The Marketeer

Back to Contents of Issue: August 2001

As president of the Osaka Stock Exchange -- the birthplace of futures -- Goro Tatsumi is determined to push through reforms. But there are 124 years of habit to overcome. And Tokyo bureaucrats.

by Alex Stewart

For foreigners in Tokyo, Osaka has a faintly familiar suggestion of Manchester or Pittsburgh. A few events may stand out. Wasn't there a big Expo fair or something? That was 30 years ago. Aren't they bidding to host the Olympics in 2008? Even so, it all feels like another case of an old economy fading into a Midlands-type rust bowl. But there are some who see it in a very different light. One of those is Goro Tatsumi, president of Osaka's venerable, 124-year-old stock exchange.

Tatsumi, president since June last year, when the Exchange announced its tie-up with Nasdaq to form Nasdaq Japan, is the bane of Tokyo's mandarins and a relentless repudiator of red tape. He started his own brokerage in Osaka, Kosei Securities, while still in his twenties, and with drive and a little bit of arm twisting -- and aided, no doubt, by his consummate self-promotion skills -- squeezed it onto the First Section of the stock exchange just before the Bubble burst.

He was a major force behind the introduction of financial futures trading in Osaka in the 1980s -- an action that saved the Exchange from complete marginalization. He now ranks the new OSE with the Chicago Mercantile, SIMEX in Singapore, and LIFFE in London. The advent of Nasdaq Japan is the most telling sign of this makeover from local exchange to global marketplace. The vision is that it will operate as part of a tripolar global trading system allowing investors to access stocks in Nasdaq markets around the world and issuers to tap local investors through a global network. In reality, there are significant regulatory hurdles yet to be overcome, and it still takes three clicks to find a link back to the Nasdaq Japan site from Nasdaq US's.

Nonetheless, and to Tatsumi's delight, Nasdaq Japan has so far managed to expand its listings and trading business faster than either Mothers or the OTC, both in Tokyo. It's a tale of two cities, and the competition it elicits is good for the expansion of capital markets in Japan and therefore venture businesses. Tatsumi is a buccaneer in a world which has long been staffed by bureaucrats. Add him to the ranks of new mavericks the times are bringing forth. It's a boost for Osaka -- and better still, for Japan.


Why did you decide to offer yourself for appointment as president of the Osaka Stock Exchange?
I was brought up to think how to help my country and society, so I have a sense of civic responsibility. On top of this, I really love Osaka. I founded my own securities company (Kosei Securities) 40 years ago. Thanks to the existence of the Osaka Stock Exchange (OSE), I could set up in business by becoming a member of the Exchange. I have been actively involved ever since. For 20 of the past 40 years I have served in leading positions, such as chairman of the Board of Governors, and head of the Japan Securities Dealers Association in Osaka. I also headed the first study group for trading futures on the OSE. I've been a strong advocate of globalization. I was head of a committee for the advancement of globalization. My assumption of the presidency of the Exchange is just an extension of all this.

Why did the Exchange want a president from the private sector after having had ex-bureaucrats as presidents for a long time?
Bureaucrats ran the Exchange for 24 years before my selection. But it was my idea to select bureaucrats. We did so because everything is controlled from Tokyo. If we were going to get the attention we needed, we had to have people from the ministries in Tokyo who could speak for us. Before this, presidents had always been selected from the private sector. We faced a new set of issues that needed new responses and where Tokyo was no longer especially helpful. I'm talking about structural reform, global competition, deregulation, and demutualization. The Exchange wanted someone from within the industry, with the guts and determination to push through reforms. That's why I was recommended and why I accepted. It's going to be my last contribution to help the Exchange.

What are the pressures facing the Exchange?
If you are thinking of foreign pressures, then there are none. That's because competition with other markets is something we can handle. Our problem is simply that everything falls under Tokyo's control. We manage 98 percent of futures trading in Japan, so you'd think Tokyo would leave it to us, but it still wants to tell us what to do, and it obstructs us. This pattern started in the eighteenth century when Shogun Tokugawa Yoshimune started interfering in the merchant life of Osaka. It was also at that time that Osaka rice merchants developed the first form of futures trading in the world. It took 15 days then to travel up for an audience in Tokyo, sitting cramped inside a small lacquer basket carried by two men. You could say that's how I feel sometimes when I'm dealing with Tokyo today!

Against this, what would you like to accomplish during your term of office?
The securities industry has been tainted by scandals, going back at least 10 years. When I used to discuss this problem with Ministry of Finance officials, my comment was always that we needed a system where personnel could be changed easily -- i.e., what they have in the US: a system of hiring and firing. In Japan, though, we have the seniority system and the lifetime employment system. In such a system it is very difficult to change things quickly. If we could change this culture, we could put an end to many of the bad practices which plague us.

At the OSE, there was practically no new hiring between 1982 and 1989 due to the crisis we were in [Note: Before the introduction of Nikkei Futures in 1988, there were doubts that the OSE could continue to survive]. After 1989 we began recruiting again, and the Exchange hired a lot of excellent young people. They are the foundation on which we are going to build the new Exchange. I have established a strategy committee, which includes Professor Shoichi Royama, formerly of Osaka University; Hirotaro Higuchi, honorary chairman of Asahi Breweries; and Toshihiko Fukui, a former deputy governor of the Bank of Japan. We gave them a year to deliver their recommendations. They submitted interim reports last November. Among their proposals was that we should speed up the process of demutualization. Also they recommended that we should focus on improving the way shares are traded. We have adopted all their recommendations.

After my appointment, I determined to give myself 100 days to set the pace and direction of my administration. I started the practice of taking younger staff out with me to lunch whenever I was free, for what I call power lunches. I usually invite around 10 staff members. We have frank and open discussions, and I use the output from our lunch meetings to implement new thinking. I hope this will rank as an achievement. We still face a lot of built-in resistance. The Exchange has existed for 124 years and has accumulated practices which are hard to change overnight. It makes reform harder to carry out, but we've made a start.

Are you guided by any model, such as other futures exchanges?
No particular model. Osaka is the birth-place of futures. We feel very proud of this fact. However, there is something I have noticed when I visit the Chicago Mercantile Exchange, which is the expression on the faces of traders in the pit. They are completely different from the faces of traders in Japan. They look like wild animals chasing their prey! I always point this out to people from Japan when I'm there, and I say to them, "Look at their faces, we've got to learn from this; we don't look like this in Osaka, but we should." I think this is a measure of how far we have to change.

The Exchange became a joint stock company in April. Presumably this will help you initiate changes in both the culture and direction of the company. What sort of changes do you think you can make?
When we consider ourselves by corporate standards, we are, to use a metaphor from our chairman, Mr. Higuchi, like a luke-warm onsen (hot spring bath). We need to get a lot hotter! One thing we need to do is speed up communications. The decision process should have no more than three levels. I'd also like to see each and every member of our company become an independent thinker.

Who owns the company now?
It's owned by the original Exchange members now. However, within about two years we plan to take the company public. Then the general public can own us.

Why do you think Nasdaq US was willing to form a joint venture with you, rather than, say, with the Tokyo Stock Exchange?
The TSE is the national market, but it operates by its own standards, the standards of Kabutocho (the area around the TSE in Tokyo). We operate on a global standard. When we started trading futures, we went out of our way to say Osaka is open, and as part of this we actively invited foreign securities houses to become our members. We told them, if you can't make money here, then we are going to fail. This happened when I was chairman of the Board of Governors of the Exchange. Our futures products are truly international and are the foundation of our Exchange.

Have the hopes you had when you started negotiating with Nasdaq changed in any way?
Our contacts with Nasdaq are long-standing. I became involved personally with the senior management of Nasdaq when I participated at meetings of the international councils of Securities Dealers and Self-Regulatory Associations. The top person then was Mr. Hardiman [Joseph Hardiman, president and CEO from 1987 to 1997]. I formed an excellent relationship with him and his wife, which goes back 14 years. We attended together at least 10 different meetings of the Associations in different locations for more than 10 years. I formed a similarly good relationship with Mr. [Frank] Zarb, who is a successor of Mr. Hardiman, Mr. [Richard] Ketchum, and Mr. [John] Hilley of Nasdaq International. Whenever we met, we talked about our dreams of forming a tie-up between the OSE and Nasdaq and how we would do this. Thus, whenever I was asked to draw up proposals for the reform of Japan's capital markets, I always proposed some form of partnership with the Nasdaq. This March, when I was in Florida for a Futures Industry Association meeting, I met Mr. Hardiman and his wife for dinner. We talked about how the OSE-Nasdaq tie-up was now a reality, and we both said, Wow, it's taken a long time, hasn't it!? So, do I think anything has changed since we started talking to Nasdaq? No, not a thing! When we finally signed this agreement, I can tell you, it was like hitting a home run. What's more, when it happened, I was so excited that I wanted to run past everyone in the team, punching the air just like you see on TV!

What about the benefits of listing on Nasdaq Japan: How are they different from listing on other exchanges in Japan?
The first thing is we plan to integrate our market with the other Nasdaq markets around the world. For example, Nasdaq recently bought Easdaq, the pan-European exchange based in Belgium. It has also signed a cooperative agreement with the London International Financial Futures Exchange (LIFFE). So Nasdaq has footholds now in both the UK and the Continent. We can participate in this network. In Asia, Nasdaq always says they have the OSE as their partner. We thus consider ourselves the third pillar in a tripolar global network, connecting the US, Europe, and Asia. This is not ready yet, but when it happens, a Japanese company listing on our Exchange will in effect be listing on the whole world.

How about the current weakness of the Nasdaq market in the US? How is that affecting the operation of Nasdaq Japan?
The month after we signed the agreement to set up Nasdaq Japan, in June last year, I visited the US to sign an agreement to list the Nasdaq 100 Index in Osaka and to trade the QQQ (Nasdaq 100 tracking stock). At the start of November, Nasdaq told us they wanted to list 26 companies on the Nasdaq Japan market. I wanted them to make some public offerings or secondary placements through the Exchange, as I told them this would create more interest and depth in the market straight away. While we were getting FSA approval to do this, the markets nose- dived. As a result, listings got delayed a great deal, and when the market for listing foreign stocks opened this April, the line-up of companies wishing to list had changed quite a lot from the original. We still have some big companies, but the list is not the same.

What are the benefits for foreign companies of listing on Nasdaq Japan?
The biggest benefit is access to funds. Japan has a massive pool of savings, about ¥1,400 trillion of deposits held by ordinary people. Very little is currently invested in stocks, perhaps around 10 percent of all savings. My view is that these savings should be made to work wherever they get the best return -- that is, anywhere in the world. When a foreign company lists on Nasdaq Japan, it will be like listing on the OSE because it will be just as easy for local investors to invest in it. We are therefore opening up access to a global market for local investors and a huge local market to international issuers.

Does the existence of the Nasdaq Japan market have much impact on Osaka? Can it offer any specific support to the Kansai venture economy?
Nasdaq Japan is not a market geared to the local economy. For example, most of the companies which apply for listing have Tokyo head offices. It is therefore a national, or, in fact, global market. Concerning the local venture economy, the Osaka Prefecture government is planning to list a venture capital fund which will invest partly in local companies. Venture companies in the fund will be taken public through Nasdaq Japan. Our biggest problem in Osaka is getting out information about what is happening here to the world. To overcome this, we need a financial explosion.

What do you mean by "financial explosion?"
I mean we need to strengthen the financial infrastructure of the Kansai economy. As I've said, the economy here has risen and fallen in waves. Before the war, business was divided almost 50:50 between Osaka and Tokyo. However, computerization has concentrated resources and information in Tokyo. But we now have another revolution, the communications revolution, which has made it possible to send out information from Osaka to the world, and to receive information from the world in Osaka.

You seem strongly in favor of globalization. What do you consider the good and bad points of it?
Globalization is a race, and we have no choice but to participate in it. The first point then is that we are determined to enter it and compete. There is a Japanese expression, "Don't sit in your castle and wait for death. Get out and fight for your life." The weak point for us is that we are not good at speaking English. I'm not good at it, nor are most Japanese.

Many large Japanese corporations are now making it compulsory to learn English. Is that happening yet at the OSE?
We have a system in place to encourage employees to study English. I've traveled abroad three times since I became president. Each time, I make sure that I have at least two young staff members with me. I do this to encourage them to build relationships with people abroad.

Do you see a special place for Asia in your global plans?
Once we have the links with Europe and the US in place, we plan to develop an Asian stock index. We've already signed a contract to do this with the Dow Jones. We intend to become an Asian trading hub.

Is this going to be your own index or will it be based on an existing index?
It will be a new one. We'll use existing indices too, but we think a completely new one will be best. As part of the contract we signed with Dow Jones last year, we agreed to list the Dow Jones 30 and Dow Diamonds (an exchange traded fund that tracks the DJIA). Under the same agreement, we can develop new indices as well. The Dow Jones has created more than 3,000 indices in 39 countries.

Coming home to Osaka, do you think Osaka's reputation as a birthplace of entrepreneurs is still accurate?
Osaka has produced a lot of famous entrepreneurs. Its position as a commercial center went into decline after the late Tokugawa Shogunate, because Osaka was allowed to use a silver standard only, unlike the gold standard in Tokyo. It was only at the Meiji Restoration that Osaka got the gold standard. Osaka revived on the back of the textiles industry and defeated Manchester to dominate Asia and the whole world. After the war, it produced Matsushita, Sharp, and Sanyo. I knew all three of the founders personally. It is true now that Osaka is declining relative to Tokyo, but there are still a lot of influential Osaka businessmen prominent in Tokyo: Hirotaro Higuchi [Asahi Breweries] is a good example. When I invited him to become chairman of the OSE, some people in Osaka complained that I was bringing in someone from Tokyo, but I told them he was born in Kyoto and is a leading businessman representing Osaka. Others on the Strategy Committee I mentioned earlier are similarly influential national figures with their roots in Osaka. For example, Yoshihiko Miyauchi, president of Orix, and Toshihiko Fukui as well.

How would you like to see Japan change?
What irritates me enormously is how weak Japan is in certain basic qualities. We have a saying, "To have a Japanese soul and Western talents." We need to learn these talents from the Anglo-Saxon countries in particular. What do you mean by "Western talents?" We need to exercise better managerial skills. But our history stands in the way of us. Japan is trying to restructure, but it doesn't really work. I envy the US, and Britain for that matter. In the 1980s, the US was flat on its back, but look, they've roared back. When I visited in the 1980s they were in tears. Our problem in Japan is crony capitalism. In the Anglo-Saxon countries, it's possible to move quickly, but not here. This irritates me the most. When the president of Deutsche Bank visited Japan three or four years ago, I met him. We talked about cultural differences, and he told me that Germany, too, really has to learn this from the Anglo-Saxon countries -- otherwise, it will not be able to catch up and compete with the US.

Finally, as a possible investor in the OSE, why would you recommend that I buy the shares when they are listed?
The OSE has been undergoing significant restructuring for the last five years. This sets us apart from the TSE. We've cut costs by ¥41.5 billion. The other focus we've had, especially under my presidency, is to make all of our business transparent. The goal of this is to make our company attractive to investors. I was elected to make this happen. Take demutualization: If you compare our progress with the TSE, we've done it very quickly. Compare the boards of directors: The TSE is planning to have five inside directors and four outside, so they will still have more insiders. We have only four inside directors and 14 outside directors. From now on, the success of an exchange will be determined by the effectiveness of its compliance system. This is what will lend it credibility with investors. For my part, I am encouraging managers in their thirties to take the lead in setting the direction for the company. They will be the foundation of our success. This will be the reason to buy our shares.

And will you list on the TSE as well as the OSE?
No way!

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