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TOKYO -- Even as Japanese technology stocks, like those worldwide, were taking a tumble, Japanese electronics giant Hitachi was announcing a new unit to bolster sales of Internet technologies.

Such thinking may be needed now more than ever in Japan. While U.S. industries have spent years embracing Internet technologies to cut costs, boost sales and enhance productivity, Japan has just recently jumped on the bandwagon.

Now, while a backlash against high-tech stocks could slow Japan's momentum, it will be hard to derail.

The growth of the Internet is spurring a wave of entrepreneurism not seen since the building boom after World War II. The economy is splitting into the "new" and the "old" as investors, despite recent hits, reward companies with Internet strategies and punish those without them. High-tech start-ups are luring employees from Japan Inc., where age and experience, not performance, define careers. And more people realize that Japan needs to catch up to avoid falling further behind in a globally networked economy.

"The entire society has to change," says Koji Nishigaki, president of electronics giant NEC.

For years, Japan has been under pressure to deregulate its economy, the world's second largest. Change has come, albeit sometimes at a glacial pace. For the first time, banks are now being sold to foreigners and airlines are discounting tickets. The telephone monopoly is lowering prices. While historically resistant to foreign investment, Japan welcomed a record $14 billion last year.

The growth of the Internet and network technologies is hastening the pace of that change, many say. Consider:

* Spending is rising on software and computer hardware to make Japanese companies more efficient. This year, 25% of Japan's capital outlays will go for high-tech products, up from 15% in 1998, says Simon Jones, chief investment officer for Jardine Fleming in Tokyo.

* Companies are getting into the Net. Toshiba and Fujitsu are retooling to focus on information technologies. NTT DoCoMo has emerged as a world leader in Internet wireless connectivity. Next year, NEC expects 25% of its sales to be over computer networks. Sony is pushing into the Internet from all angles. It even hopes to set up an online bank.

Already, almost 40% of Sony's new PlayStation 2 game machine sales in Japan are online, says Mike Morimoto, senior executive vice president. In February, Sony started selling other products directly to Japanese consumers, cutting out middlemen. In Japan, five layers of people, each adding cost, can sit between producers and buyers.

Being able to cut costs and move products quickly in a global market "is a must for our survival," says Yoshio Tateisi, CEO of automation device maker Omron.

Perhaps more important, Japan is beginning to talk about changes to bedrock societal values. In January, a government-commissioned advisory panel suggested that individuals in group-oriented Japan be empowered and that students spend more time being creative.

It also said that Japan needs to brush up on its English, the language of the Internet and of the global economy. Although students study English for years, a heavy emphasis on studying grammar has left Japan, along with Communist North Korea, with the worst English skills in Asia. "We cannot go on like this," says Tadashi Yamamoto, president of the Japan Center for International Exchange and a member of the panel.

Time to change

For decades, Japan's traditions served the country well. From the ashes of WW II, it rose to world prominence in the 1980s as a manufacturer of quality goods. But in today's knowledge-based economy, different strengths are needed, many say.

Strengths like those of Kai Masaki, 29. Five years ago, the economics graduate shunned a traditional big-company career to start his own software company. Today, he employs 30 people.

Naoko Tomita, 35, chief financial officer of Internet start-up Crayfish, breaks all the rules. She is an executive in a country where women are expected to quit work in their mid-20s and marry. She also left a bigger company, IBJ Investment in Tokyo, to join a start- up.

The entrepreneurs are chasing a growing market. Japan's Internet population, 18.5 million last year, is expected to reach 60 million by 2003.

A year ago, NTT DoCoMo started offering mobile phones that connect users to the Net. Today, 5 million subscribers pay small fees to do such things as read e-mail, trade stocks and access cartoons.

Koji Furukawa, 39, sees the Internet in his future, too. This summer, the founder of gamemaker Video System hopes to spin out a new company to make low-cost devices to enable consumers to download karaoke tunes and lyrics from the Net. Last year, the 15-year-old Video System had revenue of $60 million. The karaoke venture already has $90 million in orders. "It will be huge," Furukawa says.

Furukawa, Tomita and Masaki are pioneers. And even they acknowledge that their country faces huge challenges during its economic transition.

Group mentality

Individualism and risk taking are revered in the USA. Enterprising youngsters like Bill Gates and Jerry Yang of Yahoo founded high-tech marvels.

In Japan, the group and conformity are highly valued.

"Unfortunately, Japanese society still tends to frown on displays of individual excellence," says the panel's report. "The nail that sticks out is hammered down."

Japanese companies, too, are ill-positioned. In a global market where an online bookseller like Amazon.com can change entire industries, companies have to move fast to adapt.

But to maintain harmony, Japanese companies rely on the time- consuming process of making decisions through consensus.

Despite some reforms, Japan's regulations still prevent a lot of free-market forces. Even book prices are regulated. Japan's government, now led by Prime Minister Yoshiro Mori, has been backtracking on job-costing reforms for months as elections near.

And the popping of the Internet stock market bubble could embolden arguments against the need for change, analysts say.

Most likely effect: slowing the flow of money into venture capital funds, which fueled the rapid growth of Internet industries in the USA the past six years. The stocks of Japan-based Internet investment giants Softbank and Hikari Tsushin have been tanking for weeks. Tuesday, several Internet companies said that because of weak stock prices, they were suspending plans to issue more shares.

Like many investors these days, "I remain cautious," says Ron Bevacqua, senior economist at Commerz Securities in Tokyo.