In October 2024, Japan’s ruling party held its presidential election, which resulted in Shigeru Ishiba being elected to succeed Fumio Kishida as prime minister. So far, there has been little impact on the ongoing Japanese market development initiatives under PM Ishiba’s leadership, as Ishiba has maintained his predecessor’s ‘Policy Plan for Promoting Japan as a Leading Asset Management Center’. This initiative encourages more personal savings to be channeled into productive investments to achieve a “virtuous cycle of growth and distribution.” The Tokyo Stock Exchange’s efforts to enhance the corporate value of listed companies are also progressing steadily.
In March 2024, the Bank of Japan (BoJ) ended 17 years of negative interest rate policy, beginning the process to normalise interest rates as prices continue to surpass 2%. The 10-year JGB yield recently exceeded 1.5% for the first time in nearly 16 years, signaling significant movement in the interest rate world.
Meanwhile, uncertainty has roiled the global economy since the beginning of 2025, leading to increased volatility in equity and currency markets. Against this background, there is growing demand for Japanese derivatives among traditionally conservative Japanese financial institutions and overseas investors who are major players in the Japanese derivatives market.
In Japan, equity derivatives trading volume makes up 93% of all derivatives traded at Japan Exchange Group (JPX) as of 2024. Notably, Nikkei 225 and TOPIX futures, primarily traded by institutional investors, both reached record-high transaction volumes in 2024.
To further strengthen the equity derivatives market ecosystem, the Osaka Exchange (OSE) under JPX has specifically targeted development of the single stock options (SSOs) market and the introduction of short-dated equity index options as its next strategic priorities.
SSOs have seen active trading in the US, Hong Kong and other markets, but in Japan, their trading has been limited to a small group of investors, resulting in lower market liquidity relative to the massive size of the stock market.
To address this imbalance, market makers began providing liquidity for 12 SSOs – comprising two ETF options and 10 individual stock options – last year. At the same time, a new online broker began offering SSOs services to retail customers in Japan. This boost in transaction flow has led institutional investors
to adopt strategies such as covered calls, and February 2025, trading volume for SSOs reached JPY 16.6 billion on a notional basis, marking the highest level since market making began.
Philippe Imhoff, senior vice president and head of convexity solutions (Asia) at Amundi Japan K.K., commented: “The utilisation of SSOs could offer a way to finance protection strategies on indexes, for example, by benefiting from higher premiums on SSOs on which the fund manager has a view. It would be great to see the SSOs and market become more active, and I hope that the efforts of OSE and the market makers will foster a robust single stock option ecosystem, one that asset managers can leverage.” Imhoff expressed optimism about the growing liquidity in the Japanese SSOs market and increasing adoption of SSOs by institutional investors.
To capitalise on these opportunities, OSE plans to attract more market makers and aims to increase the number of SSOs for which liquidity is provided from the current 12 to around 30 by the third quarter of 2025.
In line with recent global market trends, OSE will introduce Nikkei 225 Mini (Weekly and Monthly) Options, short-dated options that expire on Wednesday on May 26, 2025 to complement the existing Friday expiration. These additional expiration dates will allow investors more flexibility to hedge against short-dated event risks.
Recently, demand from domestic and foreign institutional investors to trade quantitative investment strategy (QIS) products has been on the rise in Japan. David Dredge of Convex Strategies Pte Ltd. emphasised the operational benefits of having access to QIS strategies through a variety of listed derivative products. He expects increased liquidity in the listed market, saying: “We expect both direct and indirect use of QIS-type strategies to be a key driver of growth in the listed futures and options markets.”
In addition to the new product development, enhancing market transparency and reliability is also key to success. Imhoff of Amundi Japan remarked: “OSE has recently improved the accuracy of settlement prices and we were quite happy to see strong levels during the peak of the market turmoil in Japan in August 2024.”
As we move into 2025 and market uncertainty grows, institutional investors need to be prepared for increased volatility. While investment in the Japanese equity market increases, further development of its listed equity derivatives market will foster a more efficient and fair market environment.