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Japan Internet Report No. 47 April 2000

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In this month's issue:

- Fun finance facts
- Japanese stock market follies
- Interview with March Kikumoto of WebEggs
- The biggest e-commerce player in Japan
- Credit cards rule Japan's online payment sector

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Fun finance facts

Back on a finance kick this month. Here are some updates on Japan's
wild and woolly online retail securities sector:

- More than 50 companies are now offering online securities trading
services in Japan.
- There are now approximately 700,000 online brokerage accounts in Japan.
Nomura is the market leader with about 150,000 accounts, followed by
Daiwa with about 130,000, and E*TRADE with about 75,000.
- Commissions on retail securities purchases have dropped 60% since
deregulation last October, according to one study. Among online-only
brokerages, the drop has been even more dramatic.

In spite of the huge increase in the number of individual consumers
using online brokerage accounts to purchase securities, institutional
investors still account for the overwhelming majority of transactions,
in both volume and yen terms. In part that's because of stock market
rules regarding the minimum number of shares that can be transacted at
one time. In general, investors must purchase either 100 or 1,000
shares of any given stock in a single transaction.

So even if a single stock is priced at a reasonable 2,500 yen per share
(approximately U.S. $24), an obligation to purchase a minimum of 1,000
shares means an outlay of some U.S. $24,000. That's far more than most
individual investors can afford to place on a single stock. Japan still
has a long way to go before it truly becomes a nation of individual
investors...

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Japanese stock market follies

What's the deal with Japan's stock markets? Specifically, there are
three basic questions that have been bugging me for months, so I'm going
to take this opportunity to try to answer them.

First question: How can a single share of stock, even at the initial
offering price, cost the equivalent of U.S. $150,000 or more? For
example, as I write this, a single share of Rakuten Ichiba, the Japanese
language online shopping ASP, is trading at 43 million yen, or more than
U.S. $405,000. The stock opened less than a week ago at 15 million yen,
or about U.S. $141,500 per share. What gives? How can individual
investors possibly participate in a market like this?

Second question: Why do companies issue so few shares? For example,
Rakuten Ichiba has a grand total of 12,340 shares outstanding.
Naturally, with per-stock prices so high, this makes sense in terms of
total market capitalization, but why not issue many more shares at a
lower price? As it is, Rakuten Ichiba's market cap is now about U.S. $5
billion, but that would somehow seem much more logical if there were
millions, rather than thousands, of shares outstanding. Is the idea is
to drive prices up through planned scarcity?

Third question: Why do shares of some companies not trade at all on some
days?

Clearly these three things are related, and making conjectures based on
how the rest of the Japanese business world operates might lead us to
the following: Various government rules limit flexibility in determining
the number of shares to be issued, meaning that per-share prices wind up
at such high levels that only institutional or extremely affluent
individual investors can afford them. Meanwhile, there is so much pent-
up demand in Japan for IPOs that new Internet-related offerings have
very good odds of succeeding.

Read on for our interview with March Kikumoto of WebEggs, who will shed
some light on the above.

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Interview with March Kikumoto of WebEggs

This month we enjoyed both online and offline chats with March Kikumoto
of WebEggs (www.webeggs.com), a site that provides opportunities for
entrepreneurs in Japan to find venture capital and support services.
March has a strong finance background, and did much of the production
work for Yahoo Japan's financial quotes page (http://quote.yahoo.co.jp/).
Not only that, she financed her college education in the U.S. by
trading stocks. We asked her to give us an overview of WebEggs and help
shed some light on Japan's stock market.


- Tell us about WebEggs. Why are you starting it, and what kind of
service are you providing?

In Japan, most venture capital firms just invest money. But Japanese
entrepreneurs need a lot more help than just funding. Imagine that
there are many good seeds for, say, premium apples. The seeds won't
grow without well-cultivated soil. And even if the seeds are planted in
good soil, they still need water, sun, and fertilizer to grow.

The soil is the community that WebEggs.com is trying to create. The
seeds are entrepreneurs' business ideas and plans. The water, sun, and
fertilizer are the funding, facilities, and support services that member
companies provide. We are trying to create a community in which all
sorts of support companies participate to create a partnership network
that helps entrepreneurial businesses grow. At the present time,
PricewaterhouseCoopers, UUNet, NTT Software, and HP have joined us as
sponsoring firms.

Ultimately, we hope to develop WebEggs.com such that entrepreneurs
visiting our site with business plans or ideas will be able to gain
access to the funding, people, and services that will enable them to
grow their concepts into real, successful businesses. We will
officially launch WebEggs.com in mid-May.


- Help us understand the Japanese stock market. Why does a single share
of stock end up being priced so high in Japan?

Many factors. First of all, Internet companies such as Yahoo! Japan
have very few shares outstanding. For example, Yahoo! Japan has 57,908
shares outstanding, while Sony has 907,278,326 shares outstanding. This
creates an unbalanced relationship between buyers and sellers. What
happened with Yahoo! Japan is that stockholders did not want to sell,
yet there were many people who wanted to buy. It is just a typical
supply and demand relationship. When you have few shares outstanding,
the stock price is more likely to be influenced by this relationship
than by actual company value.

Second, high-tech stock fever in the U.S. also influenced the Japanese
market. It is generally believed that the Japanese economy follows the
U.S. - what happens in the U.S. will happen in Japan sooner or later.
Finally, the overly high price decreases the liquidity of the stock,
which in turn causes high price volatility.


- Why do companies issue so few shares?

There are regulations about stock splits and other issues in Japan that
don't exist in the U.S. One rule stipulates that paid-in capital
divided by the number of shares outstanding must be equal to or greater
than 50,000 yen. In other words, the 50,000 yen face value of each
share (about U.S. $476) has to be matched by cash in the bank.
Therefore few pre-IPO companies can afford to issue tens of thousands of
shares, let alone hundreds of thousands or millions.


- Why do shares of some companies not trade at all on some days?

Simply because of a lack of buyers. I am sure that there are many penny
stocks in the U.S. that don't trade at all as well. In Japan, two
reasons for these no-trade days include 1) the company is discovered to
be financially unsound, or 2) the company's credibility is called into
question (Hikari Tsushin, for example). When something like this
happens, there may simply be no buyers for the stock!


- How is the bursting of the Internet bubble in the U.S. affecting Japan?

Since historically, the Japanese market tends to be influenced by
downward (rather than upward) movements in U.S. stock markets, it did
cause a downward movement for a short period of time. But most
experienced investors anticipated the downward movement in NASDAQ.
It is not a surprise at all. The market was going too crazy. We're now
going through a market readjustment. I expect U.S. high tech stock
investors to move in four different ways: 1) stay in high tech stocks
either because prices went down too low to sell, or because they
continue to believe in the companies, 2) get out of individual stocks
and start investing in mutual funds and bonds, 3) get out of high tech
stocks and start investing in blue chip stocks, or 4) leave the U.S.
stock market and start investing in other countries such as Japan where
there's more room for price growth.

So I believe that the NASDAQ drop won't neccessarily have a strong
negative impact on Japanese high tech stocks.


- Will there continue to be a series of successful Internet-related IPOs
such as Rakuten Ichiba?

I would say that it depends upon which market startups go to for their
IPOs. For example, Rakuten Ichiba went public on JASDAQ, which has much
higher standards and a longer history than MOTHERS. It has greater potential
to be successful. As for NASDAQ Japan, it has higher standards than
MOTHERS. So we can expect more liquidity in the market. I would say that
the success of NASDAQ Japan depends upon what kind of companies go out
there first. If many solid businesses go public on NASDAQ Japan, it will be
able to keep attracting many investors, which in turn will generate more
success stories.


March Kikumoto
Business Development Executive

mailto: march.kikumoto@twc-jp.com
tel: (813) 5464 0394 ext. 118 fax: (813) 5464 0387
http://www.WebEggs.com
The Web Connection http://www.twc-jp.com
Winning Solutions in the Digital Economy

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The biggest e-commerce player in Japan

Who is the biggest e-commerce player in Japan at the moment? The answer
last month was Sony Computer Entertainment (SCE). The company claims to
have sold an astounding 500,000 PS2 game machines online in March.
Assuming SCE's claims are accurate, online revenues from the device
alone totalled more than U.S. $184 million (500,000 units x 38,800 yen /
105). If we make the reasonable assumption that, on average, purchasers
ordered two games with each player, the online revenue figure jumps to
an amazing U.S. $238 million. Not bad for one month!

On the first day of the PS2's debut, one friend's wife stayed up till
the wee hours trying unsuccessfully to order online. SCE's servers were
crushed by 30 times the expected demand. IBM Japan scrambled to make
things right, but the site was slow for four days, and some users
complained that it took up to eight hours to place an online reservation.

Another interesting fact in this drama: In addition to bypassing its
own retailer channels with the direct-from-manufacturer sales model, SCE
is selling the PS2 online at 1,000 yen below its own suggested retail
price of 39,800. This prompted one executive at a leading game store
chain to wonder "whether SCE is planning to leave us retailers in the
lurch..."

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Credit cards rule Japan's online payment sector

I've always been skeptical of electronic money and other alternative
online payment schemes, and two years ago wrote what to me seemed an
obvious truth: That there is already a practical, secure online payment
solution that is used by millions of people around the world to buy
products online, and which is the default standard for business-to-
consumer online transaction settlement. It is called "the credit card."
(http://www.jir.net/jir5_98.html#bleak).

The evidence suggests this is true in Japan as well. For example, the
only way you can buy PS2 products online from SCE, currently Japan's
biggest e-commerce player, is by credit card. And a recent study
conducted by a Japanese research outfit (which I can't locate at the
moment) found that 60% of respondents with online shopping experience
used credit cards to make their purchases - a far higher percentage than
any other payment mechanism mentioned. Other studies, most notably
Nikkei's Internet Active Users Survey, find that credit cards rank
second, behind bank and postal money order transfers. But I believe
that because of their extensive use in purchases of merchandise such as
PCs, consumer electronics, software, books, CDs, and videos, credit
cards blow other settlement methods out of the water in terms of total
transaction value.

Some argue that younger people, who are the most likely to be online,
are also the least likely to have and use credit cards. That's true,
but the reality is that those who are sufficiently motivated to make
substantial purchases online are adults who have both disposable income
and credit cards. Our own survey data and empirical observation also
shows that many adults are purchasing online not for themselves, but for
their children. Credit cards, rather than convenience stores and
electronic money schemes, rule Japan's online payment sector.

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Tim Clark
Editor

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