Nasdaq Misjudged Japan, Financially and Culturally
By Phred Dvorak and Craig Karmin
The Wall Street Journal
Aug. 19, 2002Nasdaq Underestimated Securities Markets, Overestimated Its Ability to Change Things
TOKYO -- When the Nasdaq Stock Market came to Japan in the late 1990s looking to set up its own market here, brokerage firms and regulators were noncommittal. After all, the country already had eight stock exchanges and an over-the-counter market, and was still deep in the throes of a 10-year equities slump.
Nasdaq bulled ahead anyway, spurred by dreams of making Japan the first leg of a global market. The Americans snubbed Japan's traditional securities establishment and launched the Nasdaq Japan market in 2000 on their own -- a decision that backfired by angering Japan's biggest securities firms.
While the differenceswere resolved, the episode is emblematic of the way Nasdaq just got Japan wrong -- again and again. On Friday, those mistakes contributed to Nasdaq's downfall in Japan. As expected, the board of Nasdaq's Japan unit said it was ending the venture by the end of the year, pulling the Nasdaq name from the market it set up on the Osaka Securities Exchange just two years ago.
To be sure, part of Nasdaq Japan's problem had to do with the bursting of the global tech bubble, which torpedoed its revenue projections. Today, Japan's benchmark Nikkei 225 Stock Average is 41% lower than it was in June 2000 -- a drop that scared away companies from listing on the new market and investors from trading them. The fall in stock prices also undermined profits of brokerage firms that Nasdaq hoped would invest in its new trading system.
Meanwhile, the 67% slump in the Nasdaq Composite Index in the U.S. during the same period lessened the ability of the Nasdaq Stock Market to support its hemorrhaging Japan unit. Nasdaq recently announced plans to take a $20 million charge against second-quarter earnings for its investment in Japan, and a Nasdaq spokesman said Friday that no further charges would be assessed.
Nasdaq officials say the market collapse alone was enough to doom the Japanese venture. Nasdaq's failure in Japan "was a question of timing more than anything," said John Hilley, Nasdaq's head of international operations. Indeed, Mr. Hilley maintains that the demise of Nasdaq Japan is a stumbling block, rather than a serious blow to his vision of a global stock market. He insists that Nasdaq's model for a 24-hour trading system -- connecting Asia, Europe and the U.S. -- is still viable and suggests that Nasdaq will return to Asia during better economic times.
"We'll have to see a change in market conditions, but we haven't lost the vision," he said. "It's all driven by the markets. When Nasdaq does well [in the U.S.], we can do well globally."
Yet critics in Japan say in large part, Nasdaq created its own problems in Japan by underestimating how differently the local securities markets worked, and overestimating its own ability to change things. Nasdaq's idealistic vision of replicating its U.S. market in Japan was often blocked by a snarl of rules, customs and vested interests.
Nasdaq irked the Japanese securities establishment by launching its market with the help of two often unpopular entrepreneurs: Masayoshi Son, head of Internet company Softbank Corp.; and Goro Tatsumi, a former stockbroker who heads the Osaka exchange. The two championed Nasdaq's vision of a global stock market and openly expressed hope that competition from Nasdaq Japan would force change in the stodgy Japanese securities industry.
But the country's big brokerage firms bristled at the newcomers. Some were reluctant to trade Nasdaq Japan shares, which stifled the fledgling market, said a person familiar with the situation. The brokers were pacified four months after the market's launch, when Nasdaq Japan invited them to invest in and have a say in the running of Nasdaq Japan, the person said.
Convinced that Japan was ready for a boom in initial public offerings, Mr. Hilley pushed the Osaka exchange to agree to a set fee of about ¥700 million ($5.9 million) a year, overturning an initial plan to pay fees to Osaka based on a percentage of revenue, said the person familiar with the situation.
That seemed like a sweet deal, considering that Nasdaq figured the pace of IPOs to accelerate, giving Nasdaq Japan several hundred listed companies over the next few years. But in the ensuing market slump, only 98 companies went public on Nasdaq Japan. Last year, fees paid to Osaka exceeded Nasdaq Japan's total revenue by about 40%, said people familiar with the situation.
Spokeswoman Maggie Kelly said Nasdaq declined to comment on its business or personal relationships with the Osaka exchange officials, other than to say that "Osaka fulfilled its obligations to us."
Other setbacks followed. Nasdaq's plans to launch a type of exchange-traded fund that was gaining popularity in the U.S. got bogged down by Japan's regulatory and legal barriers. It was finally approved in Japan this year -- "two years too late," Mr. Hilley said.
In addition, an experimental trading system Nasdaq aimed to introduce in Japan ran afoul of the vested interests of the country's biggest securities firms, which insisted the new system would crimp profits too drastically, particularly during the post-2000 market downturn. Nasdaq pushed ahead anyway, investing millions of dollars in the effort, which it later had to write off.
The constant friction wore away at Nasdaq's relationship with the Osaka Securities Exchange. To try to disprove media rumblings about discord between Osaka and Nasdaq officials, Mr. Tatsumi took Mr. Hilley and a Nasdaq entourage on a whirlwind tour of ancient temples in February 2001. Later, Mr. Tatsumi treated his guests to an evening of geisha and sake at his posh Kyoto house. But even that gesture fell flat. As Mr. Hilley sat smiling diplomatically at the entertainment, Mr. Tatsumi chided: "Mr. Hilley, you're pretty formal."
As the Osaka exchange turned down Nasdaq's requests to revise the market's fee structure and dragged its feet on the new trading system, even the pretense of goodwill disappeared. In March of this year, Mr. Hilley and other Nasdaq officials hosted a cocktail party in a Tokyo hotel to which they invited prominent securities-industry leaders, but nobody from the Osaka exchange, said Mototaka Hirota, president of a small Osaka brokerage house, who attended. "That's when I figured the alliance was in trouble," he said.
In May, Osaka's markets committee decided that Nasdaq's proposed new trading system would cost brokers too much to implement during current market conditions. Nasdaq Japan responded in early June by publicly threatening to find another partner and demanding that Osaka review its fees. Two weeks later, Mr. Tatsumi accused Nasdaq of trying to blame Osaka for its own "excessively optimistic projections," and revealed that Nasdaq Japan had ¥5.3 billion in accumulated losses.
The battle's aftermath -- and Nasdaq's pullout from Japan -- has left bitterness all around, especially for many of the 98 companies left behind on what will soon be merely a section of the Osaka exchange.
"Nasdaq's withdrawal shows contempt for our shareholders," said Hirokuni Hibi, a spokesman for ITX Corp., a venture-capital company that listed on Nasdaq Japan in December, lured by the vision of being on a global market.