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Japan.com Hits a Rough Spot

Japan's highflying Internet sector has taken a beating over the past two weeks.

TOKYO -- Investors often talk about the New Japan and the Old Japan. The former describes Internet plays, the latter describes blue-chips going through hefty restructuring to rid dud loans piled up during the bubble era of the 1980s.

With the advent of the New Japan companies, talk of traditionally foreign concepts -- like shareholder value and stock splits -- is finally in vogue. Although investors can't be absolutely sure if management will deliver, the newfound openness from New Japan CEOs -- especially to fund managers -- is quickly gaining acceptance throughout Japan Inc.

So if tech firms are ushering in a new corporate era in Japan, why has the sector shed 13.8% over the past two weeks? Leading the slide are

Sony

(SNE) - Get Report

,

Softbank

and

Hikari Tsushin

, three companies heralded only a month ago as the must-have tech plays.

The easy answer is on your calendar -- March 31. That's the end of Japan's fiscal year and, traders and fund managers say, institutional investors are selling shares to book profits. Following the general market trend, retail investors have begun shedding the same shares. Traders reckon that as the market dug a deeper hole retail investors got margin calls on large-cap shares, which in turn prompted them to sell over-the-counter stocks to raise funds.

A more subtle explanation is also emerging: Investors, it seems, are starting to fine-tune their attitudes about the micro issues of Japanese Net firms as corporate information becomes more readily available.

"Just like the reversal in tech shares in the U.S., Japan also must go through its first downtrend as the Internet hype deflates," says Ken Fukui, director of research at

Sparx Asset Management

, which invests about 40 billion yen ($381 million) worldwide. "It's no surprise that Japan also re-evaluates the price of tech shares."

Fukui predicts that Japanese investors will soon focus on business-to-business firms, mirroring the current trend in the U.S. that has helped the

Nasdaq Composite

punch through a string of record levels.

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On top of that, bad publicity, rampant rumors and a war of words between senior executives at Softbank and Hikari Tsushin have tarnished the saintly images of both firms.

Yoshitaka Kitao

, the senior aide to Softbank founder

Masayoshi Son

, last week accused business partners Hikari Tsushin and Hong Kong's

Pacific Century Cyberworks

of stealing Softbank's business strategy and called them greedy. An article in a Japanese magazine alleged Hikari Tsushin uses strong-arm tactics to sell mobile phones. The company's president was also rumored to have been arrested for insider trading. That rumor was denied.

Investors' biggest worry, however, is where Hikari Tsushin's future profits will come from. Most of its revenue, which totaled 259.28 billion yen ($2.47 billion) for fiscal 1999 ended Aug. 31, came from cell-phone sales. But as the firm slowly shifts away from being a phone reseller to an Internet holding company, its revenue stream, like Softbank's, will come from its investments. Some investors are afraid that the company's gamble on the next Asian Internet firm will not turn out to be a

Yahoo! Japan

, of which Softbank owns a 50.8% stake. Yahoo! Japan, also owned in part by U.S. parent

Yahoo!

(YHOO)

, has climbed more than 135% over the past five months.

Not everyone is disillusioned, however. David Scott, fund manger at

Jardine Fleming Asset Management

, is fond of Softbank and Hikari Tsushin's business models, which aim to incubate and spin off the next hot Asian company. He says investing in Hikari Tsushin, which represents 8.3% of his total holdings, has helped his

Japan Smaller Company

fund jump 604% (in dollar terms) last year.

"This is the silly season in Japan," Scott says, rebuffing the recent tech bashing. "I expect smooth sailing from April 1 and for the market to get back to the Old Japan/New Japan theme as we approach earnings announcements in May."