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One was for a report by the end of 2012 on the implementation of appropriate regulations and oversight to increase the transparency of the commodities markets, and the other was for recommendations on improving the functioning and oversight of price reporting agencies for mid-2012. In response, IOSCO has been formulating recommendations on price reporting agencies and preparing to report on the progress made in implementing its "Principles for the Regulation and Supervision of Commodity Derivatives Markets" (Reference 2).This column will seek to shed light on the commodity market price trends underlying these requests as well as the "commodities" and "financial instruments" relevant to the growing price correlation between commodities and traditional financial instruments, e.g., equities,—the so-called "financialization of commodities"—and will examine the relationship between the "financialization of commodities" and the Japanese economy. Commodity market price trends and the "financialization of commodities"Figure 1 shows a plot of well-known international commodity price indices, the S&P GSCI (white line) and the DJ-UBS Commodity Index (orange line), from 2007 to 2011. The S&P GSCI provides high exposure to energy products, while the DJ-UBS is more evenly diversified across energy products, agricultural products, and metals. Prices in commodities markets shot up between 2003 and 2008, particularly for crude oil, causing both commodity indices to soar sharply. With the price rises from 2009 onward coming primarily in precious and industrial metals, however, the DJ-UBS outpaced the S&P GSCI in its climb. The "financialization of commodities" has thus become a topic of particular interest since 2009.Figure 1: International commodity indices 2007 to 2011The "financialization of commodities" was even analyzed in the G20 Commodity Study Group Report (Reference 3), which was mentioned in the Cannes Summit Final Declaration, as one dimension—alongside physical demand/supply, biofuel policies, and global monetary expansion—for analyzing commodity market trends. This report examined the evidence for a "financialization of commodities" by defining the term as significant changes in the price levels and volatility of commodities as well as in the price correlations between commodities and traditional financial instruments as a consequence of the expansion of traders of traditional financial instruments into the commodities markets. However, its findings on the existence of a "financialization of commodities" were inconclusive. The "commodities" and "financial instruments" in questionWe will here find out what are the "commodities" and "financial instruments" in the discussions on the "financialization of commodities" from the perspective of price correlation.Figures 2 through 6 illustrate the respective correlations of the Dow Industrials 30 (United States), the Nikkei 225 (Japan), and the Euro Stoxx50 (Europe) to ICE Brent Crude Oil and COMEX Gold. Figure 2, for instance, shows the correlation between the Dow Industrials 30 (horizontal axis) and ICE Brent Crude Oil (vertical axis). During the period 1990 to 2003 (blue dots), the price of crude oil remained relatively stable despite fluctuations in the Dow Industrials 30, and the two are almost entirely uncorrelated. From 2004 to 2008 (red dots), crude oil prices surged, and overall, a positive correlation can be discerned. This positive correlation becomes more clear-cut during 2009 to 2010 (green dots) and 2011 (yellow dots). This would seem to indicate a strong likelihood of the Dow Industrials 30 ("financial instruments") and ICE Brent Crude Oil ("commodities") manifesting a "financialization of commodities." Figure 3 also shows the possible manifestation of a "financialization of commodities" in the correlation between COMEX Gold and the Dow Industrials 30 from 2009 to 2010.Figure 2: Correlation between Dow Industrials 30 and ICE Brent Crude OilFigure 3: Correlation between Dow Industrials 30 and COMEX Gold The "financialization of commodities" and the Japanese economyFigures 4 and 5 reveal a possible "financialization of commodities" with the Nikkei 225 representing "financial instruments." In contrast to the Dow Industrials 30, however, there is almost no indication of a "financialization of commodities" with respect to either ICE Brent Crude Oil or COMEX Gold. This holds true when looking at TOPIX as well and even when commodity prices are converted into Japanese yen.In many discussions on the "financialization of commodities," the mechanism underlying the rising correlation between commodity prices and stock prices is described as investors in traditional financial instruments incorporating commodities into their portfolios and, unlike traditional commodity market participants, basing their investment decisions on portfolio selection theory. Should this mechanism be genuine, Figures 4 and 5 suggest the possibility that "financial instruments" representative of the Japanese economy are not often incorporated into portfolios that include "commodities."As shown in the yellow-dotted portions of Figures 6 and 7, the "financialization of commodities" has collapsed for the Euro Stoxx50 as well, particularly in 2011. Reflecting the European crisis, a negative correlation with COMEX Gold can be discerned in 2011.Based on these data, it would seem that the "financialization of commodities" is not necessarily a valid argument with respect to the Japanese and European economies. This can be attributed to the fact that Japanese/European stock indices are seldom incorporated into global asset portfolios that include commodities or, conversely, commodities are seldom incorporated into portfolios that include Japanese and European stock indices.Figure 4: Correlation between Nikkei 225 and ICE Brent Crude OilFigure 5: Correlation between Nikkei 225 and COMEX GoldFigure 6: Correlation between Euro Stoxx50 and ICE Brent Crude OilFigure 7: Correlation between Euro Stoxx50 and COMEX Gold Year 2012The "commodities" sector in 2012 will see IOSCO's report on the progress made in implementing its "Principles for the Regulation and Supervision of Commodity Derivatives Markets" as well as efforts to improve the transparency of commodity markets. The "financial instruments" sector will be plagued by many uncertainties stemming from the ongoing issues on default, the economic slowdown, and other factors. Given these circumstances, the presence and extent of a "financialization of commodities" will undoubtedly continue to garner interest.(Sources for figures) Prepared by the author utilizing various data January 18, 2012>> Original text in Japanese Reference(s) ^ G20 Cannes Summit Final Declaration^ IOSCO, "Principles for the Regulation and Supervision of Commodity Derivatives Markets"^ Commodity Study Group Report Tweet January 18, 2013 Print Article(s) by this author Commodities, Financial Instruments, and the Japanese Economy in 2012 January 18, 2013［Issues Facing the Japanese Economy in 2012 (January 2012)］ Articles Column Special Series Priorities for the Japanese Economy in 2024 (January 2024) Priorities for the Japanese Economy in 2023 (January 2023) Priorities for the Japanese Economy in 2022 (January 2022) Priorities for the Japanese Economy in 2021 (January 2021) Priorities for the Japanese Economy in 2020 (January 2020) Priorities for the Japanese Economy in 2019 (January 2019) Priorities for the Japanese Economy in 2018 (January 2018) Priorities for the Japanese Economy in 2017 (January 2017) Priorities for the Japanese Economy in 2016 (January 2016) Fellows' Views on the Trans-Pacific Partnership (TPP) Priorities for the Japanese Economy in 2015 (January 2015) Priorities for the Japanese Economy in 2014 (December 2013) Issues Facing the Japanese Economy in 2013 (January 2013) Issues Facing the Japanese Economy in 2012 (January 2012) Issues Facing the Japanese Economy in 2009 (January 2009) Issues Facing the Japanese Economy in 2008 (January 2008) Issues Facing the Japanese Economy in 2007 (January 2007) RIETI Fellows' View on Incident at Japanese Consulate-General in Shenyang (June 2002) Newspapers & Magazines Fellows' Works VoxEU Column From IZA Perspectives from Around the World Other Contents RIETI Report Policy Update Keizai Sangyo Journal Communications Newsletter RSS Feed Facebook X YouTube Research Areas Research Programs (FY2024-2028) Research Programs (FY2020-2023) Research Programs (FY2016-2019) Research Programs (FY2011-2015) Policy Research Domains (FY2006-2010) Projects Survey Fellows Research/Policy Papers Discussion Papers (English) Discussion Papers (Japanese) Policy Discussion Papers (English) Policy Discussion Papers (Japanese) Technical Papers (English) Technical Papers (Japanese) Non Technical Summaries List of Articles in Journals Research Digest Discussion Papers Search Publications RIETI Books (English) RIETI Books (Japanese) History of Japan's Trade and Industry Policy Authors' Words Other Publications (English) Other Publications (Japanese) Events Symposiums Workshops BBL Seminars Archived Seminar Series Data JIP Database R-JIP Database CIP Database Industry-Specific Nominal and Real Effective Exchange Rates AMU and AMU Deviation Indicators JSTAR RIETI-TID RIETI FDI Database ICPA Project Links Articles Column Special Series Newspapers & Magazines Fellows' Works VoxEU Column From IZA Perspectives from Around the World Other Contents RIETI Report Policy Update Keizai Sangyo Journal (METI Journal) About RIETI Privacy Policy Site Policy Site Map Help Contact METI Web Site Research Institute of Economy, Trade and Industry, IAA (JCN 6010005005426)JCN: Japan Corporate Number Opinions expressed or implied on this website are solely those of the author, and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI).Titles, numbers, specific names, etc. on this website are as of the date of publication. 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