Tokyo, Mar 30: Japan's once-mighty brokerage houses will fight a life-or-death battle as income from critical commissions plummets when Tokyo's `Big Bang' financial reforms shake up the market this week. The government is to lift regulations from April 1 on brokerage commissions for transactions exceeding 50 million yen (US$ 389,000 dollar) ahead of full liberalisation in 1999.The move is a major part of the Big Bang deregulation prime minister Ryutaro Hashimoto pledged in 1996 in an effort to make Japan's old-fashioned financial system meet international standards. But analysts warn the liberalisation of commissions, which now account for about half of Japanese brokers' income, will deal them a fatal blow.
"It is unavoidable for some weak securities houses to face an extremely crucial moment," said Ryo Narumai, chief financial analyst at SRIC Corporation. "For the Japanese brokerage industry, this year will be a turning point," NarumaI said. Japan witnessed a prelude to the survival of the fittest lastyear. Yamaichi Securities Co Ltd, the nation's fourth largest broker, collapsed in November after it lost its market credibility due to its sloppy management and growing losses.
"The Yamaichi case was unfortunate, but it just came earlier," Narumai said. "It will become more obvious that healthy companies will survive and troubled ones will fade away." Haruhiko Urushibata, an analyst at Nikko Research Centre, said: "Small and medium-sized securities houses will first come under pressure."
In Japan, some 40 comprehensive brokers are operating in Tokyo, led by three major brokers - Nomura Securities, Nikko Securities and Daiwa Securities. But most securities houses, even including the three biggest brokers, have suffered profit declines since the end of the speculative "bubble economy" of the late 1980s.
"The winner will be those who can successfully transfer from dependence on commissions to collection of more assets for effective fund management," said Urushibata. "But we don't know how many securitieshouses can do it," he added.
Analysts also said the Big Bang reform would speed up the entry of foreign rivals into the still-wealthy Japanese market. "There is no doubt that foreign securities houses are vigilantly watching for a chance to expand their operations in Japan following the Big Bang," Urushibata said. Competition has been already intense in the industry with many brokerage houses, including foreign rivals, announcing plans to slash commissions."We are ready to compete with Japanese securities houses over a cut in commissions," said an official at Deutsche Morgan Grenfell. But the battle would directly hit their revenue.
Cosmo Securities, a mid-sized comprehensive brokerage house, expects income from commissions would decline by 20 per cent from the current level. "We will make up for the expected loss by cutting operation costs and accelerating streamlining efforts," a company official said.Japanese life insurance companies, major institutional investors, have said they would select brokeragehouses based on commissions when they place their orders. "Commissions are not the only scale for choosing brokers, but dealing costs will be an important gauge," said an official of Dai-Ichi Life Insurance.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
