Dynasty, Japanese-Style : THE HOUSE OF NOMURA: The Inside Story of the Legendary Japanese Financial Dynasty <i> by Albert J. Alletzhauser (Arcade: $22.95; 304 pp.; 1-55970-089-0)</i>
It is midday on Oct. 20, 1987, in Tokyo and panic is rampant. Wall Street has just experienced its biggest decline since 1929, and the effects are spreading across the Pacific.
Top officials of Japan’s four most powerful securities firms, led by Nomura Securities, are having lunch at the Ministry of Finance. Quiet words are exchanged, tacit understandings reached. Later that day, the Big Four go into the market and begin buying stocks en masse. The plunge in Japanese stocks is arrested. Soon the hemorrhaging slows in London and New York. A financial catastrophe is barely averted, thanks to the exercise of raw and deliberate Japanese financial power.
So begins “The House of Nomura,” the saga of a small money-changing business that started in 1872 in Osaka and became not only the world’s largest securities firm but the most profitable financial company anywhere (with estimated profits for this last year of $1.5 billion according to the Wall Street Journal). It became not only the investment bank that trades 20% of all stocks and bonds in Japan but also the owner of the largest commercially funded research institute in the world. And it became not only Japan’s second-largest software company, but also its fifth biggest real-estate operation.
Written by an American stockbroker who worked in Tokyo, and based on extensive interviewing of the Nomura family and the firm’s executives, the story of the financial empire encompasses, in the first instances, many colorful personalities.
The House of Nomura began its ascent in 1905 when the founder’s son, Tokushichi Nomura, made an investment in a textile firm that was rumored to be near bankruptcy. After careful research, Nomura learned that the firm was indeed healthy but that speculators were spreading lies to drive down the price of its shares. He also felt that the future of the spinning business was bright, and he sensed a strong stock market down the road. He bought into the textile group in time to catch the 1906 bull market, making his first fortune.
One year later, with Japanese stock exchanges booming, Nomura had a strong intuition that the good times were ending. While others were buying feverishly, he was quietly selling and taking positions that allowed him to capitalize on price declines. Sure enough, when Japan was rocked by the crash of 1907, Nomura pocketed his second fortune. Having started with almost nothing, he had amassed more than $60 million, in today’s dollars, before he was 30. He then went on to build a broad-based conglomerate composed of banks, securities firms and trading companies--all of which survived and grew until World War II.
Another legend was Minoru Segawa. Overweight and hard-drinking, he started as a stock salesman in the Nomura trenches in 1929 and rose to become the firm’s top operating manager in 1948. Segawa was a gambler and speculator, a metaphor for the rough and chaotic stock markets in which he grew up. From the beginning, according to author Albert J. Alletzhauser, Minoru saw opportunities to manipulate stock markets for Nomura and friends by spreading false information and anticipating effects on prices. Thanks to him, Nomura reaped large profits in the aftermath of World War II in the black market for currency--an important element in the firm’s survival.
There was Tsunao Okumura, a rich and lazy playboy who rose to be the firm’s president after the war. Okumura was to symbolize the close link between money and politics. After the war, for example, he set up a movie house, receiving exorbitant prices for tickets to what was the only diversion the Japanese had from their devastated lives. With his profits, he provided food and geishas for Japan’s financially impoverished but politically powerful politicians, many of whom would return the favor one day. Among those in his debt was Sigeru Yoshida, then prime minister, and his finance minister, Hayato Ikeda--critical players in Japan’s postwar recovery.
“The House of Nomura” is more than a parade of characters. Alletzhauser shows how the ebb and flow of events in Japan affected the brokerage firm. Japan’s victory over Russia in the war of 1905, for example, made it an industrial and military power and opened up major opportunities for Nomura. The earthquake of 1923 resulted in widespread devastation, but it also led to Nomura’s lucrative participation in the flotation of massive amounts of government-backed reconstruction bonds. World War I, in which Japan provided supplies to England and France, created another boom for Nomura.
But the most significant period in the firm’s history was 1939 to 1953, World War II and its aftermath. According to Alletzhauser, Nomura researchers were quietly predicting Japan’s defeat as early as 1942. Before the end of the war, much of the House of Nomura’s wealth was stashed away in various subsidiaries and records of transfer destroyed. After the Japanese surrender, the Nomura conglomerate was stripped of its banking and trading arms, and the Nomura family and top executives were purged. Only the securities firm and various subsidiaries were allowed to continue as the House of Nomura.
How did the firm survive and recover from Japan’s defeat during a period in which starvation was widespread, telephones didn’t work and the Tokyo Stock Exchange was turned into a gym for American GIs? In the beginning there was the black market. Then came a massive campaign to donate small wooden boxes called Ryo Savings Chests--piggy banks, really--in Japanese houses all over the country. The keys were held by Nomura salesmen. When the boxes were full, Nomura would be called, and the money would be emptied and exchanged for stocks.
Another important milestone was government permission--the result of Okumura’s political ties--for Nomura to manage the first postwar mutual funds. Nomura Securities was tapping into personal savings as they were beginning to grow. As it built its client base--house by house, community by community--its financial power soared.
“The House of Nomura” reveals Japan’s securities markets as rife with all manner of inside trading and market manipulation. When this book was released in London earlier this year, Nomura sued the author and his British publisher for defamation. No doubt it objected to descriptions such as those of how Nomura once used in-house knowledge of an upcoming decline in the price of Honda’s stock to protect its own positions and those of favored clients at the expense of its other customers. Alletzhauser tells another story of how Nomura once pumped up the price of the stock of Mitsubishi Heavy Industry in order to win a role as its financial adviser, enriching a variety of its friends in the process.
Beyond recounting specific deals and transgressions, the author explains how very low in the hierarchy of professions stockbrokers traditionally have stood in Japan, thanks to their image as unprincipled gamblers and their alleged association with gangster groups. He discusses, too, features of the Japanese system--such as extremely low dividends and low taxes on capital appreciation--that work to push stock prices up and up, well beyond any reasonable intrinsic value.
Finally, Alletzhauser writes about The Nomura Man, the regimented salesman who lives and acts like a foot soldier for a highly organized army devoted to selling stocks from daybreak to midnight. The drab dormitories for single men, the humiliation of not meeting sales quotas and the intense pressure to conform and perform at all levels are vividly described in many anecdotes.
Since the research for “The House of Nomura” was completed, a political scandal involving stock-market abuses brought down two governments in Tokyo. In the last few months, moreover, Japan’s stock markets have gone into a tailspin, losing nearly 25% of their total value, with economic consequences for Japan and the world that no one can yet foresee.
When the dust settles, the Japanese securities industries may be subject to the biggest wave of reforms since the American occupation. Whatever happens, however, Nomura will still be Japan’s major securities company, and Alletzhauser has given an American audience an extremely readable and important starting point for understanding the firm and the milieu in which it operates.
