In their first two years, Japanese stock index futures contracts exhibited persistent departures from “fair” price, offering potentially profitable arbitrage opportunities. As the markets have matured and new contracts have been introduced, however, deviations from fair pricing have declined substantially. For the three active contracts based on Japanese stock indexes—the Nikkei Stock Average contracts traded on the Singapore International Monetary Exchange and the Osaka Securities Exchange and the Tokyo Stock Price Index contract traded on the Tokyo Stock Exchange—deviations are currently within the bounds implied by transaction costs.

Past deviations from fair price can be explained by relatively high transaction costs and by trading restrictions such as restraints on short selling and arbitrage activity by Japanese securities firms. Since late 1988, however, transaction costs have declined substantially and trading restrictions have been eased. The evidence in the Japanese markets lends support to the view that trading restrictions have an adverse impact on financial market efficiency.