Nasdaq Japan: Birth Pangs, Or Something Worse?

So far, the ballyhooed new tech exchange looks like a bust

The announcement was the kind of publicity Nasdaq Japan hardly needed. In late September, just three months after mutual fund tracker Morningstar Japan listed on the new market, Morningstar Chairman Yoshitaka Kitao said he was considering a new trading platform. Who could blame him? Since the firm listed with Nasdaq Japan, its stock is off 65%; most days, fewer than 10 shares change hands. If Kitao's company, like Nasdaq Japan itself an offshoot of a U.S. concern, departs, it will be especially awkward. Kitao doubles as a director at Softbank Corp., a half-owner of Nasdaq Japan.

Is Nasdaq's first venture abroad going to make it? Not without a struggle. Launched on June 19, Nasdaq Japan was to be a globally credible exchange where Japan's ambitious startups could list. It would eventually offer local investors the chance to buy Nasdaq stocks, too, as well as an index that tracks the U.S. Nasdaq's top 100. But the new exchange was immediately hit by the global slide in high-tech shares. It has also been hobbled by outdated rules that make shares too expensive and a dearth of attractive issues. Nasdaq officials insist they will solve these problems, but it's going to take time. "Our true birth will be a year from now," says John L. Hilley, chairman of Nasdaq International Inc., which is setting up Nasdaq exchanges overseas.

SAVIOR TO VICTIM. That's cold comfort for investors and young Japanese companies eager to go public. Nasdaq Japan was supposed to bring order to Japan's venture market, which was dominated by the Market of High-Growth & Emerging Stocks, or Mothers, a hastily built affiliate of the Tokyo Stock Exchange. Nasdaq Japan had stricter listing rules, sophisticated technology, and a stronger pool of Internet companies. But in one short summer, Nasdaq Japan has gone from savior to victim. The market now lists just 30 stocks--a third of which, like Morningstar, average volume of fewer than 10 shares daily. As for trading into the U.S. market, that's not due to start until well into 2001.

The rout in tech stocks has certainly hurt. The Bloomberg Japanese IPO index, which measures stocks listed within the previous year, is down 25% since its launch on June 30. And with Nasdaq Japan's complex computers still to be installed, the exchange is using the Osaka Securities Exchange's auction-based trading system, which is fine for a large-volume market--and a disaster for Nasdaq Japan. Volumes are so low that every buy drives up prices and every sale exaggerates declines. "We'd love to get in, but it's just too illiquid," says David Scott, who manages $2.3 billion in small-cap funds for Jardine Fleming Asset Management Ltd.

Retail investors are shut out by high share prices. Japan's Commercial Code stipulates that companies must have at least 50,000 yen in assets for every issued share. Thus, even Net startups must issue shares that cost tens of thousand of dollars each. Morningstar Japan sold 1,000 shares at its IPO for $65,100 apiece. The government is mulling a rule change, but no action is imminent.

That leaves companies such as Morningstar marooned. Nearly two-thirds of listed stocks have fallen since their IPOs. Companies such as Cisco Japan and Yahoo! Japan have reportedly backed away from listings. And investors are focused on this month's tranche of Nippon Telegraph & Telephone Corp. stock and the float of Sky Perfect Communications, a satellite TV distributor due to list on the TSE's Mothers.

Nasdaq Japan execs are working hard at repairs. They hope to add 20 more local stocks this year--and 100 more in 2001, as well as more U.S. shares. They also intend to offer about 15% of Nasdaq Japan to a consortium of 13 Japanese and Western brokerages to give them a stake in the exchange's health.

Nasdaq Japan is not the only casualty of the tech wreck. Volume on Mothers is just a seventh of that on Nasdaq Japan. Hong Kong's Nasdaq is also a flop. The new markets hope they can survive the bear market in tech. It could be a long wait.

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