Updated: Yahoo Japan Chooses Google For Search

In a hit to both Microsoft (NSDQ: MSFT) and major shareholder Yahoo (NSDQ: YHOO), Yahoo Japan says it will use Google (NSDQ: GOOG) to power search on its site. In passing over Microsoft, Yahoo Japan CEO Masahiro Inoue said the company’s search technology was not “sufficiently strong enough for its needs,” according to a Reuters sum-up. Those words have to hurt Yahoo, which owns a 35 percent stake in Yahoo Japan, and is itself outsourcing its search engine to Microsoft’s Bing, under the 10-year search partnership Yahoo and Microsoft announced last summer.

For Yahoo, the impact is more psychological than financial. Analysts say that the company — which generated $303 million in search and brand licensing revenue last year from Yahoo Japan — will still get the same amount of income from Yahoo Japan even after Yahoo Japan’s deal with Google goes into effect because it has to provide Yahoo with a cut of revenue under an existing agreement that expires in 2017. In a statement provided to AllThingsD, Yahoo says that Yahoo Japan’s move won’t have a “material financial impact on our revenues” and “does not impact the global rollout and implementation of the Yahoo! search alliance with Microsoft, except in the Japanese market.”

The Japanese market was, however, one where Yahoo was dominant. According to the most recent comScore numbers I could find, Yahoo has about 51.3 percent of the Japanese search market, while Google has 39.2 percent — meaning Google will now have 90 percent of the market in that country. In a Q&A on the Yahoo Japan site, Yahoo Japan says that Japanese regulatory authorities have said they will give the deal their OK.

Microsoft is nevertheless arguing that the deal is anti-competitive. In a strongly worded statement provided to ZDNET, Microsoft says the “agreement is even more anticompetitive than Google’s deal with Yahoo in the United States and Canada that the Department of Justice found to be illegal” two years ago, saying that it gives “Google virtually 100 percent of all searches in Japan.” The company, however, isn’t saying whether it will file a complaint.

One possible long-term effect: The deal could pave the way for Yahoo to finally shed its stake in Yahoo Japan — something investors have badgered the company about for a long time. In a report this morning, Barclays Capital analyst Doug Anmuth says that because the deal “suggests significant deterioration in the YHOO & Y!J relationship,” Yahoo “may be less concerned about the impact (of a sale) to Y!J shares.”