Another Japanese-Korean Truce?

The consolidation fervor sweeping through U.S. and European exchanges has now reached Asia. Last Friday, officials from the Tokyo Stock Exchange (TSE) and the Korea Exchange (KRX) announced that they have signed an agreement to collaborate on a number of projects, including cross-listing shares between the two exchanges.

Although the announcement was short on specific goals or milestones, the agreement paves the way for a possible merger between the two exchanges. Young-Tak Lee, KRX Chairman and CEO, clearly identified the impetus behind the move: "[.] I hope that this initiative between the two exchanges will further develop to jointly cope with the drastic changes of business environments such as strategic partnership and M&A's among exchanges around the world."

Mr. Lee is not wrong; the exchange industry is currently undergoing massive changes due to the globalization of capital, technological change, and a push for global scale from dominant national or regional players.

Last month, the NYSE Group (NYSE: NYX  ) , parent of the New York Stock Exchange, made a friendly merger bid for pan-European exchange Euronext. Although Euronext has recommended that its shareholders accept the offer, Deutsche Borse, which operates the Frankfurt Stock Exchange, is waging an aggressive campaign to thwart the merger and create an all-European titan.

Meanwhile, the Nasdaq Stock Market (Nasdaq: NDAQ  ) made a failed takeover bid for the London Stock Exchange in March and has since increased its stake to 25.1%. Under UK takeover rules, the Nasdaq must now wait until September 30 to make another bid.

So where does that leave these markets' Asian counterparts? The TSE understands that there are forces at work to which it is not immune. However, its response with this agreement lacks the necessary boldness and urgency. The Tokyo Stock Exchange has announced plans for an initial public offering in March 2009, and it's not clear that it would consider a merger before completing the listing. Furthermore, the Exchange is constrained by current law, which prevents a foreign exchange from purchasing more than 50% of the TSE.

The TSE has some breathing room while the NYSE and the Nasdaq fulfill their European ambitions, but it needs to articulate a clear strategy that will allow it to actively benefit from consolidation. The Tokyo Stock Exchange is the dominant exchange in the Asia-Pacific region, but it has relied on the size of its internal market for too long. (The shares listed on the TSE represent a total capitalization of $4.5 trillion, second only to the NYSE.)

NYSE Group CEO John Thain was part of the team that turned Goldman Sachs (NYSE: GS  ) into a global institution, and it's a fair bet that he has similar aims for the NYSE. Once he turns his attention to Asia, the TSE will want to be able to negotiate from a position of strength. The last nine months have done nothing good for the Tokyo exchange's reputation, following a series of technological blunders. (For more on that, read Dayana Yochim's account of the $225 million typo.) Now is not the time for timidity.

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NYSE Group is aRule Breakersrecommendation. Goldman Sachs is anInside Valuewatch list stock.Check out our suite of investing newsletters with a 30-day free trial.

Fool contributor Alex Dumortier has no financial interest in any of the other companies mentioned in this article. He welcomes your (constructive) feedback. The Motley Fool has a strict disclosure policy.

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