Japan's brokerages face huge challenges


Tokyo -- Japan's "Big Four" securities houses, which seemed ready to take over the globe as the freewheeling 1980s ended, suddenly look like shaky candidates for top roles in world financial markets of the 1990s.

Some foreign executives and analysts based here, once awed )) by the Big Four's money-spinning prowess, now wonder whether any Japanese firm -- even Nomura Securities, the world's biggest -- will be among the coming generation of full-service global operators.

The Big Four -- Nomura, Nikko Securities, Yamaichi Securities and Daiwa Securities -- have been wracked by a year and a half of unrelenting crashes on the Tokyo Stock Exchange. Their after-tax profits tumbled by more than 50 percent last year.

Three years of recurring scandals have cost Nomura and Nikko Securities their chief executive officers, have deeply undercut morale, and have left the Big Four struggling to maintain their credibility.

But foreign brokerage executives and investment bankers here say that trouble runs far deeper than just scandal and lower stock prices. The Big Four, they say, have grown fat and lazy after gorging on the commissions of Japan's 1980s "bubble economy."

Nomura and the other giants lack the innovative products, individual creativity and risk-taking that hard times have forced upon New York and other Western brokerage markets during the past 15 years. That has left the Big Four dependent on sales commissions for more than 50 percent of their revenues.

"The Ministry of Finance will have to move in a very short time on a much stronger dose of system reform if it wants to make sure that even a handful of Japanese players get a chance to become major, full-service global factors by the end of this decade," said John S. Wadsworth Jr., president of Morgan Stanley Japan Ltd.

Major U.S. houses such as Salomon Brothers, Goldman Sachs and Morgan Stanley are globalizing on the strength of revenues dominated by net income from trading and by fees for deal-making services.

Indeed, Roy Smith, a professor at New York University's Ster School of Business, estimates that one-third of the capital of the major U.S. firms is already employed productively abroad. These companies have been weaned from a dependence on commissions by the changing regulations of the Reagan and Thatcher years and by the steady growth of mutual funds, savings plans and institutional investors, which demand finely shaved commissions.

In response, New York-based investment banks have been highly innovative -- and willing to use those innovations where the competition has been less intense. "The U.S. firms are by far the best-positioned to be global," Mr. Smith said. "They have had to go other places to make money."

In the emerging global market, commissions account for 10 percent or less of revenues, analysts here say. Yet fees provide scarcely any significant income for the Big Four, and trading is only now developing as a revenue source.

Both of those revenue sources, foreign critics say, require individual creativity among traders and brokers, a risk of the firm's own capital to make deals work, and a steady flow of innovative products and methods.

"The kind of trader I want is the kid who was great at trading baseball cards in fifth grade -- the guy who's going to carry that instinct for a deal with him all his life," one foreign executive said. "That's exactly who can't get a job with Nomura, because what Nomura understands is eliminating risk, doing things the way they've always been done, taking orders from retail customers."

One analyst said, "If I ask an executive at Nomura what his strategy is for dealing with all these problems, he tells me something like, 'We've got to save the retail investor.' That's a strategy for locking yourself into your home market."

Worse, it may be a strategy for shrinking revenues even at home.

Mounting global pressures to modernize Tokyo's financial markets will sooner or later draw more individual investors under the aegis of big institutions such as mutual funds, savings plans or other pre-packaged forms of investment. Such big institutions have the power to demand commission reductions that dramatically slash brokerage revenues.

And trading on the TSE shows no sign of returning to the frenetic pace of the 1980s, when 800-million-share days were the norm and billion-share days were commonplace. That produced phenomenal commission revenues. For more than a year, 300-million-share days have been the norm, and 200-million-share days are becoming commonplace -- a trend that has drastically cut commission revenue for the Big Four.

Global securities giants

The Japanese "Big Four" all make the listof Top 10 securities firms worldwide when ranked by capital. But in underwriting activity -- perhaps a better guage of success -- U.S. companies come to the fore.

Capital.. .. .. .. .. ..Underwriting

1. Nomura.. .. .. .. ..Merrill Lynch

2. Salomon.. .. .. .. .Goldman Sachs

3. Merrill Lynch.. .. .First Boston

4. Daiwa.. .. .. .. .. Salomon

5. Shearson.. .. .. .. Morgan Stanley

6. Nikko.. .. .. .. .. Lehman

7. Yamaichi.. .. .. .. Kidder Peabody

8. Dean Witter.. .. .. Nomura

9. Goldman Sachs.. .. .Bear Stearns

10. Morgan Stanley.. .. Daiwa

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