Can Japanese firms face up to the challenge of financial reforms?

Financial market reform in Japan will probably challenge the management of the country's banks and securities brokerages, said Kotaro Tamura, the Cabinet officer in charge of Japan's financial regulator.

The Cabinet and the regulatory Financial Services Agency are in talks about measures to boost Tokyo’s image as a financial center. This includes ways to draw in more hedge funds, private equity firms, Islamic funds and other financial players, Tamura said.

“We must carry out reforms in three years, otherwise it'll be a failure,'' Tamura, 43, said. “Nationality doesn't matter as long as one can contribute to Japan's interest.” Japan is considering a merger of its securities and commodity exchanges, replicating London's ‘Canary Wharf' in Tokyo and easing rules separating bank and brokerage operations to win a bigger share of global investment. Tokyo lost its presence as Asia's financial hub in the past decade, with rival cities such as Hong Kong and Singapore gaining ground.Many Japanese financial firms with local management teams may face difficulties surviving the reform, he said. “Nevertheless, we're prepared for changes.”

The most urgent issue is reform of the Tokyo Stock Exchange, said Tamura. “We simply don't have the market in which a variety of new financial products can be traded.” Consolidation of Tokyo's exchanges, longer trading hours, timely disclosures in English, alliances with overseas markets and finding overseas companies to trade their shares in Japan are all needed, he said.

Japan will place strengthening of its financial markets as a priority item in a June economic reform paper, Yuji Yamamoto, Minister for the Financial Services Agency, said. It plans to replicate Canary Wharf, London's financial center, to encourage more overseas financial institutions to locate their Asia headquarters in Tokyo.

Many Japanese financial firms with local management teams may face difficulties with the reform. Will they survive? What should these firms do to prepare for the changes? Will the Tokyo Stock Exchange withstand the changes and emerge the victor over bigger rival New York Stock Exchange, or are we about to witness the imminent doom of the world's second-biggest bourse?