Emerging Markets in Shakeup Prompted by Overcrowding, Prolonged Slump

By Katsuhiko SAKAI

NEO, Hercules, Q-Board, Ambitious, fast increase of emerging companies Against that background, stock Mothers, Centrex and Jasdaq…If you amid high economic growth. The sys- exchanges launched emerging-company know what they have in common, it is tem then was simply an auxiliary market markets one after another. In 1999, the fair to say you are well versed in the where shares in small companies falling Nagoya created the Japanese economy. The last name may of meeting requirements for listing Centrex market and the Tokyo Stock remind you of something familiar. You on stock exchanges were traded over the Exchange (TSE) established the Mothers may suspect Jasdaq as a Japanese version counter at securities companies. market. In 2000, the Securities of Nasdaq. Correct! All these seven Nevertheless, the over-the-counter stock Exchange (OSE) formed an alliance names are those of stock markets for market alone has provided with the US Nasdaq market to set up emerging companies in , listed in a with opportunities to meet promising Nasdaq Japan. Then, the Ambitious reverse chronological order. There is growth companies for more than 40 market was born at the Sapporo another thing common to the emerging years. Securities Exchange and the Q-Board equity markets — their respective inde- A turning point for the Japanese secu- market at the Fukuoka Stock Exchange. pendent survival is doubted amid slug- rities industry came in the second half of In 2001, the JSDA assigned its Jasdaq Ngish trading. Their realignment has the 1990s when the Japanese version of Market Inc. unit (now known as Jasdaq become an urgent challenge for Japan’s Britain’s Big Bang Securities Exchange Inc.) to running the securities industry. deregulation started. In the securities over-the-counter market. industry, regulations were eliminated or As Nasdaq withdrew from Nasdaq 7 Markets at 6 Exchanges eased to encourage Japanese companies Japan in 2002, the OSE renamed the to shift their fund-raising focused on emerging market Hercules. Jasdaq Jasdaq, which boasts the longest histo- indirect means – bank loans – to direct acquired the stock exchange license in ry and the largest number of listed com- fund-raising from the market. Then, 2004 and created the NEO market in panies among the seven, originated from the Japanese economy was in the midst 2007 for companies with new business an over-the-counter stock trading system of a slump after the burst of eco- models. At present, Japan now has that the Japan Securities Dealers nomic bubbles, leading to growing calls seven emerging markets at six exchanges, Association(JSDA)created in 1963, for industrial restructuring through the becoming a rare country with such a when the first venture boom came on a development of venture companies. large number of emerging markets.

Photo: Kyodo News Harmful Effects of Excessive Competition

As a matter of course, the large num- ber of emerging markets forced them to wage a fierce competition for their respective survival at the cost of investors. They tried to increase listed companies so desperately that these exchanges’ screening of initial (IPO) applicants grew laxer. As a result, some companies that lacked business bases or executives suitable for publicly traded firms made IPOs for list- ing on these exchanges. Falsified financial statements, win- dow-dressed earnings reports, relations with antisocial forces and other prob- lems began to surface in 2005 for com- Passers-by glance at brokerage bulletin boards showing the 11th straight day of decline in Tokyo panies listed on these emerging markets. stock market prices on July 3, 2008, the longest uninterrupted drop in 54 years. Coming in January 2006 was an event

50 JAPAN SPOTLIGHT • September / October 2008 FINANCE

Table Overview of emerging markets (as of the end of May 2008) that seriously deteriorated con- Number of Market fidence. Executives of Livedoor Co. Market Date of founding listed companies capitalization (´1 Bil.) were arrested for their alleged fraud after the Internet company attracted public Jasdaq (Tokyo) Feb. 1963 949 11,983.8 attention through its high-profiled Centrex (Nagoya) Oct. 1999 32 83.4 attempts to acquire a professional base- ball team and a major television broad- Mothers (Tokyo) Nov. 1999 198 2,166.9 caster, and took advantage of frequent Ambitious (Sapporo) April 2000 12 17.4 stock splits to raise its stock price and Hercules (Osaka) May 2000 172 1,580.5 achieve the largest on the TSE Mothers market. The pop- Q-Board (Fukuoka) May 2000 10 6.9 ular company’s questionable practices NEO (Tokyo) Aug. 2007 4 38.5 prompted investors to dump shares in Nasdaq (US) Feb. 1971 3,009 443,382.4 wide-ranging businesses. The “Livedoor shock” forced the Mothers market index Source : Data from respective exchanges to lose more than 10% for two consecu- tive days, sending all emerging markets turns, the Osaka exchange has decided ming from its large size and dominance on a roller coaster ride from hell. to acquire the Jasdaq Securities by institutional investors. Exchange, the largest Japanese emerging The Japanese emerging markets, Jasdaq to Merge with Hercules market. On a prolonged slump in stock where the market capitalization of each trading, Jasdaq posted a loss in the year issue is small, are too small to be liquid Emerging markets have shown no sign to March 2008 for the first time ever. for institutional investors. Individual of full recovery over two years and a half The Osaka exchange plans to merge investors dominate transactions on these since the debacle. At the end of June Jasdaq with its Hercules emerging mar- markets. This is the reason many com- this year, the Jasdaq stock index was at ket in two years. Jasdaq President panies that have grown through only half the level before the Livedoor Takashi Tsutsui emphasized the effects Japanese emerging markets such as shock. Indexes on the Mothers and of the merger. “The greatest advantage Jasdaq move to the Tokyo exchange to Hercules markets were a quarter of their would be cost reductions and effective emphasize themselves as leading busi- respective before-shock levels. Their utilization of human resources through nesses. If any Japanese emerging market slack performances have led to plunges the integration of trading systems.” were to prevent companies from fleeing in IPOs. Many IPO companies have to the Tokyo exchange, it would have to seen their first market prices slipping Pursuing Big Market Close to create a mechanism to attract institu- below their respective IPO prices. Share Nasdaq tional investors. prices of some companies on these mar- As a matter of course, any large-scale kets continued to decline, forcing the The planned merger of Jasdaq and realignment involving the Sapporo firms to be delisted from markets due to Hercules has stimulated discussions on exchange’s Ambitious, the Nagoya insufficient market capitalization. realignment of the Japanese emerging exchange’s Centrex and the Fukuoka A panel at the Ministry of Economy, markets that have agonized over how to exchange’s Q-Board as well as Jasdaq and Trade and Industry released a report in attract investors. This is because securi- Hercules would not be easy. This is April warning that venture company ties industry people have acknowledged because consolidation of these emerging owners were hesitating to implement a fierce competition between similar markets could develop into the question IPOs that could not be expected to small markets may fail to invigorate of whether regional stock exchanges bring about fund-raising planned for investment in startup companies. The should be eliminated. In fact, regional investment needs. “Emerging markets JSDA has indicated a plan to create a stock exchanges have been determined to in Japan are far more and smaller than panel to intensively consider how best to remain independent under their respec- in any other country,” the panel said. reform the emerging markets. It hopes tive goals of developing regional busi- “Each emerging market should reconsid- the panel will draw up recommenda- nesses. But the Jasdaq-Hercules merger er its own role from such perspectives as tions in one year. could spur a greater-scale realignment of market size, international competitive- An ideal model under consideration emerging markets. “If a dominant ness and market efficiency.” The panel by many securities industry people is emerging market is born, the others may was concerned that emerging markets’ Nasdaq, the world’s largest venture mar- move to join it,” said a JSDA executive. shrinking financial intermediation could ket boasted by the United States where endanger the regeneration of the venture companies prosper. The reason Japanese economy. Microsoft Corp., Intel Corp. and other Katsuhiko Sakai is a senior staff writer and Recently, however, a breakthrough famed companies stay on Nasdaq is that deputy editor at the Economic News Division, has emerged. Following twists and the market features high liquidity stem- Jiji Press.

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