Daiwa Securities Company, Limited
Daiwa Securities Company, Limited
Assets: ¥4.4 trillion (US$30 billion)
Stock Index: Tokyo Osaka Nagoya
Daiwa Securities Company is the second-largest securities broker in the world and has been called the most international of Japan’s Big Four securities houses. Daiwa conducts traditional investment banking activities and also operates as a retail brokerage. To a great extent its history parallels Japan’s economic prosperity since World War II. In good times, active stock and bond markets produced excellent profits for securities companies. In recessionary periods, commissions and underwriting profits suffered from investor reluctance and lack of volume. Since its incorporation in 1943, Daiwa has seen Japan rise to the forefront of world commerce. It has played a vital role in the development and advancement of Japanese capital markets, and has helped shape personal investment in Japan.
Daiwa Securities Company was incorporated in 1943 as a merger between the Fujimoto Bill Broker & Securities Company and the Nippon Trust Bank. The company’s origins date back to 1902, when Sibei Fujimoto entered the bill-brokering business at a time when Japan’s securities industry was still in its infancy. In 1907, the company entered the banking business and took the name Fujimoto Bill Broker and Bank, to reflect its expanded services. World War I brought tremendous growth to the Japanese economy. Export demand skyrocketed and stock trading increased, as did the number of corporate and government bond issues. As a result, the Fujimoto organization grew quickly.
After the war and throughout the 1920s, Fujimoto engaged in both banking and securities brokering. Bond trading reached new highs, and as the Japanese economy became more complex, stock trading set records too. But a number of financial catastrophes rocked the economy in the later 1920s. In 1927, a run on the banks sent shock waves through the financial community. Dozens of banks and securities dealers collapsed, but Fujimoto, due to prudent management, survived intact. The Depression which followed the collapse of the New York Stock Exchange in 1929 brought about changes in the laws regarding Japanese financial institutions. Fujimoto was forced to give up the banking business, so in 1933, the Fujimoto Bill Broker & Securities Company was established in compliance with these new government regulations.
The 1930s were a time of great political turmoil in Japan. By the end of the decade, the country was at war with China. Increased demand for war-related goods accelerated economic expansion. The stock market was active, and prices went up. As the Japanese government began to issue bonds to fuel the war, it also exercised greater control over the markets. Nonetheless, Fujimoto continued to profit from its underwriting and brokerage activities. By 1941, Japan had entered World War II. The war had a positive impact on the Japanese economy until 1943, when Japan’s military success began to falter. The market responded accordingly, and stock prices plummeted. Fujimoto Bill Broker & Securities Company decided to combine forces with another financial institution. On December 27, 1943, it merged with the Nippon Trust Bank to form a new entity, the Daiwa Securities Company.
After the war, the occupation forces halted all securities trading on the exchanges and restructured the Japanese economy and political system. Daiwa survived by trading non-defense-related industry securities over the counter at its offices until 1949, when the exchanges were reopened.
Throughout the next decade Japan’s economy, and Daiwa with it, flourished. The Korean War created tremendous demand for Japanese goods, and the economy began the steady climb which has continued almost uninterrupted to the present day.
In 1951, Daiwa entered the investment trust business. Investment trusts were a very popular savings instrument among the Japanese. Within eight years Daiwa’s investment trust activity had grown so large that a separate company had to be set up to handle its business. The Daiwa Investment Trust and Management Company, Ltd. opened its doors in 1959. During the 1950s, Daiwa’s underwriting and brokerage activities made it one of Japan’s most successful financial companies. Daiwa’s innovative philosophy was characterized by its motto, adopted in 1957: “scrupulous as well as daring.”
The early 1960s were a period of growth for Daiwa, both at home and abroad. Encountering stiff competition from other securities dealers in Japan, Daiwa began to look overseas for new opportunities. Japanese companies had begun to issues stocks on foreign exchanges, and Daiwa actively pursued the underwriting of these issues. In 1964, Daiwa established an office in London. Later that year, the Japanese stock market experienced the worst panic since before the war. Daiwa Securities was hit hard by the panic, as was the rest of the securities industry. The recession lasted through 1965, and prompted the Ministry of Finance to implement tighter restrictions on securities-company licensing, primarily requiring that companies acquire separate licenses for underwriting and for retailing. It was a technicality that affected small dealers but had little impact on Daiwa’s operations.
By the end of 1965, the Japanese economy had bounced back. Daiwa established the Daiwa Securities Research Institute to forecast trends in the economy and analyze specific industries and companies. In 1967, the Japanese government liberalized Japanese capital markets, giving Daiwa an opportunity to solicit more foreign investments. By the early 1970s, considerable capital was flowing both in and out of Japan.
During the early 1970s Daiwa’s international sector saw the greatest growth. In 1970, Daiwa Securities (Hong Kong) Ltd. was established, followed by Daiwa Singapore Ltd. and a representative office in Paris in 1972. A year later, Daiwa Europe N.V. was incorporated in Amsterdam. The company also set up a subsidiary to handle asset management services in 1973, the Daiwa International Capital Management Company, Ltd. (DICAM). DICAM worked closely with the Daiwa Securities Research Institute to offer investment advice to its international customers.
During the 1970s, the bond market in Japan exploded. Beginning in 1970, foreign government bonds denominated in yen took the Japanese market by storm. These so-called “samurai bonds” increased in popularity throughout the decade. A secondary market for bonds soon developed, and was accompanied by an influx of Japanese government, particularly municipal, bond issues. Between 1970 and 1975, bond sales in Japan tripled.
In 1978, Daiwa (Switzerland) Ltd. was incorporated. Together with its operations in Great Britain, the Netherlands, France, and West Germany, Daiwa had a firm base on the European continent that proved to be invaluable during the 1980s. The European appetite for Japanese stocks and bonds combined with surplus Japanese capital available for foreign investment made Daiwa a major dealer in the euromarkets by the late 1970s.
Throughout the first half of the 1980s Daiwa’s earnings were staggering. The fact that Japan still allowed fixed commissions on security trades made Japanese brokers like Daiwa the most profitable in the world. Many new kinds of bonds appeared in the mid-1980s, when the Japanese Ministry of Finance approved substantial changes in the capital market regulations. Colorful names like “shogun bonds,” “sushi bonds,” and “geisha bonds” denoted a variety of issues, some in yen, some in foreign currencies. These new investment vehicles were, in effect, completely new product lines for Daiwa Securities.
Under pressure from abroad, mainly the United States, the Japanese continued to deregulate their capital markets. Daiwa was suddenly subject to competition from huge American investment banking firms like Morgan Stanley, First Boston, and Salomon Brothers on their home turf. At the same time, Japanese banks became active in securities trading. But Daiwa, with its close ties to institutional investors, was not as affected by the new competition as were other Japanese dealers who relied heavily on retail activities.
The company saw its future in U.S. markets. By the mid-1980s, Daiwa had become a large dealer in U.S. treasury notes. However, virtually all of its customers were Japanese. The company’s American subsidiary, Daiwa Securities America Inc., struggled to build a domestic base in the United States to ensure its success in those markets, but like other Japanese securities companies, had only measured success. Part of the problem was the reluctance of American corporations to develop close ties with foreign investment bankers. Another was that Japanese dealers were sluggish in reacting when American underwriting opportunities did arise; key decisions always had to be cleared with top management in Tokyo.
Daiwa was the first of the large Japanese securities companies to give its American employees authority to make underwriting decisions on the spot. Daiwa Securities America had an American vice chairman. In addition, the subsidiary’s American employees outnumbered their Japanese co-workers six to one. These characteristics made Daiwa more attractive to Americans than other Japanese houses, but the company still had trouble competing with American investment bankers.
Daiwa’s weak base in the United States was compounded by the stock market crash of October, 1987. Many Japanese investors were scared out of the stock market. In 1988, Daiwa cut its American staff by 7%, but remained determined to position itself in the American market. In the late 1980s, Daiwa diversified its services in the United States, initiating mergers and acquisition services both at home and in America. It was designated a primary dealer in U.S. government securities in 1986. It became increasingly active in commodities futures trading in 1988 and became a member of the Chicago Board of Trade. And by the end of the decade, American attitudes toward Japanese securities firms were changing. The sheer size of Daiwa and other large Japanese dealers had finally attracted the attention of American investors and issuers.
Daiwa Securities’ growth in the 1980s was astounding. It is still considerably smaller than its rival Nomura Securities, but Daiwa’s progressive attitude regarding its American operations and its historically stronger ties to institutional investors may help it close the gap. Daiwa has the most experience in international markets of any Japanese securities house, an important edge as securities markets become more and more global.
Daiwa Securities Research Institute; Daiwa International Capital Management Inc., Ltd.; The Daiwa Investment Trust and Management Co., Ltd.; Nippon Investment & Finance Co., Ltd.; Daiwa Computer Service Co., Ltd.; Daiwa System Service Co., Ltd.; Daiwa Mortgage Co., Ltd.; Daiwa Credit Service Co., Ltd.; The Daiwa Building Co., Ltd.; The Daiwa Real Estate Co., Ltd..
A History of Japan’s Postwar Securities Industry, Tokyo, Japanese Securities Research Institute, 1984.