The unprecedented outage that halted trading on the Tokyo Stock Exchange for the whole of Thursday is the last thing local authorities need at a time when the nation is seeking to reinvent its capital as a global financial hub.
As China clamps down harder on Hong Kong, some in Japan have seen the opportunity to realize a long-held vision of making Tokyo more attractive to international financial firms and luring highly paid professionals.
Yet the city’s image as an international hub has suffered major setbacks, having come under global criticism over the treatment of former Nissan CEO Carlos Ghosn while under arrest as well as its ban on almost all foreigners entering the country, including those with valid work visas, during the height of the novel coronavirus pandemic. And Thursday’s exchange outage isn’t winning back any points among foreign executives.
“It won’t help at all in their global financial hub ambitions,” said Gary Dugan, chief executive officer of the Global CIO Office in Singapore. “A continuously, regularly trading market is an absolute baseline must. Today, they failed the markets and investors.”
Tokyo Stock Exchange has long sought to position itself as a “we never close” outlet, and a crucial part of the capital’s pitch as a business hub.
Unlike equity markets in nearby Hong Kong, natural disasters such as typhoons have never forced the exchange to close. Markets remained open even in the aftermath of the 2011 earthquake and tsunami, which struck with minutes of trading time left. Unlike bourses in the U.S., there are no circuit breakers in places to limit volatility in the cash equity market.
Yet the exchange has repeatedly been taken down over the years by technical glitches.
Thursday’s outage, its worst ever, was the result of a hardware problem at the bourse’s “Arrowhead” trading system, and a subsequent failure to switch to a back-up. It caused the first full-day suspension since the world’s third-largest equity market moved to all-electronic trading in 1999, and came on a day of high anticipated trade volume following the release of the Bank of Japan’s closely watched tankan corporate survey and a rise on Wall Street.
Arrowhead, developed by Fujitsu Ltd., debuted in 2010, bringing processing times for trades to 5 milliseconds — on a par with the New York and London stock exchanges at the time. The system got an overhaul last November, and currently processes orders in about 0.2 milliseconds.
TSE officials said a disc device failure caused abnormalities in the distribution of market information and monitoring functions, although the fundamental cause of the problem was still unknown. Fujitsu said any findings from its investigation into the failure would be disclosed through the exchange.
Trading resumed as normal on Friday after replacing hardware and restarting its systems.
“For now, there’s relief that trade was able to resume,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management. “The cause has not been clearly indicated yet, so traders are processing orders that couldn’t be done yesterday as they wait and see how the system works, rather than actively trading.”
“It’s problematic that this happened after the TSE upgraded its system as recently as 2019,” said Takatoshi Itoshima, strategist at Pictet Asset Management.
Exchange officials recognize the stoppage couldn’t have come at a worse time for Japan’s promotion as a financial hub.
“With the government considering plans to develop the city as a financial hub, I must humbly apologize for the full-day outage,” Tokyo Stock Exchange CEO Koichiro Miyahara told reporters in Tokyo. “The exchange should be a crucial piece infrastructure for the financial markets.”
Miyahara’s responsibility for the incident — as well as that of the holding company CEO, Japan Exchange Group’s Akira Kiyota — will be closely watched. In 2005 Takuo Tsurushima, then the head of the bourse, was forced to step down along with other executives after two system failures, neither of which was as severe as Thursday’s.
“Our watchword has been ‘never stop’,” Miyahara said. “I want to thoroughly investigate the cause and prevent it from happening again, while keeping that watchword in mind.”
That said, authorities had already faced an uphill challenge convincing the markets that Tokyo could rival the likes of Hong Kong, with issues including the comparative lack of English spoken and the absence of domestic helpers commonly employed by highly paid professionals in other Asian hubs.
“I don’t think today’s problem at the TSE much affects Japan’s efforts to create a global financial hub that can rival Hong Kong,” Morningstar Inc. analyst Michael Makdad said. “Japan’s efforts face much bigger challenges than that, such as taxes and a perception that Tokyo has a lot of bureaucracy and isn’t always friendly to global business.”
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