Japan Gears Up for Online Trading
By Kaya Laterman
Japan Correspondent
TOKYO -- If you're tired of hearing about lunatic online traders and the fortunes they win and lose, don't bother reading any further. Japan is jumping headfirst into the online trading froth.
Thirty-one online brokers have set up shop in Japan, and another 20 are planning to get up and running soon. Online accounts will likely double to 100,000 by October and surge to 600,000 by the end of next year, according to Shogo Noguchi, an analyst at the Daiwa Institute of Research, affiliated with the big brokerage of the same name. And that's sure to lure even more companies -- and more traders -- into the fray.
Compared to the estimated 5 million trading online in the U.S., Japan's embrace of Internet punting might seem reluctant. But with Japan's reluctant economy finally showing signs of life, online trading will grow at the speed of the country's shinkansen bullet trains, changing the way Japanese trade and how brokers do business.
"The first engine of the [online trading] rocket has been ignited," says Yoshihiko Kan, manager of retail strategy at Nomura Securities (Nasdaq:NRSCY) ADR, Japan's largest brokerage and the operator of the HomeTrade system.
Like American brokerages in 1995, Japanese online brokers are flourishing as the Internet phenomenon finally takes root in one of the world's most gadget-reliant societies. Sales of PCs have started picking up and Internet users, who total about 12% of the population, tripled this year.
That trend is intersecting with a stock market that's showing enthusiasm for rising for the first time since the collapse of the Bubble Economy in 1990. The Topix index, a broad benchmark similar to the S&P 500, is up 27.4%. The Jasdaq index of smaller companies has doubled.
Also fueling the boom: Competition is helping bring costs down. When DLJDirect SFG Securities, the Japan joint venture of DLJDirect (NYSE:DIR - news) , announced online commissions of 1,900 yen ($16.50) for small-lot trades, homegrown Orix Securities quickly countered with pricing of 1,800 yen. The changes take place in October, when the government fully deregulates commissions as part of its Big Bang liberalizations.
Cheaper pricing is only one of the ways the advent of online trading has forced the big brokerages to reconsider the way they do business. In the past, asking a customer if they wanted Mickey Mouse or Snoopy on their ATM cards constituted good service. Now customers are looking for access to research and quick connect times, as well as bargain prices.
The older and larger brokerages have tried to sway customers by using their historical presence and name while also doling out their staff's reports and investment advice. The ability to trade online, over mobile phone or by fax through one account also spurs the cause.
Brokers are trying to tap men in their 30s and 40s, a demographic that is by and large salaried and looking to prepare for retirement, as well as have a little fun. Most of these keyboard jockeys have less than a year's trading experience, a situation that has already caused headaches for brokers who occasionally must explain the basics of securities trading.
"You would be surprised at some of the questions we get," says Nomura's Kan, adding that the naivete of some online traders is one of the reasons the firm stops accepting orders 30 minutes before the market closes.
That's one of the reasons average monthly transactions are still low, at about 700,000 yen per month. With those figures, brokers won't turn a profit on their operations for at least two to three years, says Daiwa's Noguchi.
Still, the rush is on. "There will be more users in Japan than in the U.S. over time," boasts Yoshihito Sato, director of Matsui Securities, a discount-brokerage maverick that was among the first of Japanese brokerages to start online trading. "The Japanese have money," he adds, alluding to the estimated $10 trillion in personal savings -- one-third of the world's total -- the country has sitting in bank accounts that yield as little as 0.1%.
That massive amount of wealth has helped prompt the Nasdaq and Japanese Internet conglomerate Softbank to announce the creation of a small-company stock market. When that gets under way, it will likely raise younger investors' eyebrows. With more stocks to choose from, more money will be raised to invest, encouraging more start-up firms to take a shot at going public.
The adoption of a 401(k)-like defined-contribution pension system, expected to come in the next year or so, is also seen fueling interest in online trading in Japan.
Expect the media blitz to continue.
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