Japanese Broker’s Survival Secrets : Only One Leader Out of Top Four Houses Remains in N.Y.

It looked so easy just a few years ago. American stock markets were booming and Japanese brokerage companies were not going to let the grass grow under their feet. They were going to converge on Wall Street and drum up business.

Then the October, 1987, stock market crash changed the picture for the entire brokerage industry in the United States. Since then, American firms have seen their share of layoffs, and now the chief of only one of the top four Japanese commission houses is still leading his operation in New York.

Takuro Isoda of Daiwa Securities Co.’s U.S. subsidiary has managed to keep his head above water, but his counterparts at three other leading Japanese brokerage houses all have been recalled to Tokyo or are about to be.

The chairmen of Nikko Securities Co. International, owned by Nikko Securities Co. Ltd., and Yamaichi Securities’ Yamaichi International (America) have already been replaced.

Masaaki Kurokawa, chairman of Nomura Securities International, the U.S. subsidiary of Nomura Securities Co., is returning to Tokyo soon after 30 months in New York, an unusually brief stint, industry sources said.

What is Daiwa doing right? Its competitors concede that its slightly better performance could be due to steady but cautious expansion.

“It has done a good job in Treasury securities trading since February,” one industry observer said.

A senior European investment banker in New York who used to do business with Nomura and Daiwa in London and Tokyo said that a key factor in Daiwa’s success has been caution. “Nomura and Nikko aggressively took up people and expanded so that the more aggressive, the more severe backlash they had to face.

More Cuts Possible

“Daiwa also actively expanded, but not as aggressively as the two,” he added. “Nomura is big and powerful, but Daiwa always impresses me (by) providing better quality, higher standard service.”

The chairman of Daiwa America said the U.S. unit expects a profit of between $4 million and $5 million in the six months that ended in March. Isoda said, however: “I have no confidence in expanding the business now, although rationalization has come to a halt.”

The Japanese are among many Wall Street firms that have undergone an urgent process of laying off staff, and the cutting may not be over. “There is no limit to trimming extra fat,” one senior executive at Nikko said.

Even with the layoffs and Wall Street’s recent strength, the future looks bleak. In the midst of gloom, the retreat of the Japanese securities houses has touched off a few questions about their basic business strategies in the United States, industry sources said.

The going in New York has been rough, and Japanese executives are learning that the market there is very different from the market in London, where they are strong. Japanese companies exercised financial muscle in London by underwriting Japanese Eurobonds and selling them in Japan.

Their power in the Eurobond market allowed them to gain a firm foothold in Europe, but Japanese companies rarely issue bonds in the United States. Selling Japanese stocks and bonds to American investors is still a slow business, Japanese brokers said.

Even with growing demand for Japan to assume economic leadership and for the yen to play a larger role in international financing, U.S. portfolio investors are still uncomfortable holding or adding to yen-denominated assets, they said.

Japanese brokerage houses find it difficult to win clients in the United States, just as foreign companies have a rough time winning clients in Japan.

Have Less Expertise

Daiwa’s Isoda said that sales of U.S. stocks to Japanese investors are profitable, but selling to American investors is not.

The Japanese companies’ main business is selling U.S. stocks and Treasury securities to Japanese, but the advantage of close relations with investors at home can be lost to American competitors who have naturally a longer and deeper expertise in the U.S. markets.

To survive the slowdown in the stock and bond markets, Japanese companies have been trying to expand in mergers and acquisitions and commodity futures.

The mergers and acquisitions outlook is not as rosy as it was a year ago, however. Last year, Nomura, Nikko and Yamaichi teamed up with U.S. merger specialist firms, but are still in a warming-up phase.

Isoda said that without a partnership with a U.S. company, his subsidiary soon expects to post a small profit from its mergers-and-acquisitions team for the first time.

In the commodity futures brokerage business, Nikko, Daiwa and Yamaichi began to make money after they obtained clearing memberships in the Chicago futures markets last year.