Crazy For The Net

Takeo Nakajima's entrepreneurial dreams materialized in his childhood bedroom. Last year the 25-year-old Keio University graduate turned the tiny space into a warren of cheap computers, tangled cables and scurrying part-time employees who work odd hours and nap on futons tucked under desks. His company, CyberAssociates, designs banner ads, the virtual billboards that decorate the digital world. "And when we found out what would happen on Oct. 1," he says, "we created iTraders." Pegged to Japan's deregulation of its retail securities market this week, the Web site offers news briefs, how-to tips for prospective investors and links to online brokerages. Says Akihiko Tsuruta, the company's 22-year-old programmer: "We want to become the default home page for Internet stock trading in Japan."

It could happen. iTraders now logs about 30,000 hits a day, a tally set to multiply after individual Japanese investors commence discount stock trading on Friday. The latest installment in Tokyo's "big bang" financial reforms, deregulation will empower some 28 million traders to flee Japan's major brokerages, stodgy firms notorious for steep commissions and inattentive service. Moreover, cheap computers and a price war among Internet service providers are ushering in Japan's digital age. "In the United States, deregulation came in 1975 and the Internet came 25 years later," says Oki Matsumoto, president of Monex, a start-up on-line trading venture. "In Japan, these two things are happening in a very condensed period, and the impact will be enormous."

Consider the numbers: Japanese, per capita, hold about $110,000 in savings--most of it in accounts that pay virtually no interest. The nation's savings rate is the highest in the developed world, and the rate of stock ownership among the lowest. Cautious Japanese opted for savings accounts because they're guaranteed. But with real interest rates now negative, those accounts are shrinking. Beginning next April, a staggering $1 trillion in long-term postal deposits will mature, creating a potential shift from savings accounts to stock markets unprecedented in Japanese history.

Will it happen? "The investment style of Japanese families will change," says Shuji Madono, a retail strategist at Nomura Securities. "The only question is how fast." In Japan, the answer may be "not very." Yet the prospect of attracting even a portion of those savings has inspired brokerages to gear up, particularly for online trading. Dozens of firms now deal on the Net--among them Japan's Big Three securities companies, Nomura, Daiwa and Nikko. Newcomers, too, are crowding the market. The list includes a Sony-backed start-up headed by a former investment banker, a Japanese version of E*Trade and America's paramount cut-rate brokerage Charles Schwab, set to launch next year. "For clients there is no downside to this," says Ronald J. Strauss, president and CEO of Merrill Lynch Japan Securities. "But are all financial institutions going to be winners? Obviously not."

Consumers are being courted like never before--with a dizzying array of books, tip sheets and personal-finance products. "Even the easiest books are written on the assumption you know the basics of the stock market, which, to be honest, I don't," says salaryman Takashi Hashimoto, 32, as he surveys titles at a Tokyo kiosk. Many of the works before him promise fabulous returns; one recent guide boasts a method for "doubling your money in a year." Another urges salarymen to play the markets rather than working overtime, promising a 50 percent return on investment "while staying in bed on Sundays." Little wonder Hashimoto frets that "stock trading is a gamble."

Yet amid these punters' guides are investment programs based on logic, not luck. Shuzo Maji's "Enjoy Stock Trading on the Internet" is a how-to online-trading manual that looks like a binder. It offers advice on software, discount brokerages and doing research on the Net. A second popular title, "Japan Is Rich. Why Are You Poor?" urges investors to shrink their bank accounts and buy stocks and mutual funds overseas. "Internet Trading for Garbage Investors" presents computerized stock dealing as a hip lifestyle choice. On its cover, a blond man in an aloha shirt sits by the ocean, tapping at his laptop as bikini-clad babes toss a beach ball in the distance. Its introductory essay, "Stock Trading Is Cool," lauds America's fascination for online investment and urges Japanese to cease thinking of stocks as "something for old men, like horses and golf." Written by a team calling itself the Alternative Investment Club, the book advocates trading online based on Net research--a formula that cuts out salesmen. The message: brokers always treat the little guys like trash, so forget them.

Michio Matsui expects an exodus from Japan' s biggest brokerages. And he's spent 10 years preparing to steal their clients. After taking the helm at Matsui Securities, a boutique brokerage owned by his wife's family, he closed branches, slashed staff, pushed out brokers and refocused the business on discount trading. Whereas other firms still employ armies of salesmen, Matsui is fully automated, which means it can lower commissions. "Our system was specifically designed to cut out the broker," says Yoshihito Sato, designer of Matsui's Web site. "Others merely cut out the telephone."

Take Nomura Securities. Japan's dominant brokerage employs 7,500 salespeople in 124 branches scattered across the country. Inaugurated in 1997, its online service now boasts 55,000 retail accounts, 70 percent of them once traditional customers. With its client base shifting steadily to the Net, Nomura's brokers conduct fewer and fewer trades. But rather than downsize, Japan's oldest brokerage has raised fees on some small transactions. "Our clients want better advice, more information and a bigger product range, not lower commissions," says Madono. Given this strategy, Matsui views its quest to overtake Nomura as a replay of discount brokerage Charles Schwab's surge past its tradition-bound U.S. rival, Merrill Lynch. "I want to be the Schwab of Japan," says Matsui, "and I can do it in two years."

He might be right. In 1997, Merrill bet large on Japan's big-bang financial reforms, buying a hefty chunk of bankrupt Yamaichi Securities for $200 million. Like Nomura, Merrill saw a future in full-service trading, opening 33 branches and hiring 2,000 brokers. In its first year the firm lost $125 million. Merrill plans to launch online trading in Japan next year, but it'll be playing catch-up. Monex, a start-up with Sony as its 49 percent stakeholder, christens its online brokerage this Friday. Its aim: to court Japan's cash-rich silent majority, people who have never bought shares or used the Net. "They are going to have to think about mutual funds and stocks for the first time," says Matsumoto. "This is a paradigm shift," he argues, referring to his country's high-tech revolution. "My business model can only fail if Japan fails."

In the digital realm, at least, the fear of failure doesn't loom large. With literally hundreds of sites now devoted to online trading, there's a raw energy power on the Net that most of Japan's economy so sorely lacks. Mind you, this is entrepreneurialism Japanese style, which means it can seem quite cautious. Ikuko Osada, a 35-year-old former radio scriptwriter, recently completed a three-month course in financial planning and is now a columnist for the online women's magazine Cara Carina. Her investment tips stress the sense of trading in what you know. "Like Hisamitsu Pharmaceuticals," she says, citing a company that sells knee and ankle braces. "With so many young girls getting injured wearing those ridiculous platform shoes, they must be doing good business."