Briefly, how to invest in Japanese stocks.

Back to Contents of Issue: May 2000

by Veryan Allen

Selection of broker
So far brokers only have sites in Japanese, just as US-based brokers only have sites in English. This may change of course. Make sure you choose a broker whose site functionality and reliability suits you. Paying a low ¥1,000 or ¥2,000 a trade won't help if that broker's site goes down or fails to execute a trade and costs you a few million. Everyone seems to prefer a different broker, so read surveys, talk with friends, and choose two so that you have a back-up. Online brokers are launching, adjusting their pricing structures, enhancing their services, and offering promotions frequently. Most offer fairly comprehensive news, information, and research and charting capabilities, although, like the US-based online brokers, their services are limited to keep costs low. Don't ignore the traditional guys like Nomura, Daiwa, Nikko, and other domestic securities houses. Unlike the US experience, where the traditional brokers were slow to offer online trading, these have all offered Internet trading for the past couple of years. Their commissions are much higher, of course, but most employ English speakers, their information and research is superior, and they will give you more help.

What next
When you have checked out several brokers, register online or by phone and you will receive some forms (in Japanese) to fill in through the mail. Choose at least two to wire money to. If necessary get a friend who speaks Japanese to guide you through their sites and help you fill in the forms. Order entry is so straightforward that learning to do it yourself is easy, and the screen kanji will rapidly become familiar. Broker's screens differ, but basic inputs are the four-digit stock code (which is used in Japan instead of letter-based ticker symbols like MSFT), buy or sell, how many, and at what price. You will also be asked to specify whether the order is only for the day or GTC. You have two tax choices, which I'll go into below. You'll receive a user-name, password, and a dealing password, but you should choose your own once the account is set up.

The basic mechanics of trading Japanese stocks are similar to overseas. Whilst there are numerous differences "under the hood," these should not overly concern you. The exchanges consist of the TSE 1st and 2nd sections, the OSE (Osaka Stock Exchange), assorted regional exchanges like the Nagoya and Sapporo, the Jasdaq or OTC, the much heralded Mothers, and a Green Sheets market which is vaguely similar to the US pink sheets. Nasdaq Japan should open next month.

The three main differences from US trading that will concern you are:

1. Minimum trading units. Until recently the minimum trading unit for most Japanese stocks was 1,000 shares. For high-priced shares, even getting into the game required tens of millions of yen. This is finally being reduced to a more manageable 100 shares, or even 10. The ultra high-priced shares like Yahoo Japan and Internet Research Institute trade in 1-share units. Eventually, as some of the archaic restrictions are dropped, such stocks will one day do a 1:1,000 or even 1:10,000 stock split, increasing liquidity and becoming buyable by normal investors.

2. Price limits on each stock. In general, a stock is only allowed to move within a maximum daily limit. Whilst designed to curb speculation, it is becoming a more prevalent occurrence for stocks to "lock limit" up or down, especially as more Japanese Net stocks go public. If a flood of buy orders comes in, the stock can go "limit up" on the open and stay there all day. Whilst the US has curbs and time-outs in place on indices if Armageddon ever hits, there is nothing on individual stocks. The result in Japan is that for a stock you want to buy, you may have to watch in frustration for days before you can actually get in, especially with IPOs.

3. Taxation. Japan is generally regarded as a high-tax country. For income tax it certainly is, but for capital gains it is advantageous. When you buy a Japanese stock you have two choices: (1) you pay 1.05 percent immediately regardless of what ultimate direction the stock goes, or (2) you pay 26 percent of your capital gains, if any. Obviously the choice to make is the first; unfortunately, this method will be abolished in April 2001, so, as they say, "Make hay while the sun shines."

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