Jakarta Composite Index Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The Jakarta Composite Index is the major stock market index for the Jakarta Stock Exchange. The Batavia Effectenbeurs had been established on December 14, 1912, under the Dutch trading in shares of companies involved in rubber, tin, pepper, and the like. It was closed during World War I, reopened in 1925, and continued in operation until 1942, with the start of the Japanese occupation. It remained closed until 1952 when it was reopened under the Capital Market Emergency Regulations, but the only products traded were Indonesian government bonds. By 1956 it had stagnated and it remained closed during the rest of the presidency of Sukarno, Indonesia’s first president. It reopened on August 10, 1977, when it was managed by the Badan Pengawas Pasa Modal (“Capital Market Supervisory Agency”: Bapepam), under the control of the Ministry of Finance.

During the years that Suharto was president of the country, according to former investment banker and author Kevin O’Rourke, the Jakarta Stock Exchange (JSE) had become a venue for legalized gambling. Part of this was because of the tiny capitalization and hence the small number of shares being traded. This led to Indonesian banks establishing high-yield portfolio accounts and margin-trading instruments that pushed up stock prices. The economy was further deregulated between 1988 and 1990, allowing foreign investors to trade easily in the country. The Securities and Money Trading Organization also oversaw the Pararel Bourse, which consisted of brokers and dealers. On June 16, 1989, the Surabaya Stock Exchange also opened.

To measure how much shares on the stock exchange were rising, the JSE Index was established using a representative group of companies traded in Jakarta. There was a massive bull run in 1990, and large profits were being made. One of the companies involved there was the British firm Barings Bank, but it started registering a loss from trading despite the large rise in prices. In 1991 they sent over a newly trained banker, Nick Leeson, who discovered some £100 million in share certificates lying around the room the bank was working from in the Hotel Borobudur. Because of his work there, he was later sent to Singapore where, in 1995, he was involved in the collapse of the bank.

The result of the 1990–91 bear market was that the price of shares became heavily inflated; on July 13, 1992, the JSE was privatized and became the Jakarta Exchange Inc., with Bapepam becoming the Capital Market Supervisory Agency, although it was not until 1996 that it had the power to investigate possible violations of stock exchange rules that were handled by the police. To help the growing numbers of stock traders, the Jakarta Stock Exchange, by this time known as the JSX, established a series of automated trading. This continued to encourage investors and gamblers alike, and was measured by the JSX Composite Index.

The Asian financial crisis of 1997 led to a collapse in the share values of many companies on the JSX, which was measured by falls in the JSX Composite Index. Many people lost fortunes, and it took many years for some of the major companies to regain the price levels that they had in the boom years—some companies did not survive. Some people found fault with the JSX, and as a result, some 30 corporate stocks switched to being listed on the Jakarta Islamic Index that was established in 2002. All the companies listed on this rival index had to fulfill the requirements of Islamic sharia law.

In 2005, with further globalization, the JSX Composite Index, along with the indices from the Bursa Malaysia, the Philippine Stock Exchange, the Singapore Exchange, and the Stock Exchange of Thailand, was used to establish an FTSE/ASEAN index to show the rise or fall of stock prices throughout the member states of the Association of Southeast Asian Nations (ASEAN).

Up until September 2007, there had been a separate Surabaya Stock Exchange, operating in the city on the east coast of Java. In that month it merged with the Jakarta Stock Exchange to create the Bursa Efek Indonesia (Indonesian Stock Exchange). On July 13, 2007, the JSX established the Kompas100 Stock Price Index, which started operating from August 10, 2007, to coincide with the 30th anniversary of the reopening of the stock exchange in Jakarta. For this, the Kompas100 Stock Price Index is based on a weighting of some 100 companies chosen because they reflect the frequency of sale, the value of transactions, and also the market capitalization, as well as the fact that they reflect a range of different sectors of the economy.

Bibliography:

James S. Ang, Alireza Tourani-Rad, and Jean C. Yu, “Some Lessons from Price Bubbles and Market Crashes in Southeast Asia,” Managerial Finance (v.30/7, 2004);
David C. Cole, Building a Modern Financial System: The Indonesian Experience (Cambridge University Press, 1996);
Ayşe Y. Evrensel and Ali M. Kutan, “IMF-Related Announcements and Stock Market Returns: Evidence from Financial and Non-Financial Sectors in Indonesia, Korea, and Thailand,” Pacific Basin Finance Journal (v.15/1, 2007);
Alicia García-Herrero, Jacob Gyntelberg, and Andrea Tesei, The Asian Crisis: What Did Local Stock Markets Expect? (Bank for International Settlements, 2008);
Nick Leeson, Rogue Trader: His Own Amazing Story (Little, Brown & Company, 1996);
Kevin O’Rourke, Reformasi: The Struggle for Power in Post-Soeharto Indonesia (Allen & Unwin, 2002);
Assif Shameen, “Indonesian Market Is Hot, and Getting Hotter,” Barron’s (July 16, 2007);
Jasso Winarto and Simon Wang, Winarto & Wang’s Indonesia Stock Market Handbook (Bisnis, 1991).

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