********************************************************* Japan Internet Report No. 38  May 1999 ********************************************************* In this month's issue: - Online investing, banking activity soaring in Japan - Japanese version of Amazon.com to emerge? - Interview with Tokyo-based Finance Mystery Guest - Are you reading this? - Industry Briefs - Cell phones rule: FINIS ********************************************************** Online investing, banking activity soaring in Japan Online investing and banking activity is soaring in Japan, based on results of a study of active Web users completed by Ion Global this month.  The study queried more than 12,000 Japanese Web users between June 1998 and June 1999.  Some highlights: - The number of Japanese consumers using the Internet to invest in securities appears to have grown nearly fivefold over the last year, and may soon reach 300,000.  Meanwhile, the number of Japanese consumers using online banking services appears to have increased more than fourfold.  - More than 3.5% of active Web users surveyed have online investing experience, and nearly 10% have online banking experience.  - The typical Japanese online investor is a white collar 'salaryman' in his 30s with at least one computer at home.  Yet 35% of those with online investing experience are over the age of 40, and only about 20% are in their 20s, making older Web users an attractive initial market for securities firms venturing into the online arena. - Among respondents who do not yet have experience purchasing investment trusts, Japan's equivalent of mutual funds, women and users in their 20s indicated significantly more interest in future investing compared to their male and older counterparts.  Growth in Internet usage is fastest among these segments, making them strong future prospects for securities firms offering online trading services. - Stock exchange commission fees in Japan will be fully deregulated in October of this year, and NTT has announced plans to offer flat rate telephone services.  The two events will combine to produce explosive growth in online trading in Japan. ********************************************************** Japanese version of Amazon.com to emerge? "We're going to redefine distribution in the traditional publishing industry...making ours into an e-commerce service that other bookstores won't be able to catch up with for five years."  So says Fujio Shimazaki, vice president of book retailer Bunkyodo, as he describes "J-BOOK," a new business-to-consumer online book retailing service slated to begin in June. One key difference with Bunkyodo's model is that the company will outsource both warehousing of popular titles and all shipping to a major parcel delivery firm, greatly reducing delivery costs, according to Shimazaki.  Shimazaki says Bunkyodo will offer the lowest shipping charges of any Internet book retailer in Japan. But the real efficiencies will come with implementation of EDI links between Bunkyodo and its supplying publishers.  Under Japan's current book distribution system, retailers have the right to return unsold merchandise to publishers, and take full advantage of this - on average, they send back more than 40% of the books they initially order but are unable to sell.  Publishers, anticipating the returns, tend to undership initial quantities.  The result is a cat-and-mouse game between retailers and publishers that drives up costs and wastes manpower. Shimazaki says Bunkyodo will use EDI links to transmit both order and sales data simultaneously to publishers, enabling sharing of accurate data and eliminating the over-ordering/sandbagging charade.  The Bunkyodo exec says he has already struck agreements to establish direct EDI links with more than ten publishers. ********************************************************** Interview with Tokyo-based Finance Mystery Guest Continuing with our occasional Mystery Guest series, this month we spoke with the general manager of investment management and trading system development/support for the Japan branch of one of the world's largest securities firms. Due to confidentiality concerns, FMG prefers to remain anonymous, and stresses that his views are his own and do not necessarily represent those of his firm. - We are confident there is enormous potential demand in Japan for online retail securities purchasing and account management.  What is your view? Looking a few years down the road, I would say yes.  I think there will be investor and day trader types. At the moment, I think many remember the days when securities companies wanted to churn in order to get commissions, and often did not act in the best interests of the individual. This and the general risk-averse attitude of many may make for a slow start. Also, leading into the point below, I think there is an education process whereby the consumer will need to take a longer term view. Instead of short term gains, they will think longer term investing. This seems to be starting with investment trusts, though it's been a slower start than expected. As people become more comfortable with risk vehicles I think some will look toward single equities as an investment alternative. Hopefully soon we will see defined contribution plans where individuals will manage their own futures, thus requiring access to account information where the potential client base is enormous.  So I would expect those offering these programs to offer online means. - What are the key challenges that foreign firms will need to overcome in order to develop the Japanese online investing market? I think one of challenges for foreign firms will be name recognition, but over the last year we have been enjoying increased press coverage, active advertising, and a receptive public. Also, as mentioned in the point above, if you are looking for investors you need to educate and change the attitude of a risk-averse society. Aside from all this is the issue of putting together systems that will work in this country and taking care of the ongoing evolution of the systems. A seemingly quick way in the market is alliances with domestic firms but I'm sure there will be a few clashes between the partners. On the other hand, building an organization from scratch will be difficult unless you have some key individuals who can pull things together for you. - Which demographic segments (salarymen, housewives, etc.) do you believe will be the most active online investors? I think there is much interest in what the housewife will be doing. Looking at what these women do with their money, it seems that they save primarily by purchasing time deposits. Looking at the demographics, the investors tend to be men in the prime of their working careers. I would say that for the time being working men in their 30s to 40s will be the most active investors. - Japan's investors are extremely conservative by U.S. standards. How will foreign securities firms overcome resistance to investing in equities rather than low/no-risk instruments? Again, education. Also I think the markets are getting more efficient, accounting principles are getting in line with global standards, and the information dissemination seems to be better and there is more of it, so hopefully the individual investor will be protected more and these individuals will know that they will be protected. What may happen is people start slow with low risk securities and eventually get to equities. - Does the "Big Bang" really remove all the legal, quasi-legal, and logistical obstacles to full participation by foreign firms in Japan's finance sector?  What is your assessment of the effectiveness of the Big Bang to date? I wonder whether it is deregulation/Big Bang or whether it is the competitiveness of the foreign firms that is helping to capture market share. For several years regulations have been changing so that foreign firms can begin competing here. I think business is picking up on both the retail and institutional sides, especially in view of recent fund performance. As far as the Big Bang is concerned, I feel that it is wonderful that we have more disclosure, products and distribution channels but I see all this as simply an enabler. People need to study and take advantage of these changes. A really frustrating thing about these changes and upcoming changes is that there is confusion at the detail level as to what they will be and when they will happen. - Who is the current leader in the online retail securities sector, in your opinion? I can't remember too many names but smaller houses that have gotten attention are Imai and Matsui. Some of the smaller houses seem to have more at stake and also can handle change better, so they have not only worked on online trading but also the way they deal with clients. For instance there is a company that shut down its retail locations and opted to use the phone instead. I do believe it is the larger houses such as Nomura and Daiwa that have been legitimizing this area and will most likely capture a large audience. Longer term, I believe it will be these larger houses with not only the drive but also the spending power who will lead. Aside from changing your workflow for online transactions, there is a major investment in technology required, and the skills to put in a solid infrastructure such as firewalls and systems that can properly handle transaction processing are rare. One other point, and I don't have stats on this, is customer loyalty. In the U.S. I keep hearing the same story from people who are involved with internet trading. "If we were first in getting to the market, we would be the leader now." I wonder how this applies here in Japan. The feeling I get is that people still tend to build relationships and stick with their alliances. Elsewhere we would shop around.  The point I would make is: who today has market share and who will best leverage that market share to capture online trading customers? - Are you aware of any studies that have been done of Japan's online retail securities sector? There are studies but not publicly disclosed. In discussions with people involved with the internet I have found that most are frustrated with the amount of quality information available. In some personal finance magazines there are terse reviews of services and even less on the sector itself. I did look through the Internet White Paper but found that there were only a few pages on the subject. ********************************************************** Are you reading this? Every week I get a nifty e-mail newsletter called Japan MarkeTracker that summarizes key Internet, computer, and multimedia-related news. If you're not yet a subscriber, check it out at <http://www.internetjapan.com>. ********************************************************** Industry Briefs MITI, MOJ, FUJITSU to start work on common online financial transaction platform MITI, in cooperation with the Ministry of Justice (MOJ) and FUJITSU, will soon begin work on a common platform for conducting financial transactions online.  The ministry wants to ensure interoperability between vendor platforms and "guarantee a safe and stable open-network infrastructure."  The three partners plan to establish a common set of standards and specifications, develop platform software, and position their system as a global standard (!), according to a spokesman. WAKO SECURITIES, AOL JAPAN to launch online securities trading service WAKO SECURITIES will join forces with Tokyo-based AOL JAPAN to launch an online securities trading service for AOL subscribers.  The partners will launch "Internet Trade on AOL," a new feature of the ISP's "AOL Home Trade Center" site where users will be able to buy and sell investment trusts, the Japanese version of mutual funds, and listed and over-the-counter stocks.  WAKO, which has only been able to attract 1,000 subscribers to a similar service it launched on its own last August, hopes the partnership with AOL will help it win more customers, according to a spokesman. Japanese firms getting hip to Affiliates reality Trading giant MITSUI & CO. will soon launch a new "affiliate"-style online sales program whereby the company will pay commissions to operators of corporate and personal Web sites that direct customers to MITSUI's CurioCity virtual mall. MITSUI developed the system, dubbed Curio EC Partner System, in cooperation with Tokyo-based MITSUI KNOWLEDGE INDUSTRY.  The company hopes to attract 10,000 participants by paying 5%-10% commissions on sales produced by affiliates.  More tales of underground cables... Tokyo's Transportation Bureau plans from January 2000 to start leasing capacity on optical fiber cables laid throughout the city's subway system to both domestic and foreign telecommunications carriers.  The bureau plans to determine usage fees and contract terms by early June, then start soliciting lessees.  It will be the first time that Japanese subway operators have leased their cable capacity to independent third parties, according to a spokesman.  The move was driven by two factors, say industry watchers: strong demand for new capacity from new telecom carriers, and declining Transportation Bureau revenues. Most online housewives buy online, says study More than 50% of career homemakers that use the Internet have purchased products online, according to an online survey conducted by Tokyo-based INFOCOM RESEARCH on Internet shopping behavior.  INFOCOM conducted the online shopping survey, which targeted married women, from February 22 to March 1 of this year and received 4,091 valid responses.  Career housewives accounted for 14.7% of the entire group. ********************************************************** Cell phones rule: FINIS After this comment, which I forgot to include last month, I'll try to get off my cell phone kick for awhile :) A key point about the new Internet-enabled handset services such as DoCoMo's i-Mode is that they can substantially reduce connectivity fees, since charges are based on the actual size of messages sent, as measured in kbytes, rather than metered usage of a telephone line.  For remote e-mail access, the core application, these fees are quite reasonable.  Moreover, a lengthy (and fee-inducing) dialup procedure isn't required.  Just another reason for the rapidly growing popularity of cellular handset-based Internet services... ********************************************************** Tim Clark Editor To subscribe or unsubscribe to JIR, send any message to: subscribejir@tkai.com unsubscribejir@tkai.com Copyright 1999 by Ion Global and Digitized Information, Inc. 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