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Whither Japan Stocks: No Joy in Nomura and Daiwa

This article is more than 10 years old.

It may be an unknowable conundrum, a question of “nature” vs. “nurture.”  Simply:   Are Japanese stock brokers inherently venal, and dedicated to impoverishing their clients; or are they made this way by Japan’s structurally anti-investor market?

During the early 1990s, while at Merrill Lynch International Bank in Tokyo, I worked alongside some 150 local “financial consultants” in Merrill’s then six retail offices throughout the country.   What I saw of their approach to customer service—“churn and burn” pretty much sums it up—was hardly edifying.   The FCs, in order to generate commissions, would constantly hector clients to sell stocks or unit trusts that had gone up slightly in value, or had gone down, or even stayed the same, offering another stock or unit trust the sale of which would benefit themselves.  Within a short time, often only months, the clients, having failed to earn any net return, or—more often--having lost a substantial amount, would give up and withdraw from the market.  Upon which event, the FCs would prospect and find another set of clients.

Needless to say, Japanese clients shared some, if not most, of the responsibility for the abuse and losses they suffered.  It never ceased to amaze me how long they would continue to use plainly rapacious FCs, out of sense of “loyalty” and, more to the point, an inability or aversion to doing research themselves and making their own decisions.

Things do change, and people—even diffident Japanese investors or some of them—do learn.  Which explains—along with late 1990s deregulation—the advent and relatively successful operation of half a dozen “no frills” internet brokers, most prominently SBI, Rakuten, Monex (merged with Orix in 2010), Matsui, and Kabu.com.

But 2011 was not kind to the internet brokers either.  Total trading volume was some JPY 83 trillion, down 4 percent from 2010, continuing a five year decline to the lowest level in eight years.

More deserved of hardship—given their past treatment of clients—are Japan’s “full service” brokers.  That they are in deep trouble is apparent from the stock prices of the most prestigious and best of the lot, Nomura Holdings (NYSE ADR: NMR) and Daiwa Securities Group (NYSE ADR: DSEEY).  The stocks began 2011 fiscal year in April at above JPY 400 and above JPY 350 respectively.  Yesterday they closed at JPY 263 and JPY 252 respectively.  Both fell below JPY 240 in December, so they have recovered somewhat.  But the stocks are again at lows reached in 2010, evidencing investor pessimism about future earnings.

Following last year’s 17 percent slide, the Japanese stock market has fallen to the level of 30 years ago.   Yesterday the Nikkei 225 average closed at 8,550 within the narrow range it has occupied for most of the past six months.  During the past month, daily trading volume on the first section of the Tokyo Stock Exchange has remained below JPY one trillion, depression level for brokers.

The market is now questioning whether Nomura and Daiwa can remain independent, or whether they will be forced to merge or ally with one of the Japanese megabanks.  Of course in Japan low stock prices and poor operating performance do not often lead to shareholder activism or M&A threats from competitors.   And managements almost never take the initiative.

In 1999 Daiwa Securities formed a joint venture with Sumitomo Mitsui Bank for corporate business.  This JV was dissolved in 2009.  Daiwa president Hibino is vocal in refuting the presumed synergies of another tie-up.

But pressure is building, particularly from credit rating downgrades.   Both Nomura and Daiwa are on negative watches.  Downgrades could seriously impact the companies’ derivatives business.

With revenues hard to come by, Nomura and Daiwa are cutting costs to maintain their ratings.  Nomura is cutting 1000 people, particularly in Europe.  Daiwa is cutting 200 in Europe and 100 in Asia.

My sense is that there is little joy in Japanese securities companies in the best of times.  These may be the worst of times.  It must be miserable.