international houses.

Other Japanese investment in Hong Kong

Japan's outward direct investment

Japan's outward direct investment in Hong Kong peaked in the late 1980s and has recently been at relatively low levels.

As shown in Figure 5 below, Japan's outward direct investment in Mainland China overtook that in Hong Kong in 1992 (although investment in Hong Kong exceeded that in Mainland China in the single year 1999). Japanese investment in Mainland China peaked in 1995 and declined thereafter, it is understood because of persistent difficulties encountered by the Japanese in the Mainland environment. However, it has been picking up again in the current decade.

Figure 5. Japan's outward direct investment in Mainland China and Hong Kong

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Japanese financial activity in Hong Kong

The number of Japanese authorised institutions (ie banks and deposit-taking companies) in Hong Kong peaked at 95 in 1995 as shown in Figure 6 below. By 2003 it had declined to 22. The decline is understood to relate to the domestic difficulties of the Japanese economy, the lower attractiveness of Hong Kong in its recent years of recession, and the more liberal financial environment in Japan.

Figure 6. Number of Hong Kong authorised institutions with
Japanese beneficial ownership

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The above pattern is broadly reflected in the pattern of loans extended by Japanese authorised institutions in Hong Kong to Hong Kong customers, as shown in Figure 7 below.

Figure 7. Total loans to customers in Hong Kong by authorised institutions
with Japanese beneficial ownership

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The trend in Japanese authorised institutions' loans to customers outside Hong Kong shows an even sharper pattern of rise and decline, as shown in Figure 8 below. Essentially, Japanese financial institutions formerly used Hong Kong as an offshore base, to reduce tax exposure or to conduct transactions that were difficult to do in Japan. Now, they no longer use Hong Kong for such purposes. The decline in such use relates partly to the domestic problems many of these institutions faced; partly to liberalisation of the Japanese financial market - ie a greater range of transactions are now permitted to be conducted onshore; and possibly also to cultural changes among Japanese institutions.

Figure 8. Total loans to customers outside Hong Kong by authorised institutions with Japanese beneficial ownership

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The Japanese economic cycle and the progressive liberalisation of the Japanese domestic markets in recent years may perhaps explain the trends in usage of the Hong Kong market. However, the absolute level of investment by Japan in the Hong Kong market nonetheless remains low. This may relate to the conservatism of Japanese investors and investment institutions.

Characteristics of Japanese individual investors

Japanese individuals tend to be quite conservative, investing on average 12% of their financial assets in securities, 4.9 percentage points being in shares and equities. The major financial assets are time deposits (39%), insurance and pension (28%) and cash and currencies (16.9%)3. These proportions have remained stable over the last few years.

Over the four years to 2003, individual investors' contribution to total stock trading on the TSE averaged 15.1%, ie the market is dominated by institutions.

Japanese individual investors make only a minimal contribution to derivatives trading on the TSE. For example, in the most active contract (TOPIX Futures), individuals contributed less than 0.1% of turnover in 2003; in TOPIX Options, less than 0.1%. Individual investors were, in relative terms, most active in equity options (8.9% of turnover), but this market is very small - individuals' share amounted to just 52,817 contracts in 2003. The picture on Japan's other equity derivatives exchange, the Osaka Securities Exchange, is similar.

Japan's outward portfolio investment

Japan has invested its capital exports to a great extent in overseas bonds, especially US Treasuries. As shown by Figure 9 below, overseas stock purchases have been around one-tenth of overseas bond purchases.

Figure 9. Purchases of foreign securities by Japanese investors

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Japanese investors are long-standing participants in the Hong Kong stock market, ie their participation can be regarded as somewhat mature. Their participation broadly follows the market trend. Japan was formerly a more significant overseas source of order flow, but is currently at around half the peak level in relative terms.

It can be said that strategically, China stocks, with their potential linked to the high-growth, developing Mainland China economy, should be a good fit for Japan which is a mature developed economy with an ageing population. Nonetheless, Japanese investors tend to be conservative and have concerns about the governance of Mainland China enterprises. Again because of conservatism, they are only marginal users of Hong Kong derivatives. These fundamental attributes would have to change before Japanese investment in the Hong Kong securities market could be seen on a large scale.


1 Directly held and indirectly held through AEON Credit Service Co, Ltd, a consumer finance services company in Japan.

2 Indirectly held through Share Able. 3Source: Tokyo Stock Exchange Fact Book 2004