From Nikkei Net.
Issued: May 17 ,1999
Electronic commerce set to expand
Private sector braces for explosive growth in online trading
BY MINA HASEGAWA
Staff writer
The potential for huge business opportunities in electronic trading is fast emerging in Japan. The financial sector is awash in e-trading activity as institutions shift to cashless transactions via the Internet. The retail market has also been flooded by a wave of virtual shopping malls and digital-cash operators that are thrashing it out to attract shoppers.
Although the market for electronic commerce in Japan is still far smaller than the market in the U.S., expectations are running high that e-trading will eventually blossom in the world's second-largest consumer market.
Research by the Ministry of International Trade and Industry shows that the volume of e-commerce in Japan is about one-thirty-fifth of the volume in the U.S. However, Japan is seeing a sharp rise in Internet users, which should accelerate market expansion in the next four to five years, MITI said.
The ministry estimates that e-commerce volume in Japan, excluding financial transactions, will reach 71.5 trillion yen ($586.1 billion) by 2003. MITI expects the volume of e-commerce in the U.S. to reach 186.6 trillion yen by the same year.
Osamu Sudo, an economics professor at the University of Tokyo, agrees that e-commerce is just beginning a period of remarkable growth. "Reforms to the system brought about by the financial Big Bang are synchronously developing in Japan with the digitalization of telecommunication," he said. "As Internet-based global economic standards become established, the business practices, lifestyles and social systems will change."
April 30 marked the final day of floor trading at the Tokyo Stock Exchange, a tradition that had lasted 121 years. From May 6, the following business day, the exchange was entirely computerized.
Anticipating the transition, securities companies have been strengthening and upgrading their trading systems via the Internet to attract more individual investors and reduce commission fees. With the new systems, investors can place orders via the Internet anytime they want.
Japan's major securities houses have been left behind in the early shift to e-trading by a smaller competitor, Matsui Securities Co., a brokerage that doesn't have a sales staff or any branch offices. The company specializes in telephone and Internet-based trading.
When stock-exchange commission fees are fully deregulated in October, Matsui plans to cut charges as much as 74%, company sources said. For a transaction of 1 million yen, the current commission of 11,500 yen would drop to 3,000 yen.
At the end of March, Matsui had about 30,000 customer accounts. It has made an aggressive push to boost that number by beginning to sell specialized personal computers to investors in a tie-up with Dell Computer Corp. of the U.S.
Because of the spread of Internet trading, companies with no direct experience in the financial sector are pushing their way into the crowded field of competitors.
H.I.S. Co., Japan's leading discount airline-ticket seller, started a new securities company that charges institutional investors commissions discounted at least 50-70% from what major competitors charge. The newly established brokerage plans to start operations this fall for individual investors, said Hideo Sawada, president of H.I.S.
The Tokyo Stock Exchange plans to introduce a new computer system next spring that has capacity to process 2 million orders for 3,000 issues a day, 2.7 times as much as the current system can handle. The new system is also expected to be able to allow trading beyond set hours.
More than 20 Japanese securities companies have launched Internet-trading services, and big names such as Sony Corp. and Softbank Co. are preparing to jump on the bandwagon, industry sources said.
Dollar-yen trading
E-trading is most apparent today on the foreign-exchange market. According to the Money Brokers Association Tokyo, the annual dollar-yen spot trading volume in Tokyo grew from $2.08 trillion in 1995 to $3.43 trillion in 1998. E-trading accounted for 25% of the volume in 1995; its share ballooned to 81% in 1998.
"Even though trading volumes in some Tokyo markets have swelled, the actual volume of traditional voice-trading has been sharply declining," said Yoshihiko Noguchi, secretary-general of the association. "We estimate that e-trading will reach an 85% share in dollar-yen spot trading this year."
E-trading is winning more support because it is fast and timely, industry sources said.
"It takes at least 20 to 30 minutes for person-to-person trades because a brokerage has to confirm dealing prices and credit names; an electronic broker will be finished with the trade in the same amount of time," said a trader who works for a Japanese bank.
"E-trading is dominating in both New York and London," said Masashi Aoki, managing director of Tokyo Forex Co., Japan's leading voice brokerage.
Brokerages that specialize in making deals over the telephone have been forced to shift their business focus to new products such as currency options and derivatives that are not yet being traded online.
Tokyo Forex has joined U.S. energy broker Natsource Inc. in studying the possibility of setting up a network for brokering rights to greenhouse-gas emission quotas by the end of this year.
"The penetration of e-trading is an unavoidable trend in the market," Aoki said. "However, we'll keep looking for alternatives to survive and offer additional services for diversified financial products to compete with e-trading."
Retail action
While the financial sector is setting the trend on e-commerce, retailers are not far behind.
Nippon Telegraph and Telephone Corp. and 24 banks launched in mid-April Japan's largest electronic-money experiment in Tokyo's Shinjuku district. The experiment, called Super Cash, involves 1,000 shops, restaurants, public pay phones and vending machines within the district. It will continue until next May.
Tatsuya Imai, secretary-general at the Super Cash secretariat, said 100,000 people with integrated-circuit (IC) cards and about 10,000 people who will make transactions via the Internet are participating in the experiment.
Yoh Yusa, executive manager for NTT-Long Distance and Global Provisional Headquarters, stressed the advantages of e-money: "It will be almost impossible to make fake cards and the IC-chip applications allow for many more functions than those of ordinary bank and credit cards. An IC card will serve as your identification card, your theater tickets, even your airline tickets."
One e-money project in Tokyo was launched before Super Cash. Visa International Inc. started its e-money experiment last July in the Shibuya district, one of Tokyo's biggest shopping areas. Called Smart Card Society, the experiment uses four types of IC cards: ordinary automated-teller-machine cards, credit cards, disposable cards and reloadable ones. The experiment will last until this fall.
A total of 112,000 cards had been issued as of March 31, and the average purchase was 1,327 yen, said Setsuko Yamanaka, senior manager of Visa International Inc. "Because no online credit inquiry is required for e-money settlements at the counter, both shops and customers can easily handle the cards."
Trailing the West
Yet Japan still lags behind many of its Western counterparts in the use of IC cards for e-money transactions.
Sudo of the University of Tokyo said Japanese businesses saw little need to prepare for security problems because they have become used to using cash or bank transfers for domestic transactions. Now the borderless nature of e-commerce means Japanese companies must beef up their security systems.
The Ministry of Posts and Telecommunications began international security experiments through two affiliates last fall. Cyberbusiness Association is studying e-money transactions via overseas online malls, and Telecom Services Association is experimenting with individual imports over the Internet. It plans to conclude its experiment in March 2000.
Long road ahead
Masumi Kato, an Internet-business adviser specializing in e-commerce, thinks software and IC cards currently in use are still too complicated. "The software necessary to get into virtual malls and the recharging of IC cards should be much simpler," she said.
She also thinks too many e-money systems will keep potential shoppers away. "It is necessary to have terminal units that can handle transactions from e-money cards issued by different systems," she said. "Japan has a long way to go in its current experiments."
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