Autopsy of a futures market failure: Japan’s Dojima rice futures in the early 21st century

Abstract

Futures markets promise improved price transparency and risk mitigation for staple commodities important to many developing countries, but they can fail even in developed economies with modern financial institutions. We investigate rice futures trading in Japan at the Osaka Dojima Exchange to identify the reasons underlying its failure in 2021. Our analysis reviews the multiple necessary conditions for a successful commodity futures market. We find the Japanese rice market did not meet many of these conditions. The spot market was fragmented with heterogeneous goods and a single dominant firm. Futures trading was unable to facilitate price discovery or effective hedging activity. To the extent it was traded, the Dojima rice futures contract was instead used as a forward contract for making and taking physical delivery. In addition, there was political opposition and regulatory uncertainty around futures trading. Using detailed data on trader positions in the futures market, we show how these factors contributed to diminished interest in futures trading from firms who handle physical commodities. The lessons from the Japanese case are useful for traders, exchanges, and policy makers, especially those in countries where futures markets may face similarly unfavorable economic and political conditions.