By David Dolan

TOKYO, Apr 17 (Reuters) Four members of Japan's top economic council on Tuesday suggested merging the Tokyo Stock Exchange and the country's commodities exchanges, a move aimed at boosting Tokyo's competitiveness as an investment hub.

Under the proposal by private-sector members of Prime Minister Shinzo Abe's Council on Economic and Fiscal Policy, exchanges such as the Tokyo Commodity Exchange and the Tokyo Grain Exchange would join forces with the world's second-largest stock exchange.

By linking the exchanges and transforming the Tokyo bourse into a cross-market investment centre, the plan's backers hope to make Japanese capital markets more competitive as other exchanges around the world continue to join forces.

Economics Minister Hiroko Ota told reporters on Tuesday that Abe has asked his financial services minister, Yuji Yamamoto, to draw up concrete plans for strengthening Japan's exchanges.

If adopted, a new plan would likely be included in the government's next economic policy blueprint due in June.

However, Ota said the proposal by the private-sector members encountered opposition from the other members on the panel.

''A member of the panel said that commodities are an important part of our country's infrastructure and they cannot be treated same as securities,'' Ota said.

The TSE is set to adopt a holding company structure later this year as a step towards an eventual public share listing.

Earlier this year it entered into its first tentative alliances with global peers, signing agreements to share technology with both the NYSE Group, operator of the New York Stock Exchange, and the London Stock Exchange.

Still, such deals are a far cry from the tie-up between the NYSE and Europe's Euronext, which together launched the transatlantic NYSE Euronext exchange earlier this year.

Besides encouraging other bourses to come together with the TSE, the members also suggested relaxing regulations on derivative products.

Regulators likely want to boost Tokyo's global stature by mimicking similar moves in other Asian markets, said Neil Katkov, head of Asia research at the consultanting group Celent.

But the proposal could be too much for the Tokyo exchange, which is still in the process of updating its ageing technology, he said.

''I think it's a very, very interesting attempt, but I think it comes at the wrong time for the Tokyo stock exchange,'' Katkov said.

''The exchange is already struggling just trying to keep its basic equities business going,'' he said.

LITTLE SUCCESS So far, the Tokyo exchange has had relatively little success with products such as derivatives.

The bourse offers futures contracts for its benchmark TOPIX index, but those are eclipsed by the popularity of the Nikkei 225 contracts offered by the Osaka Securities Exchange.

In 2006 the value of TOPIX futures traded in Tokyo averaged 973 billion yen (.13 billion) per day -- a little more than half the 1.63 trillion yen that Nikkei futures averaged.

Regulators are also hoping the plan could help revive Japan's ailing commodities market.

Even as the rest of the world is seeing a commodities boom due to surging demand for natural resources and grains, Japan's industry is struggling to mend its image by improving transparency and investor protection.

''This is necessary for the commodity industry at times when exchanges are struggling to raise turnover,'' said Akio Shibata, deputy director at Marubeni Research Institute.

''It will be a good move for the industry in the long term,'' he said. ''This can help attract more funds from a wider range of investors, including Japanese institutions.'' Trade in commodity futures in Japan fell 18 percent in 2006 from the previous year to 92.7 million contracts, dropping below 100 million for the first time in seven years.

The shrinking volume has also set off a wave of consolidation among commodities exchanges. There are now four exchanges, down from seven at the start of 2006 and 16 in 1989.

While Tokyo's stock exchange is second only to the New York Stock Exchange in terms of trade activity, the Tokyo Commodity Exchange ranks a modest No. 6 in its market.

REUTERS DKS RN1913