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NASDAQ Japan
-- can it repeat the US success story?

In June, the US National Association of Securities Dealers (NASD) Inc. -- the parent company of the NASDAQ market -- and Japan's Softbank announced a joint venture to create a NASDAQ Japan market, designed to mirror NASDAQ USA. With the market's screen-based approach to trading and focus on high-growth, high-tech companies, the JV partners hope to rally Japanese corporate fortunes and some pundits have said the presence of a NASDAQ Japan will jumpstart the growth of Japan's high-tech industry. NASD officials are expecting many currently listed NASDAQ companies to participate, along with a number of Japanese firms.

"Using the latest Internet technology, NASDAQ Japan will activate stock trading in Japan, and aim to achieve realtime trading of all 5000 issues listed in NASDAQ in the US, allowing trading (to occur) in Japanese using the Japanese yen," said Masayoshi Son, president of Softbank. "What we intend to create is a free, fair, and global stock market." Son's announcement comes at a time when recent developments in Japan's financial sector have given some cause to be optimistic. The Nikkei is at a high not seen since 1997, and in early June the government reported that Japan's first-quarter gross domestic product grew a whopping 1.9 percent.

In the US, however, analysts greeted the announcement with skepticism, citing the Japanese investor's traditional allegiance to the Tokyo Stock Exchange (TSE). Others pointed to NASDAQ's slow growth in Europe, where investors were reluctant to trade prior to the daily US opening. Also, the NASD is assuming that a NASDAQ in Japan will have the same positive effect on investors as the NASDAQ has had in the US, where tremendous US public interest in the market -- which provides Internet-based trading and easy access to information -- has driven many high-tech firms to go public in as little as 2-3 years. In contrast, in Japan, companies typically take 23 years to go public, according to Andrew McMillan of the NASD. But perhaps the two biggest factors affecting this JV's success will be Softbank's ability to follow through, and the nature of the Japanese investor.

The Softbank question
Admittedly, Softbank is a leader in both software distribution and the Internet space in Japan. Much of its revenue comes from software sales, and its Internet investments have performed remarkably well. Thanks to Softbank, Japan now has Yahoo!, ONSALE, and GeoCities, just to name a few. But when it comes to the financial markets, Softbank is not an established player. Other than its attempt to bring in E-trade (which has had its share of difficulties), Softbank is a new name in Japan's traditional financial sector. In addition, heavy losses in the company's media properties have put a strain on the company's bottom line. With its attempt to bring NASDAQ to Japan, one has to wonder if Softbank has the knowledge, reputation, and resources to make the venture succeed.

The Japanese investor
Unfortunately, the plunge in the TSE when the bubble burst, the failure of many Japanese banks and securities firms, and the overall malaise of the securities industry in Japan has caused many Japanese investors to lose confidence. Regardless of whether it's the TSE or the NASDAQ, the first hurdle for the new JV will be convincing the average investor to part with their hard-earned yen. Another factor is that a key component of NASDAQ success, on-line trading, is still a nascent industry in Japan. Low PC penetration rates and expensive telephone access charges will continue to put a damper on any type of e-commerce in Japan. Finally, the Japanese investor will face additional risks in trading US stocks that US investors do not face: exposure to the yen/dollar exchange rate and a heavy reliance on NASDAQ to provide accurate Japanese translations of company information.

NASDAQ Japan will be established by Softbank and the National Association of Securities Dealers (NASD) Inc. To oversee the new venture, the two have established NASDAQ Japan Planning, a 50/50 JV, capitalized at JPY600 600 million. Trading services are expected to start by the end of FY2000, although major negotiations remain to be carried out with the Ministry of Finance (MOF) regarding the new company's business licensing, as well as with computer system vendors regarding the network structure for the new market. Despite the euphoria, the devil lies very much in the details for the JV.

 

Another problem
In addition to the two factors described above, there's a third problem -- the structure of the marketplace in Japan. The weakness of Japan's securities market derives from two factors: the industry had been too-much protected and spoiled by the MOF, and there is a lack of knowledge and expertise in how to use computer systems for to achieve efficient stock trading. For NASDAQ or any other new market to be a success, it will first be necessary to reduce the MOF's influence and enhance players' computer systems. Of course, the MOF's arch rival -- the MITI (Ministry of International Trade and Industry) -- is hovering in the background, angling for any excuse to intervene the stock trading business area, since the computer business is one of its territories. In fact, MITI was involved in early negotiations for NASDAQ's launch in Japan.

"The stock trading business in Japan as a whole is too outdated and less flexible," says Michio Matsui, president of Matsui Securities, one of Japan's first trading companies to move online. "Even though the MOF (Ministry of Finance) says they've introduced the financial Big Bang, people here don't really understand how to cope with the situation. For example, owing to the revision of the securities and exchange law, a market-making system was introduced recently to activate OTC stock trading. But the computer systems necessary for supporting the market were not at all yet ready, and many securities companies had to depend on manual methods, which caused lots of trouble."

The establishment of NASDAQ Japan spotlights the comatose stock market situation here. In comparison to the US NASDAQ and NYSE markets -- which saw a total of $1,228 trillion in trading volume in 1997 -- Tokyo's TSE and over-the-counter (OTC) market saw a volume of JPY113.8 trillion during the same period.


With the support of MITI, the NASDAQ Japan venture will probably be a success, despite the fact that some industry watchers are concerned about NASDAQ Japan remaining a neutral entity -- as Softbank has relationships with many other players here. "NASDAQ Japan's success will depend on whether it can really realize a fair and flexible stock market as Mr. Son promised. If it is going to be a place where particular companies' profits are sought, it will fail in attracting general investors," said Matsui. And to give high-tech entrepreneurs in Japan hope of an early IPO, both NASDAQ and Softbank first need to prove their value to the Japanese investor. Softbank should try to replicate what E-trade did in the US by proving that a new player can make an impact. NASDAQ on the other hand, has a greater task -- showing Japanese investors that the reward is worth the risk and effort.

-- With reports from Tom Spargo in San Francisco and Noriko Takezaki in Tokyo.

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