Japan Logs On To Online Trading

E-brokerages are all the rage, thanks to a rising market and lower fees

For a long time after Oki Matsumoto quit Goldman, Sachs & Co. (GS ) in 1998 to set up Monex Securities, a Tokyo-based online broker, former colleagues looked at him with a mixture of awe and disbelief. Their shock was understandable: Matsumoto, now 40, left the bulge-bracket giant a year before its vaunted initial public offering. That meant Goldman's youngest-ever partner in Tokyo forfeited an ostrich-size nest egg. Likewise, launching an online broker -- at a time when Japan's depressed economy showed few signs of luring an army of retail investors to the stock market -- didn't seem the wisest move. Indeed, by 2003 -- five years after launching -- Monex had yet to turn a profit.

Today no one would question the ex-investment banker's judgment. Spurred by the recent surge of interest in Japanese stocks, Monex is going from strength to strength. After netting a profit of $19.9 million in the year ended in March, the company earned $12 million just in the quarter ended in June -- a 34-fold increase over the same three months last year. In a show of optimism, Monex has just completed a merger with Nikko Beans Inc., Japan's fifth-largest online broker. With almost 400,000 account holders and total assets of $12.3 billion, the creation of Monex Beans combined Monex' first-time account holders with Beans' more seasoned active traders to create a powerhouse. "We can cover the whole market," Matsumoto says.

The sizzling profit growth at Monex isn't a one-off. Online rivals E*Trade Japan, a unit of Softbank, and Matsui Securities have also posted stellar results. And fourth-ranked online broker Rakuten Securities followed suit in mid-August, helping its parent company Rakuten Inc. more than triple its first-half group profits to $67 million. Matsui, the most profitable of the bunch, made $34.6 million in the three months ended June 30 -- up 400% compared with the same three months of 2003. Meanwhile, E*Trade became the first online broker to top 400,000 customers in June. Its chief selling point: E*Trade investors are charged as little as 700 yen ($6.34) for trades of up to 500,000 yen ($4,528). Securities industry leader Nomura charges 5,250 yen ($47.55) for the same trade.


Indeed, fees at most online brokerages are a fraction of those at traditional brokerage houses. Without brick-and-mortar branches and an army of brokers, they can pass along the savings in the form of lower charges. And more and more Japanese are logging on to take advantage of it. "The online brokers are expanding very fast," says Kenji Yumoto, chief economist at the Japan Research Institute in Tokyo. "For the traditional brokers, these companies are a menace."

An important catalyst behind the emergence of Japan's thriving online brokerage community has been the buoyant stock market. With the Nikkei 225 up 3% so far this year and 7% over the past 12 months, brokers have been able to turn a profit. Some 70% of stock-trading by Japanese retail investors is already being transacted online. But at the same time just 0.2% of Japan's $14 trillion in personal assets is owned by online-broker customers -- a tenth of Nomura Holdings Inc. Commissions overall have come down significantly since they were deregulated in 1999 as part of Japan's Big Bang financial industry reforms. Each of Japan's Big Three full-service brokerage houses -- Nomura, Daiwa Securities, and Nikko Cordial Corp. -- offers PC-based trading services to retail clients. But none provides as deep a discount as the purely online brokers do. "The losers in all this are the offline brokers," says Hirohito Imada, chief financial officer of Matsui.

Yet the rise of online brokers doesn't necessarily mean the beginning of the end for the Big Three. Despite charging hefty trading premiums, Nomura's total assets under management hit a record $327 billion in June. And its profits rose 5% to $365 million in the April-June quarter on a 5% gain in revenue to $2.7 billion. Traditional brokers say they're focused on serving long-term investors with large nest eggs who need plenty of professional investment advice. "We're pursing a different business model," says Tsukasa Noda, vice-president of corporate communications at Nomura Securities. "Our primary value is providing consultation for our customers."

Investors who stuck with traditional brokers in the 1990s -- when the industry was beset with payoff scandals, bear markets, and bankruptcies -- show little inclination to flee now, especially with equity prices on the upswing. "Most online investors are newcomers [to investing]," says Natsumu Tsujino, senior nonbank analyst at J.P. Morgan Securities Asia (JPM ) in Tokyo.

Even so, Internet brokers are winning converts beyond computer geeks and day traders. Take Katsuko Hasegawa, a 60-year-old homemaker in Tokorozawa City outside Tokyo. She used to trade with Nomura but switched to Nikko Beans four years ago. Hasegawa likes the loyalty points Nikko Beans gives out with each transaction that can be cashed in for airplane frequent-flier miles. But it's the steep trading discounts that keep her coming back. "The cheap commission is the main reason," she says. "It's about half that of Nomura."

Another big factor in the increasingly popularity of online brokers is that more and more Japanese households are being wired for high-speed access to the Internet. Internationally, Japan now ranks second in the number of broadband subscribers after the United States. It's clear that Internet-based brokers are attracting a more active type of stock player than old-line brokers. Matsui's Imada says his firm's customers on average trade around 20 to 30 times annually. By contrast, Daiwa's 840,000 largely dormant online-trading account holders completed an average of two trades per year. Online brokers are also stepping up the range of products on offer: Many provide services ranging from foreign-exchange transactions and mutual funds to margin trading, enabling customers to buy and sell assets with borrowed funds.

Links with banks are another source of new business. Matsui Securities formed an alliance in May with Resona Bank Ltd., Japan's fifth-largest bank, which will introduce its depositors to Matsui's online stockbroking services. Matsui is also keen to strike deals with some of Japan's 64 regional banks. "This could be a very important strategy" to generate new clients, says Shoichi Ito, a financial consultant at Mitsubishi Research Institute.


The biggest challenge ahead for Japan's online brokers is their ability to survive a significant stock market correction. The number of online brokers in Japan dropped from a peak of 67 in 2001 down to 54 now. But there's no doubt that there is plenty of growth potential if the market stays in positive territory. Only 8% of Japan's financial assets are invested in the stock market, compared with around 50% in the U.S. Even if it took Japan 42 years -- or 1% per year to catch up the U.S. -- that would translate into $140 billion of fresh funds moving into stocks every year. "That's a lot of money," says a grinning Matsumoto. Given that Monex' market capitalization topped $3 billion earlier this year -- and that the founder and chief executive owns 12.8% of the company -- Matsumoto has plenty of reasons to keep that smile on his face.

By Ian Rowley and Hiroko Tashiro in Tokyo

    Before it's here, it's on the Bloomberg Terminal.