TT-476 -- IPOs an Endangered Species, ebiz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, July 6, 2008 Issue No. 476


- What's new
- News
- Candidate roundup/Vacancies
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While the Japanese government may be concerned about the
disappearance of rare butterflies on the Ogasawara islands
(Terrie's Take 475), there is another endangered species
that probably deserves equal attention -- the IPO (Initial
Public Offering). IPOs, or public stock market listings,
are important because they help venture-funded companies to
raise public funds to continue their growth, and they
reward the initial risk-based investors by allowing them to
sell their shares. Japan was slow to come to the idea of
IPOs as a means of funding companies, reserving the honor of
listing for firms that had already made it -- which is why
the listing requirements have been so stringent for the
Tokyo Stock Exchange (TSE). Finally, though the government
got with the program in the late 1990's and early 2000's
and quickly established or reorganized the stock exchanges
into three new start-up markets (there are more, but these
are the 3 most significant ones): the JASDAQ, TSE Mothers,
and Osaka Stock Exchange's Hercules.

Now, we don't blame you if you didn't know that that IPOs
are an endangered species, since there has been little
press coverage about the dire straits of these markets and
the companies that want to use them. But the fact is that
in June there was only one IPO, the worst record of public
listings since the last of the three start-up markets,
Hercules, was established in 2004.

So far this year, through to June-end, there were only 14
IPOs on the three markets and the speculation is that for
the rest of this calendar year, there may be as few as 50
start-up companies listing their stock -- a far cry from
the 171 listings that occurred in 2004.

Now there were of course other IPOs besides the start-ups:
i.e., those of companies large enough to go straight on to
the TSE2, for example. But even so, if you were to count
all the listings, there were still only 24 in total for the
first half of the year, a very low figure.

[Continued below...]

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[...Article continues]

One IPO that did get done in June was that of Ina Research,
a consulting firm servicing the functional foods and
pharmaceutical industries with safety studies and clinical
trials. We don't know Ina, but in our minds this didn't
appear to be exactly what you would call a high-quality
listing. The company's financials show that just one year
before the listing, the parent company lost JPY310m. Yet,
by the time they went public they were magically making
JPY219m in profit -- a dramatic profit improvement of
JPY500m in profit on sales of just JPY3.2bn...

Whatever their sales team were eating for lunch the year
before the IPO, possibly a client's new range of herbal
supplements, we want some of it!

More likely though, the reason for Ina's sudden profit
surge was more mundane. A quick look at related
(consolidated) companies revenues shows that these firms
recorded a loss when the parent went public. So maybe
individual shareholders could be forgiven for thinking that
Ina might have engaged in a wee bit of inter-company
horse trading. Certainly the stock got drubbed after the
listing. While the initial IPO price valued the company at
JPY8.9bn, today, just two weeks later, the market cap of
Ina has fallen to JPY6.47bn. This result puts Ina IPO
investors 28% under water!

And perhaps this is the crux of the problem -- quality and
the market perception of shenningans by those doing IPOs.
Our guess is that the IPO pipeline is dry because
companies are pulling their listings rather than getting
killed in the current market. And they're getting killed
because individual investors are not inclined to throw
their money into the ring as they did in the past. Instead,
they're getting choosy and only supporting those firms
with explicable and consistent earnings.

But is that the whole story? Why are the individual
investors so uninterested in the IPO market, and is there
anything the authorities can do to improve things? Or do
we hunker down until the world economy improves again
in a few year's time?

Part of the problem is social. Over the last 60 years, the
Japanese government has done a great job of breeding at
least 3 generations of compulsive savers (OK, may be not
the latest generation -- but then they don't have any
money to buy stocks any way). These people are mainstream
wage earners and are notoriously brand oriented and risk
averse -- in fact, their values are the antithesis of newly listed

The government woke-up to the fact that it had
better improve the conditions for smaller companies to
list, or risk watching its commercial infrastructure and
innovation base die. Thus, by the late 1990's, it made a
number of important decisions which at least initially
stimulated individuals to move into stocks.

The decisions included:

1) Removing the higher interest rates offered by the Post
Office -- so as to let money migrate to other savings
2) Opening Mothers and the other public markets for
start-ups to list on, by substantially lowering the
requirements for profit and revenues
3) Allowing investors tax breaks for capital gains.

These measures collectively provided an incredible jolt to
the markets in the early 2000's and the media was full of
reports about ordinary salarymen and women making more
money doing spare-time day trading than from their regular

But the fact is that the number of people who bought into
the idea that they should risk their hard-earned savings
has turned out to be finite. Our guess is that less than 5m
people actually own online trading accounts -- leaving lots
of other savers who prefer managed funds or leaving the
money in the bank. Yes, there are 13.5m online accounts
registered as of the end of June, 2008, but we believe that
most people actually operate multiple accounts.

So why don't more people trade stocks at present? The main
reasons we can see are:

1) Since almost all (97%) stock market trades are online,
traders have to be somewhat info- and tech-savvy. Many
people lack the skills and confidence to compete in the
online markets.
2) The market has dropped by more than 20% in the last 12
months and this is naturally making people more cautious.
3) There appears to be an increasing feeling by people that
IPOs are beneficial to the initial holders only, and the
individual investor is not in on the game.
4) Of course there is the simple fact that as the economy
weakens, a lot of people are scared about the future and
don't have the discretionary funds needed to place a bet.
5) When you think about it, since most of Japan's spare cash
and assets is in the hands of the aged -- this is the
demographic least likely to bet on stocks you've never
heard of before, online .

What the authorities can do about this is very limited,
unless they decided to go all the way and undertake another
big-bang approach similar to the scope of the measures
undertaken 10 years ago.

If they were to go all the way, however, amongst the best
things they could do are:

1) Introduce subsidies or low-interest loans for companies
wanting to go public -- because for most firms, the
JPY100m price tag on all the paperwork, auditing, and other
procedures is just not worth the effort. Indeed, the
average IPO this last half year brought in a paltry JPY830m
to the companies themselves.
2) This issue of meager returns for the effort could be
resolved if the Japanese government decided to direct some
of their massive retirement and other investment funds
into the start-up markets. We would suggest that they
consider allocating 5% of their holdings into new listings,
roughly the same ratio as used by some major foreign funds
for their small-cap versus large-cap stock holdings. That
5% can often help juice up earnings at the end of each
financial year.

Another measure that could be considered even sooner, and
which would be easier to implement, would be to allow
foreigners to start trading online from abroad, without
having to prove residency in Japan. Already, Japanese
residents can very easily establish a US trading account as
a non-resident, with Schwab or Ameritrade, and buy and sell
NASDAQ stocks to their heart's content. They pay taxes on
interest, but not on capital gains, and are expected to
prove their tax residency elsewhere in order to receive an

A couple of years ago, we at Japan Inc. asked the
authorities why it was that they didn't allow foreigners to
trade cross-border, and no one could give us a decent
answer. It seems that no one has considered that individual
foreigners might even want to buy into Japanese stocks in
the first place... they can't read the research right?

But this is of course a misconception, plus we know for a
fact that a number of online brokers have seriously looked
into servicing Chinese and Korean investors, who do indeed
have the capability of basic reading of stock reports.

Letting the foreigners in could make a huge difference to
the attitude of individual Japanese investors. Witness what
happened with the consumer finance and banking sectors
after the foreigners arrived. Competition increased, rates
fell, significant cash was put to work, the industries were
legitimized, and at the end of the day the Japanese
consumer has become much better off.

It's important to note, too, that the IPO drought for start-up
firms is not just a Japanese phenomenon. According to
the Wall Street Journal, there is a dearth of IPOs in Silicon
Valley as well. In Q2, calendar 2008, there were exactly
zero IPOs of companies backed by venture capitalists.
This is the first time since 1978 that this has happened,
and according to the WSJ the reason is most likely
because stocks are falling and buyers are more
interested in picking up bargains than buying into new and
basically untried companies.

Now this doesn't mean that US VC firms have abandoned the
market. Indeed, the money is still flowing -- but the
volume is down by 40% from last year's US$3.97bn, to
US$2.4bn. The WSJ says that correspondingly, more
companies are being forced to raise cash privately, and
indeed, we can testify that this is exactly what is happening.
Increasingly, we're seeing US firms not just going to
strategic sponsors in the USA, but also traveling across
the Pacific to search for Japanese tie-ups as well. They
have no doubt heard that Japanese export firms are still
flush with cash and are interested in strategic stock
purchases which will bring them IP rights, market share, or
other commercial advantages that will accrue to next year's
bottom line (rather than focusing on capital gains in 3-5

...The information janitors/


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+++ NEWS

- Paris loves Japanese pop culture
- OECD says females under employed
- Cosplay summit
- Alt-energy market to increase dramatically
- G8 lock-down costs JPY30bn

-> Paris loves Japanese pop culture

The annual Japan Expo held in Paris over 3 days this
weekend was expected to draw around 100,000 people this
year, up from the 80,000 who attended last year. The Expo
covers all aspects of Japanese pop culture, including
manga, anime, video games, cosplay fashion, rock music,
and sumo. Manga is the magnet pulling the crowds in, and
apparently at least 50% of French kids have read at least
one local (French) version manga. (Source: TT commentary
from, Jul 02, 2008)

-> OECD says females under employed

It's certainly no surprise to those of us living in Japan,
but now the Organization for Economic Cooperation and
Development (OECD) has come out and said in its latest
Employment Outlook report that Japan is wasting its female
human resources. The report states that only 67.4% of
females aged 25-54 have a job, compared to around 82% of
females in countries such as Sweden and Norway. The OECD
said this was especially surprising, given that Japanese
women are the world's third best educated, after Finland
and Canada. Indeed, 42.5% have tertiary qualifications.
(Source: TT commentary from, Jul 02, 2008)

-> Cosplay summit

The G8 leaders would never buy it, but their kids might.
Travel agent H.I.S. Experience Japan is running a set of
tours that will coincide with the 2008 World Cosplay
"Summit", for foreign fans of the manga- and anime-inspired
attire. The highlights of the tour are a Cosplay Parade,
which the tourists are able to participate in, and the
World Cosplay Championship. (Source: TT commentary from, Jul 04, 2008)

-> Alt-energy market to increase dramatically

According to market researcher Fuji Keizai, Japan is well
positioned to enjoy growth from alternative energy sources.
Apparently the fuel cell market will increase 36-fold from
JPY6.2bn last year (FY2007) to JPY223bn in FY2016. The
market for electrical storage systems, such as lithium-ion
batteries, will also jump -- from JPY327.4bn last year to
JPY383.3bn this year. (Source: TT commentary from, Jul 03, 2008)

-> G8 lock-down costs JPY32bn

In case you're wondering where all our hard-earned tax
dollars are going, a good chunk is for PM Fukuda to
entertain 7 other country heads at the G8 meeting this week
-- for the princely sum of JPY32bn (approx. US$300m). This
cost includes a no-fly zone over the Hokkaido location for
the summit, warships patrolling the coastline nearby, and
for some reason thousands of cops standing outside train
stations and other major public areas in Tokyo, looking
extremely hot and bored. ***Ed: Say, isn't global poverty
on the agenda?** (Source: TT commentary from, Jul 03, 2008)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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get the legal code written in English?

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As a limited offer we are offering readers a 2-week FREE
trial. For more information, please contact:, or call (03)3265-1161



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