JJ-Link

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JJ-Link is a spot and futures trading linkage service operated jointly by Japan Electric Power Exchange (JEPX) and Japan Exchange Group (JPX) that connects electricity futures listed on Tokyo Commodity Exchange (TOCOM) with physical electricity trading in the Japanese wholesale power market. The service is designed to allow electric utility operators and other market participants to procure and sell the electricity underlying their TOCOM electricity futures positions through JEPX spot trading, with the aim of integrating financial and physical markets in Japan’s power sector. JJ-Link is being implemented in phases and is positioned within broader efforts to develop Japanese electricity liquidity, strengthen wholesale market infrastructure, and support the use of hedge accounting for power hedging activities.

History

The origins of JJ-Link can be traced to the liberalization of Japan’s electricity sector and the establishment of JEPX as a wholesale electricity exchange to facilitate transparent price discovery and liquidity in the physical power market. As deregulation proceeded through the 2000s and 2010s, policymakers and market operators sought to complement spot and forward power trading with standardized exchange-traded electricity futures to improve risk management and hedging options for utilities, retailers, and other market participants. TOCOM, which became part of the JPX group, began listing electricity futures contracts to provide a regulated financial market for Japanese power price risk.

However, the early years of electricity futures trading in Japan were marked by relatively low liquidity and modest open interest, in part because many utilities and corporate users were more accustomed to bilateral contracts or direct participation in JEPX spot auctions. A gap emerged between the financial futures market on TOCOM and the physical spot market on JEPX, making it difficult for some utilities and corporate hedgers to demonstrate a clear link between their futures positions and underlying physical trades, particularly for accounting and internal risk-control purposes.

To address this issue, JPX and JEPX signed a memorandum of understanding (MOU) on 19 January 2023, setting out a framework for collaboration on services that would link electricity spot and futures trading. The MOU envisaged a multi-stage effort to create operational and data connections between JEPX’s spot trading systems and TOCOM’s electricity futures platform. This initiative took shape as JJ-Link, conceived as a mechanism to procure and sell the electricity underlying futures positions in the spot market through a standardized process.

In April 2024, JPX formally announced the planned provision of JJ-Link, described as a two-phase service aimed at simplifying operations for electric utility operators and supporting the acceptance of hedge accounting for electricity futures. According to the announcement, Phase 1 would focus on receiving spot trading data from JEPX, matching it against futures positions held on TOCOM, and returning linkage results to utilities. Phase 2 would expand the system into a one‑stop service in which data from TOCOM would be used to construct bidding for the electricity underlying futures positions directly in JEPX’s spot auctions.

Phase 1 of JJ-Link was scheduled for implementation in autumn 2024, while Phase 2 was expected in or after 2025. In February 2026, JEPX and JPX announced that JJ-Link had advanced to its second phase, indicating that the service was moving beyond data matching toward an integrated bidding and settlement framework connecting spot and futures electricity trading. This progression reflected ongoing efforts to develop the Japanese power market’s infrastructure in response to policy objectives aimed at strengthening wholesale market functionality and increasing the use of market-based hedging tools.

Background

JJ-Link operates in the context of Japan’s post-liberalization electricity system, in which wholesale power trading, retail competition, and balancing arrangements were progressively opened to a wider range of participants. JEPX was created to provide a centralized platform for physical electricity trading, including day-ahead and intraday auctions, and has become the primary venue for reference spot prices in the Japanese wholesale power market. At the same time, TOCOM, under JPX, developed standardized electricity futures contracts to allow participants to manage price risk over longer horizons.

The coexistence of financial and physical venues created opportunities for arbitrage and risk management, but also posed operational challenges for utilities that needed to coordinate positions across different systems, timeframes, and contractual structures. Many electric utility operators are vertically integrated or maintain portfolios of generation, retail supply, and procurement contracts, making it important to demonstrate that futures positions correspond to actual physical exposures. From an accounting perspective, hedge accounting treatment under international or Japanese standards generally requires documentation showing a direct relationship between hedging instruments and underlying items.

JJ-Link was conceived as an operational solution to these issues by making it easier to link futures positions on TOCOM with spot trading on JEPX in a systematic way. The design of the service reflects a broader trend in commodity markets where exchanges and central counterparties seek to integrate financial and physical trading workflows, for example in agricultural, metals, or energy markets in other jurisdictions, to enhance transparency and facilitate hedging by commercial users. In the Japanese power sector, this integration is also related to public policy aims such as improving wholesale market liquidity, supporting investment signals, and enabling more flexible risk-transfer between generators, retailers, and large consumers.

The development of JJ-Link also reflects JPX’s broader strategy of applying its expertise in futures, options, and market infrastructure to energy and environmental markets. JPX has previously expanded into electricity and LNG-linked products and has indicated an interest in products that support decarbonization and flexible resource management in Japan’s power system. JEPX, for its part, has worked on enhancing trading systems, balancing markets, and demand-response mechanisms to accommodate variable renewable energy and evolving retail supply models. JJ-Link sits at the intersection of these initiatives, providing a concrete mechanism through which financial instruments and physical power flows can be coordinated.

Internationally, the concept underlying JJ-Link resembles arrangements seen in some European and North American power markets, where financial futures or forwards are closely related to spot or day-ahead markets and where coordinated products or clearing arrangements facilitate cross-market hedging. However, JJ-Link is tailored to the institutional arrangements of the Japanese power system, including JEPX’s role as a voluntary wholesale exchange and TOCOM’s function as a financial futures market within JPX.

Usage

In its first phase, JJ-Link functions primarily as a data-linking and verification service. Electric utility operators and other users conduct their normal spot trading on JEPX and maintain their electricity futures positions on TOCOM. JEPX sends spot trading data to TOCOM, which checks the data against information on futures positions and returns results to participating operators showing how much of their physical trading activity is linked to their futures positions, based on predefined criteria. This linkage information can then be used by the operators for internal risk-control purposes and to support hedge accounting documentation.

In the planned second phase, JJ-Link extends beyond data verification to an integrated bidding and settlement mechanism. Data from TOCOM regarding participants’ electricity futures positions is used by JEPX to construct bidding for the electricity underlying those positions, allowing users to procure or sell power in the spot market in a way that is directly tied to their futures exposures. The intention is to create a one‑stop service in which utilities and other participants can manage both financial hedging and physical procurement within a coordinated framework, reducing manual processes and operational fragmentation.

JJ-Link is primarily targeted at electric utility operators, including general electricity transmission and distribution companies and retail electricity suppliers, that are active in both JEPX spot trading and TOCOM electricity futures. Other potential users include large industrial consumers, asset managers specializing in energy portfolios, and trading houses that participate in Japanese power markets for hedging or proprietary trading purposes. The service is also relevant to auditors and accounting specialists who assess whether hedging relationships meet the conditions for hedge accounting under applicable standards.

By linking physical and financial trades, JJ-Link can influence how participants manage risk management policies, hedging horizons, and portfolio composition. For example, a utility with a portfolio of retail contracts may use TOCOM futures to hedge projected demand and then rely on JJ-Link to ensure that subsequent JEPX spot purchases are aligned with those futures positions in a documented manner. Similarly, a generator might use JJ-Link to coordinate its physical dispatch schedules with futures positions used to manage revenue volatility.

The service’s operational design also interacts with broader trading practices in Japanese power markets. JEPX’s auctions, liquidity conditions, and price formation mechanisms remain the primary determinants of spot power prices, while TOCOM’s futures contracts provide forward price signals. JJ-Link does not alter these basic mechanisms, but provides an infrastructure layer that can make it easier for participants to treat the two venues as parts of a single risk-management chain.

Risk management

JJ-Link is closely tied to risk management objectives in the Japanese power sector. By providing a formal link between electricity futures positions and spot trading, the service is intended to support more systematic hedging practices by utilities and other market participants. For many firms, power price risk arises from mismatches between contracted sales (for example to retail customers) and the cost of procuring electricity in the wholesale market; futures contracts can be used to manage this risk, but only if the relationship between financial positions and physical exposures is well defined and documented.

In many accounting frameworks, hedge accounting treatment can reduce volatility in reported earnings by matching gains and losses on hedging instruments with those on the underlying exposures. However, hedge accounting typically requires that entities demonstrate the effectiveness of the hedge, including the existence of a documented link between the hedging instrument and the hedged item. JJ-Link is designed to facilitate this by generating records that connect specific JEPX spot trades with TOCOM futures positions held by the same operator.

From a risk management perspective, this integration can also help firms manage basis risk between spot and futures prices. Although TOCOM’s electricity futures contracts are designed to reflect wholesale power price benchmarks, deviations between futures and spot prices can occur due to market conditions, supply-demand imbalances, or contract specifications. Having a standard process through which underlying spot trades are procured or sold in relation to futures positions may make it easier for firms to monitor and adjust their hedging strategies as market conditions evolve.

The introduction of JJ-Link has implications for liquidity and price discovery in both spot and futures markets. If more utilities and other commercial participants are able to use electricity futures as hedge accounting-eligible instruments, they may be more willing to trade these contracts, potentially increasing open interest and average daily volume. Increased liquidity in futures markets can, in turn, improve price discovery by bringing more information and diverse trading strategies into the market. On the spot side, a more systematic link between futures positions and JEPX trading could influence the timing and quantity of bids and offers submitted to auctions.

At the same time, the integration introduced by JJ-Link may concentrate certain operational and infrastructural risks. The service relies on accurate and timely data exchange between JEPX and TOCOM, as well as the correct mapping of futures positions to physical exposures. Errors in data, connectivity failures, or misconfigurations in the linkage logic could affect firms’ internal risk assessments or hedge accounting documentation. As a result, both JEPX and JPX are expected to maintain governance and control frameworks around JJ-Link, including testing, monitoring, and incident response procedures consistent with regulatory expectations for market infrastructure providers.