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Downturn, red tape could kill-off NASDAQ Japan

The global downturn in equity markets is threatening to claim as its next victim: NASDAQ's stock trading venture in Japan. NASDAQ is considering killing the venture because it has made little headway against a host of regulatory hurdles, persistent economic weakness and a deep aversion to change in the country's rigid financial system.

The scrapping of so high-profile a venture would be a blow to NASDAQ's ambitions for a global around-the-clock network of stock markets. And because it was originally intended to provide emerging businesses with access to the capital they had trouble obtaining from the rigid Japanese financial system, NASDAQ Japan's dissolution would be a serious setback for entrepreneurs and startups here.

NASDAQ said on Tuesday that it would decide by the end of the month whether to abandon its 43 percent stake in the two-year-old NASDAQ Japan venture, which operates as a part of the Osaka Securities Exchange.

If NASDAQ, with its well-known brand and market-making technology, walks away from Japan -- a possibility that Japanese newspapers raised last week -- NASDAQ's main partner in the venture will also be badly hurt. The Softbank Corp, which also owns 43 percent, had hoped to use the exchange as a launching pad for the many Internet and technology companies in which it invested in the 1990s, listing them first in Japan and later overseas.

Little has come of that idea so far, in part because of terrible timing. NASDAQ Japan began trading in July 2000, just as technology-related stocks began diving, leaving investors burned and leery of risky new issues. Only 98 stocks now trade on NASDAQ Japan's exchange, half the number hoped for, and the rate of new listings has fallen sharply.

NASDAQ has also had trouble introducing the computer trading technology in Japan that it uses in the US, and it has accused officials of the Osaka Exchange and government regulators of dragging their feet in approving the systems.

Worse, outdated securities regulations created artificial shortages of shares in some companies and held trading volumes down. Under Japan's Commercial Code, companies are permitted to issue shares only in proportion to their hard assets, like factories and buildings. The rule, written with manufacturers in mind, hamstrung service providers, which might own little more than a few computers and filing cabinets.

Those problems and the general slump in equity investing in Japan have combined to badly erode the exchange's daily volume, which is down 75 percent from its peak.
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