July 22, 2024 — Powerful market, economic and technological trends are pushing the Japanese bond market toward electronification.
The last decade has seen fixed-income trading around the world transform from a phone and chat-based network into a sophisticated electronic ecosystem allowing buyers and sellers to interact in new ways. In Japan, however, Japanese market participants have been hesitant to fully embrace e-trading—a reluctance stemming in part from a cultural preference for relationship-based trading.
Today, 27% of investors trade non-yen government bonds electronically, with 26% of notional volume executed on the screen, according to data from Coalition Greenwich. E-trading in non-yen corporate bonds is lower, with only 18% utilizing e-trading and only 6% of notional volume traded electronically. (By comparison, 63% of European investment-grade bonds and 75% of European government bonds traded electronically in 2023).
Drivers of E-Trading Growth in Japan
However, the growing benefits of e-trading for investors and dealers operating in global bond markets are increasing the allure in Japan. Japanese investors are the largest holders of U.S. Treasury securities, for instance, with current investments totaling $1.1 trillion at the end of 2023. Coalition Greenwich data shows that globally, 64% of U.S. Treasuries traded electronically in 2023, with Japanese investors increasingly finding that e-trading is their best path to liquidity in that market.
“Integrating e-trading tools with key order management systems (OMSs) available to investors in Japan can dramatically improve workflows and trading outcomes with order details, compliance requirements, real-time execution data, pricing, and liquidity metrics integrated into a single view,” says Kevin McPartland, Head of Research at Coalition Greenwich Market Structure & Technology and coauthor of The Evolution of Global Bond Trading in Japan.
To manage growing volumes, global bond dealers are increasingly providing access to electronic platforms. The Japanese buy side is also looking for ways to cut costs and operate more efficiently to remain competitive, which increasingly means utilizing new all-to-all and request-for-market trading protocols. Automation is a key part of any efficiency strategy, which, in turn, requires greater adoption of e-trading tools.
“Innovative solutions targeting the local market, competition from global competitors and strong demand for global debt will all act as tailwinds to growth in e-trading,” says Seiji Ishii, Head of Japan at Coalition Greenwich and report co-author. “While that growth will change the nature of buy-side to sell-side relationships, relationships will remain critical to market functioning, with technology ultimately enhancing the level of service provided.”
The Evolution of Global Bond Trading in Japan provides a comprehensive look at the state of electronic trading in Japanese fixed-income markets, including past impediments to the growth of e-trading in Japan, e-trading usage and volumes in Japan versus other major regions, and an analysis of the key factors driving growth in e-trading in markets around the world.