Daiwa Securities Group Inc.
Daiwa Securities Group Inc.
Total Assets: ¥7.8 trillion ($58.8 billion) (2002)
Stock Exchanges: Tokyo Osaka Nagoya London Paris Frankfurt Brussels
Ticker Symbol: 8601
NAIC: 551111 Offices of Bank Holding Companies; 523110 Investment Banking and Securities Dealing; 523120 Securities Brokerage
Daiwa Securities Group Inc.—formerly known as Daiwa Securities Co. Ltd.—operates as Japan’s second-largest securities firm. Through its subsidiaries, the company is involved in retail and wholesale securities, asset management, consulting, and venture capital. During the 1990s, Japan’s financial industry began to restructure and deregulate, prompting Daiwa Securities to adopt a holding company structure. The firm also teamed up with Sumitomo Bank—now known as Sumitomo Mitsui Banking Corporation—to form a wholesaling securities joint venture. Daiwa Securities celebrated its 100th anniversary during 2002, just as an economic slowdown and a weakening securities market forced brokerage commissions and revenues to plummet.
Early History: 1902–40s
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. However, 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.
Entering New Markets: 1950s–60s
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 continued almost uninterrupted through the 1980s.
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.
International Expansion: 1970s–80s
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 that 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 the United Kingdom, 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 European market 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 U.S. 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 U.S. 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.
We the Daiwa Securities Group are committed to acting as our client’s best partner and promote their financial well-being. In order to achieve this, we shall redefine currently accepted best practice drawing on the following three core values: we shall provide products and services that exceed expectations; we shall bring the full strength of the group to bear; and we shall continually challenge the limits of financial best practice.
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 U.S. 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 U.S. staff by 7 percent 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 the U.S. The company 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. 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 was 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 helped it close the gap. At the time, Daiwa had the most experience in international markets of any Japanese securities house, an important edge as securities markets became more and more global—by 1990, the firm was listed on seven stock exchanges in Europe.
Deregulation Leads to Changes: 1990s and Beyond
As the Japanese economy slowed during the early 1990s, many of the region’s banks and brokerage houses saw profits plummet. As such, Japan’s Ministry of Finance began to slowly deregulate its financial sector. Considered a crucial step in restoring the country’s economy, Japanese deregulation came after global competitors had already revamped their financial sectors. A November 1994 Business Week article stated that “at stake is the global competitiveness of Japan’s financial industry. Unless the country can restore the health of its banks and brokers, they will be hard-pressed to do battle with U.S. and European rivals that have been expanding around the globe at a furious clip.” In 1996, Japan announced its “Big Bang,” a deregulation plan that would reform its financial system and open its industry to foreign competition by 2001.
Early deregulation allowed securities firms to enter the trust banking sector and allowed commercial banks into the bond underwriting market. While Daiwa worked to take advantage of new opportunities brought on by deregulation, the company faced an embarrassing scandal that threatened to take a toll on company profits. In 1997, after the firm had denied any wrongdoing, Daiwa was named in a corporate racketeering scandal. The company paid a sokaiya, or corporate extortionist, not to reveal certain information during annual meetings. In September of that year, Daiwa’s chairman and president stepped down along with seven directors, leaving Yoshinari Hari to clean up the company’s illegal activities. As a result of its involvement, Daiwa faced penalties including a four-month suspension of various business activities.
As Daiwa reported losses in 1998 and 1999 due to both the scandal and increased competition, the company continued to position itself for future deregulation. It teamed up with The Sumitomo Bank Ltd. in 1998 to create Daiwa Securities SB Capital Markets, a joint venture focused on providing securities services for corporate customers. Sumitomo Bank merged with The Sakura Bank Ltd. to create Sumitomo Mitsui Banking Corporation in 2001. At the time of the deal, Daiwa Securities SB acquired Sakura Securities, and its name was changed to Daiwa Securities SMBC Co. Ltd.
Meanwhile, Daiwa launched a sweeping restructuring effort that would allow the company to focus on its core businesses. On the international front, the company’s main business lines were organized into Japanese equities, non-Japanese equities, Japanese-related international bonds, investment banking, asset securitization, and asset management. All in all, the company planned to shut down 12 overseas offices. As part of the restructuring effort, Daiwa also announced its plan to adopt a holding company structure. In April 1999, Daiwa Securities Group Inc. was established and became the first listed Japanese holding company. Under the new structure, Daiwa Securities Co. became the Group’s retail service arm, while wholesale operations fell under control of Daiwa Securities SMBC.
As Daiwa entered the new century, both commissions and net income increased. During 2001, the company added a new facet to its strategy—adopting a new image. As such, Daiwa launched an aggressive re-branding campaign that had three core values as its focal point: exceptional customer orientation, seamless services building on group synergy, and continuous innovation.
- Fujimoto Bill Broker and Bank enters the banking business.
- Fujimoto is forced to give up its banking business and forms Fujimoto Bill Broker & Securities Company.
- Fujimoto Bill Broker & Securities and Nippon Trust Bank merge to form Daiwa Securities Company.
- Daiwa enters the investment trust business.
- Daiwa Investment Trust and Management Company Ltd. is created.
- The firm establishes an office in London.
- The company is designated a primary dealer in U.S. government securities.
- Daiwa Securities SB Capital Markets Co. is formed in an alliance with Sumitomo Bank.
- Daiwa Securities Group Inc. is created to act as a holding company.
Daiwa’s centennial celebration in 2002 was overshadowed by a weak global economy and a lackluster Japanese securities market. The firm posted a net loss of ¥130 billion during fiscal 2002, due in part to the disposal of various properties. Nevertheless, Daiwa management remained optimistic about its future, hoping to eventually be the market leader in developing and offering products and services. With 100 years of experience under its belt, Daiwa felt it was well positioned to handle economic downturns and increased competition brought on by changes in Japan’s financial sector.
Daiwa Securities Co. Ltd.; Daiwa Securities SMBC Co. Ltd. (60%); Daiwa Asset Management Co. Ltd.; Daiwa Institute of Research Ltd.; Daiwa SB Investments Ltd.; Daiwa Securities Business Center Co. Ltd.; The Daiwa Real Estate Co. Ltd.; NIF Ventures Co. Ltd.; Daiwa Securities America Inc.; Daiwa Securities Trust Company; Daiwa Securities Trust & Banking Europe plc.
Merrill Lynch & Co Inc.; Nikko Cordial Corporation; Nomura Holdings Inc.
“Bad Omens for Japan’s Big Four,” Financial Times London, October 24, 1997, p. 25.
“Daiwa Securities Forms Japan’s 1st Listed Holding Firm,” Japan Economic Newswire, April 25, 1999.
A History of Japan’s Postwar Securities Industry, Tokyo: Japanese Securities Research Institute, 1984.
Ishibashi, Asako, “New Finance Allies Seek Little Help for Abroad,” Nikkei Weekly, August 3, 1998, p. 1.
“Japanese Securities Firms: Once There Were Four,” Economist, September 27, 1997, p. 80.
“Making a Virtue of Modesty,” Financial Times London, October 1, 1997, p. 28.
Neff, Robert, “The Big Bang, Japanese-Style,” Business Week, November 21, 1994.
Tamura, Atsushi, “Brokers Shift Focus Away From Stocks,” Nikkei Weekly, January 27, 2003.
Tett, Gillian, “Japanese Brokerages Show Severe Downturn,” Financial Times London, January 20, 1998, p. 24.
——, “Scandal Takes Its Toll on Nomura,” Financial Times London, July 18, 1997, p. 23.
Wagsstyl, Stefan, “Daiwa Securities Aims for a Wider Global Dimension,” Financial Times London, December 6, 1989, p. 39.
—update: Christina M. Stansell