Nippon Telegraph & Telephone


, Japan's largest telecom operator, is the kind of company U.S. trade authorities hate to bump heads with.

NTT, which is still 53% owned by the Japanese government, has refused to cut the rates it charges other carriers to use its lines, essentially ensuring continued monopoly status. Meanwhile, deregulation abroad allows it to expand its global reach. Lately, it has been stepping over borders to expand its telecom business into Asia, the U.S. and Europe. And while that's the kind of thing that sticks in

U.S. Trade Representative Charlene Barshefsky's

craw, it's also one of the reasons many foreign funds have big NTT stakes.

Almost 14% of the total shares in NTT, which will report fiscal 1999 earnings on Friday, are held by foreign investors. (The limit for foreign ownership of telecom companies is 20%.) It is a major holding in many top U.S.-based Japanese equity funds, such as the

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Matthews Japan Fund, the


TCW Galileo Japanese Equities Fund and the


Morgan Stanley Dean Witter Institutional Japan Fund.

For many of these investors, NTT's big draw is that it owns 67% of Japan's top mobile phone carrier


. Last month, NTT said it will refocus its core operations on DoCoMo and other Internet operations to target 80 million mobile phone subscribers by 2003. As a result of this effort, the firm expects group operating profit to reach 900 billion yen ($8.3 billion) for the year ending March 31, and 1.1 trillion yen by fiscal 2002.

Everyone is after a piece of DoCoMo because it's the first company in the world to successfully launch a mobile phone service with Internet access. U.S. tech suppliers such as

Sun Microsystems

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have been queuing up to get DoCoMo as a customer.

Meanwhile, DoCoMo is expanding its mobile empire. Earlier this month, it bought a 15% stake in Dutch mobile phone operator

KPN Mobile

. This purchase made a mobile phone web among Korea's

SK Telecom

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of Finland, Hong Kong's

Hutchison Telecommunications

, a unit of

Hutchison Whampoa


, and

VoiceStream Wireless


of the U.S. Besides launching third-generation phones using the W-CDMA technology, this alliance will allow DoCoMo to launch a bid for the U.K.'s


, experts say.

Although NTT and DoCoMo officials (who declined to talk to the

) have said in public they are not interested in buying out Orange, there is talk that NTT will sell 10% to 15% of its stake in DoCoMo, and conduct a secondary offering of DoCoMo shares to raise up to 10 trillion yen for the purchase of Orange or other companies to expand the existing web alliance.

"As far as the market is concerned, it's good to see NTT finally in the mergers and acquisitions scene, which it has been quite absent from," says Kate Lye, analyst at

Warburg Dillon Read

. Lye's 12-month target for NTT is 2.61 million yen (the stock currently trades around 1.3 million) and she has a buy recommendation on the stock. (WDR currently does not have any brokering ties with NTT, but was one of the global coordinators for the sale of NTT shares last year.)

The prospects for DoCoMo look quite grand, and that's why investors have punched shares up by 70% since September. However, the unwinding of cross shareholdings and the ongoing war between the U.S. and Japan over NTT's interconnection fees have spoiled the party for the parent, whose shares have risen only a paltry 3% over the same period. With the threat of a U.S. trade sanction looming, NTT shares have slipped almost 32% from their high in mid-December. Also, NTT shares trade almost 55 times earnings, making it hard for some investors to go near the stock.

"I personally can't get too excited about many Japanese technology shares that have extremely high valuations," says Takeya Suzuki, whose


Goldman Sachs' Japanese Equity Fund is up 51.9% over the past year. Yet NTT DoCoMo makes up about 7.6% of Suzuki's portfolio; NTT constitutes about 2.8%.

"You can't cut the weighting of some of these firms from your portfolios just because valuations are high, because then you would be missing out on one of Japan's strongest sectors," he explains.