Asia: If trend continues, the country could see a rise in individual wealth and the means to create a more entrepreneurial culture.
By MARK MAGNIER
TIMES STAFF WRITER
TOKYO
Japanese consumers, long dismissed as an illogical breed that eschews risk and enjoys paying higher prices, are showing they will act as rationally as their counterparts anywhere else if given half a chance.
On Oct. 1, Japan ended its high fixed commissions on retail stock trading under its "Big Bang" deregulation policy---replicating a move the United States made in 1975. Overnight, commissions dropped by as much as 90%. Thus Japanese investors, who previously had to pay brokers a minimum commission of about $88 for the privilege of buying 100 shares of a $50 stock, are now paying discount fees that can dip under $10.
Japan's brokerages are now fighting for position in this brave new trading world---in a society where price competition is a relatively new concept. New entrants say the old order is over, even as traditional securities houses cling to the idea that their customers are happy to pay up to 10 times as much for their superior service.
But investors are already providing part of the answer. They have started a big bang of their own---on the keys of their computers. Since Oct. 1, market leader Nomura Securities has been opening 1,000 new Internet trading accounts a day, others are doubling their new customers, and tiny start-up Monex Inc. added 5000 new clients on its first day. Its only been [a few] weeks since our business started, but we can already see this is going to be a trend," said Oki Matsumoto, Monex’s President. "People will move toward better opportunities. You can’t stop it.
These are still the early days. But if Monex's predictions are right and thousands of people such as Ayako Kawahara start trading, it could boost individual wealth and pave the way for a more entrepreneurial culture. I don't own stocks, but I'm thinking of buying some," said Kawahara, a 33-year-old systems engineer. "Cheaper commissions are not the only reason to buy, but at one-tenth the cost, they sure make it encouraging."
Such a shift by individuals could keep Japan's stock market in a bullish mode. The main Nikkei-225 Index has surged 26% this year, to 17,438, but it still is 55% below its peak, reached in 1989. A recovering market, in turn, could give a major boost to Japan's struggling economy.
As it stands, very little of the $11.3 trillion socked away by Japan’s diligent savers finds its way into efficient capital markets, start-up companies or other productive uses.
Japan has watched with envy as United States created new industries, jobs and the likes of Microsoft, Intel and Cisco Systems. Most of Japan's savings meanwhile, has been locked in unproductive land deals, left languishing in Japan's ailing bank system or siphoned off to underwrite the government's deficit.
Finally, if Japanese investors can begin earning higher returns via stocks, it should also help Japan support a rapidly aging, and thus less productive, population. While half of all Americans are now believed to hold stock---directly, in mutual funds or through their 401(k) retirement plans---a mere 3% in Japan do so.
And while American stockholders have enjoyed returns of 20% or more annually in recent years, most Japanese have limped along earning interest rates of just 0.25% on their savings---and that's before taxes.
Japanese and foreign brokers salivating over this potential pot of gold often wonder aloud why investors could put up with such dismal returns for so long---and how much longer they might do so.
"I know I should take my money out of my savings account and invest in something better, but I just don't know how to judge," said 60-year-old Mitsuo Oyama, a trading company official. "It's still comforting to have most of my money in bank accounts." Yet while the cautious nature of the Japanese is often blamed, the bigger culprit may be the system.
"The Japanese are known for being risk-averse," said Yuichiro Tamaki, a deputy director at the Ministry of Finance. "But many speculated on land during the [real estate] bubble and lost money. [And others] love horse racing. I think it's more the system, not the nature of the Japanese."
Some of the ways that system has been stacked against individuals can be seen in stock-trading regulations. Until recently, Japan required investors to buy at least 1,000 shares at a time, making it too expensive for many. Japanese companies also limited the number of shares they issued and kept the prices high, both for status and to favor their institutional shareholders. By contrast, U.S. companies tend to split their shares to keep prices, affordable.
In addition, disclosure rules haven't been enforced, which has made it much easier for big Japanese players to trade on insider information. A preponderance of cross-shareholdings by large companies, fuzzy accounting and carefully controlled shareholder meetings further undercut the voice of smaller investors.
Many of these barriers are now slowly disintegrating. Minimum share purchase requirements have been reduced in many cases, investment advice is allowed, more companies are following Western disclosure rules, and a few enlightened firms have even lowered share prices--providing more access and more choice for average investors.
"If online trading is safe, I might do it," said Yuji Matsubara, a 58-year-old factory manager. "Regulations have been good, but it was probably controlled by big firms leaving consumers without much choice. Now we can pick who we want to deal with, which is great."
Still, few expect the Japanese to stampede headlong into stocks. More than 70% of private assets here are held by middle-aged or elderly Japanese, by some calculations, many of whom got badly burned when Tokyo's speculative stock market and real estate bubble collapsed a decade ago. Retired salarymen don't take risks," said Michio Matsui, chief executive of Matsui Securities Co. "So low-risk, low-return thinking will continue for awhile."
One strategy that brokers are following is to offer more corporate bonds and preferred shares as a way to slowly ramp up small investors' appetite for risk. Japan's move to a 401(k)-style retirement savings system next year should also help. And attitudes toward risk in general seem to be slowly changing as spreading corporate layoffs make a mockery of Japan's lifetime employment system.
As the protective walls come down, battle-tested foreign firms such as Merrill Lynch, Charles Schwab and E-Trade are arriving in droves, armed with new products, technology and lots of cash.
Nor is it just foreigners. On Oct. 1, banks also got the go-ahead to begin offering brokerage services, leading to still more competition from the likes of IBJ Securities Tokyo-Mitsubishi Securities Co. and Fuji Securities Co. In response, traditional Japanese brokers are trying to leverage their strong retail networks, historical relationships and understanding of Japan.
One big remaining question is how truly hands-off Japan's Finance Ministry can remain after decades of managing the markets. Japan lacks America's appetite for a free-for-all, and Finance Ministry officials hem and haw when asked whether they'll really let big brokers sink or swim.
That said, Japan now believes it has no choice but to embrace foreign expertise, at least until it can get up to speed.
For old-line Japanese Brokers the stakes are huge. The industry earns $9.4 billion annually in commissions, a figure analysts believe could be cut at least in half. So far Japan's largest brokers insist they can stay above the discounting fray. "The important thing is the combination of products and information we provide to investors, said Kazutoshi Inano, a Nomura Securities board member.
Daiwa Securities offers a modest discount plan to branch customers under a "frequent trader program.
"We don't think our customers choose a firm based on price; so were not even considering, any further lowering of commissions said Katsuhiko Nomura, a manager at Daiwa. "We'll provide better service rather than lower price.
But competitors scoff. "That's the same argument Merrill Lynch made 25 years ago when Charles Schwab first showed up, said Matsui. 'It didn't work then and it won't work now. These big firms are a complete anachronism. In particular, Matsui said, the big boys underestimate the Internet’s power. Online trading accounts have tripled to an estimated 200,000 in the last few months alone, analysts say, and could reach 1.2 million within 5 years.
"The big firms are acting as if this is not a big deal, but in reality they must be quite upset, said Harumi Ichiki, an analyst at Sumitomo Life Insurance. "You're going to, see some very severe competition."
Etsuko Kawase In The Times' Tokyo bureau contributed to this report.
July 13 2002