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Last Monday, Enzio von Pfeil wrote a piece entitled, "Beware of Japanese Brokerage House Stocks." Better extend that to cover specialized online brokerage firms too. On a separate note, I find it unfortunate that there is not an easier (and cheaper) way for non-Japanese investors to speculate in micro-cap Japanese stocks; although the situtation is changing for overseas investing in general according to a recent WSJ article, "Global Investing Made Easy" (paid subscription required).

The idea for this post came from a Mainichi Daily News article, "Japan's online trade boom fizzles as 'Livedoor shock' lingers" published last Friday.

"After years of heated growth, Internet stock trading in Japan may have reached a plateau, as individual investors develop cold feet in the aftermath of the Livedoor scandal."

The evidence can be found in six-consecutive monthly decreases in new online trading account openings and a 19% month-over-month drop in July. The combined market cap of Japan's five-biggest specialized online brokerage firms fell 23.5% in the quarter ended June 30th versus the prior quarter ended in March. Nomura's (NYSE:NMR) launch of Joyinvest Securities in May didn't help as it only intensified the competition. Rakuten Securities president responded to Nomura's new offering saying 'the online trading industry would be drawn into a "bloody war" of price competition.'

There are two positive developments for retail investors however, and perhaps both will result in increased trading and thus more commissions for online brokerage firms: (1) price wars pushing trading commissions ever-lower with discounts as much as 30% off commissions being offered by Nomura's Joyinvest as it struggles to attract investors, and (2) the introduction of extended-trading hours in the after-market, first by Securities and now also by some of its rivals.

At some point sooner, rather than later, I think both Japanese retail and institutional investors will come to their senses and buy more domestic stocks. Year-to-date the Nikkei 225 Stock Average is down 3.5% and the JASDAQ is off 35% after gaining 43% last year. I am not aware of an easy or affordable way for non-Japanese investors to try and speculate in the JASDAQ and other exchanges that are designated for micro-cap startups. Micro-caps as opposed to what have been labeled "small caps" by most investment funds seem to be oversold and present a unique albeit risky opportunity as Japan's economy continues to "expand" beyond the "recovery" phase.

Source: Online Trading 'Fizzles' in Japan