In the go-go days before the 1990 Tokyo stock market crash, Nomura Securities Co. epitomized Japan's expanding power in global money circles. As the largest of Japan's Big Four brokers, its $14.1 billion in equity outweighed that of Merrill Lynch, Salomon Brothers, and Shearson Lehman combined. Now, there are signs that Nomura and its main rivals--Daiwa, Nikko, and Yamaichi--are in for tough times. On May 10, Standard & Poor's Corp. put all four companies on a credit watch that may lead to a ratings downgrading and higher borrowing costs. Daiwa, Nikko, and Yamaichi were recently downgraded by the Japan Bond Research Institute.
SLASHED BONUSES. The raising of once-unthinkable questions about the Big Four's creditworthiness reflects a deepening crisis within the Japanese securities industry. Squeezed by sluggish stock trading and underwriting activity, profits are drying up by as much as 50% (chart). Although the Japanese heavyweights are now paring costs and altering strategies, they have been slow to diversify into such growth areas as trading in options and futures. That has left those markets to U. S. brokers, who are reaping record profits in Tokyo.
S&P's scrutiny of the Big Four is more than a response to flagging profits. "We're more concerned about future profitability given the increased competition caused by financial deregulation in Japan," says John A. Paulsen, an S&P assistant vice-president. Many analysts believe that long-term trends are running against Japan's top securities companies. Japanese regulators are already reducing commissions on equity trading, the bread and butter of these firms. Brokers may suffer a more devastating blow if, as expected, banks win permission to underwrite securities and offer brokerage services.
The brokers are particularly concerned about their heavy reliance on stock trading. Stock commissions still contribute about half of revenues for both Nikko and Yamaichi. But in a depressed market, trading volume is down to less than 300 million shares a day, in contrast with 1988, when the daily volume averaged 1 billion shares. Japan Bond's analyst Masumi Oga estimates that current volume is just one-half the level required by most brokers to break even. The Japan Securities Dealers Assn. announced on May 14 that profits for the country's 210 securities firms fell 68% in 1990. If this continues, says Oga, "a drastic streamlining of the industry is inevitable."
Right now, a market turnaround seems as distant as ever. Central bank Governor Yasushi Mieno has kept interest rates high despite a recent cut by the Federal Reserve. High yields are luring droves of investors from the stock market into high-interest bank deposits.
The Big Four are already starting to cut back. One survey predicts that securities firms will slash equipment investment by 27% in 1991. Job cuts have hit Kabuto-cho, Japan's Wall Street. Since last June, securities firms have shed almost 7% of their work force, or 11,840 employees, mainly young women. Japan's securities giants are also cutting bonuses for directors by 20% to 30%.
AMERICAN INVASION. As the Japanese retrench, foreign brokers are thriving. Armed with Wall Street trading techniques, U. S. powerhouses such as Morgan Stanley & Co. and Salomon Brothers Inc. are running circles around their Japanese competitors by trading futures and options on Japanese exchanges. Morgan boosted its 1990 Tokyo trading revenues by 43%, to $74.1 million, in spite of the weak market. Salomon officials attribute their firm's strong first-quarter performance to profits earned in Japan.
The Big Four are trying to catch up. Nomura has done everything from head-hunting big Wall Street names for its New York office to setting up a futures- and options-trading unit in Tokyo. Nikko is moving into aircraft leasing as well as securitization of U. S. properties, such as the Watergate Hotel in Washington. But analysts doubt these moves will compensate for dwindling commissions.
Despite S&P's warnings, the Big Four still boast higher ratings and bigger capital reserves than their U. S. competitors. Even Yamaichi, a relative laggard at AA, tops U. S. credit leader Merrill Lynch & Co., which carries an A. And, while profits are down, Nomura's 1990 earnings still exceeded $1 billion. But in this rougher climate, even the mighty Nomura will have to work harder to stay on top.