The Nikko Securities Company Limited History

Company History:

The Nikko Securities Company Limited is one of the largest securities companies in the world, and--along with Daiwa Securities Company, Nomura Securities Company, Limited, and Yamaichi Securities Company, Limited--is regarded as one of Japan's "Big Four" investment houses. Troubled in the early 1990s by a scandal involving illegal client reimbursements, Nikko has nevertheless regained its status as a leader in the industry and has sought to expand its business by diversifying operations internationally.

Founded in 1944, Nikko is the youngest of Japan's Big Four securities houses, which collectively transact more than half of the brokerage and investment banking in Japan. Nikko was formed as a merger between the Kawashimaya Securities Company and the Nikko Securities Company, which was at that time part of the Industrial Bank of Japan. The new company could count the long experience of its two predecessors among its assets.

In 1918, Genichi Toyama founded the Kawashimaya Shoten to buy and sell stocks and bonds; two years later his company was incorporated as Kawashimaya Shoten Inc., Ltd. Kawashimaya expanded throughout the 1920s and 1930s, and in 1939 Toyama set up a separate company, Kawashimaya Securities Company, Ltd., as a bond underwriter. In 1943, the business of Kawashimaya Shoten was assimilated by the Kawashimaya Securities Company.

The Nikko Securities Company grew out of the securities department of the Industrial Bank of Japan. Although Nikko separated from IBJ in 1920 and operated autonomously on a day-to-day basis, it remained under the ultimate control of the bank. In 1943, Nikko strengthened its position in the markets when it acquired the Kyodo Securities Company, Ltd. A year later, it merged with Kawashimaya, formally separating itself from IBJ and creating the present-day Nikko Securities Company.

Japan's securities markets were in a chaotic state after World War II as stock prices plummeted. In 1945, all trading on the major exchanges was suspended while the Occupation forces restructured the Japanese economy and political system. Because of the forced disintegration of the huge Japanese cartels known as zaibatsu, stock ownership became broadly based. Reconstruction called for extensive borrowing, and this need was met by substantial debenture issues. The new Nikko Securities opened during this chaos with 736 employees in 12 offices. It survived by buying and selling securities over the counter at its offices throughout Japan.

In 1948, Japan's Securities and Exchange Law laid the foundation for the reopening of Japan's principal exchanges, allowing the Tokyo Stock Exchange and the other major markets to reopen in 1949. The economy took off in 1951 as a result of increased export demand from United Nations forces, primarily American troops, engaged in the Korean conflict. This boom pulled the Japanese stock market out of a serious slump and heralded the steady growth of the Japanese economy. Nikko's own growth, for the most part, mirrored that of Japan.

In the postwar period, Nikko, along with the other Japanese securities houses, invested heavily in public relations to educate the Japanese people about equity and capital markets. The investment paid off; nearly half of all Japanese became active investors during the 1950s. Nikko established public relations libraries where people could go to keep abreast of the markets. These outreach centers were found in shopping centers, railway stations, even underground on subway concourses. In addition, the company sponsored a television show called "Morning Smiles," which went on the air as the Tokyo Stock Exchange opened and reported trends and developments in the securities markets. Nikko also targeted women in its advertisements and media campaigns, and women became a significant group of investors. According to Nikko founder Genichi Toyama, in the early 1960s "discussions of the market [received] almost as much attention in most Japanese homes as the weather and baseball." Nikko had helped cultivate a nation of avid securities consumers.

Investment trusts became one of the most popular ways for Japanese to invest. Nikko opened the first of its investment trusts in 1951, and by 1957 was managing more than ¥100 billion in subscriptions. The company offered two types of investment trusts. A unit-type trust allowed an investor to purchase a unit for ¥5,000 that would mature in five years. An open-end type resembled the American mutual fund; shares were bought and sold at the market price, which was in turn based on the net asset value at a given time.

With an increasing need for capital in the late 1950s. Nikko established itself abroad to facilitate the flow of foreign capital into Japan. In 1959, Nikko set up an office in New York. This office was primarily a research center until 1965, when it took on new services and was upgraded to subsidiary status. Nikko's main U.S. affiliate in the late 1950s and 1960s was Nikko Kasai Securities Company, a joint venture with Kasai Securities established in 1955 in San Francisco. Nikko Kasai focused on developing an interest in Japanese securities among west coast investors. Nikko continued to expand into key foreign financial centers in the 1960s, opening an office in London in 1964 and in Zurich in 1969.

In 1961, Nikko Securities went public, offering its shares on the Tokyo, Nagoya, and Osaka exchanges. Japanese securities market activity expanded at an incredible rate until 1964, when the economy slipped into one of the most severe recessions of the postwar era. The Japanese government's newly imposed tight monetary controls combined with U.S. restrictions on foreign investment to put a clamp on growth. The resulting drop in stock prices caused a public loss of confidence in the markets.

Some analysts blamed the securities companies for irresponsible, even unethical, behavior in the months leading up to the crisis. They accused the dealers of overzealously pushing securities on investors to avoid getting stuck with issues they had underwritten. As a result of these and other practices, the Japanese Ministry of Finance called for the complete reorganization of the securities industry. Nikko was reviewed and allowed to obtain the new licenses necessary to operate as a securities underwriter and dealer. Top management underwent several major changes: many of the company's managers were replaced by younger executives, nine directors retired, and the 56-year-old Moriatsu Minato, a former director with a strong background in banking, became president. By 1966, the Japanese economy had resumed its extraordinary rate of growth--growth that continued uninterrupted until the oil crisis of 1973.

When the worldwide oil crisis struck, Japanese industry, heavily dependent on imported oil, suffered a terrible blow. More than 11,000 companies went bankrupt during the recession that followed. When the economy recovered, the stunning growth rates of the 1960s and early 1970s leveled off, and slower (though still impressive) growth characterized the second half of the 1970s. This period also saw the development of a more sophisticated bond market. Large government issues beginning in 1975 brought about changes in the capital markets. Japanese companies were in competition with the government for Japanese capital investment.

Nikko responded to this challenge by establishing new offices and subsidiaries around the world. By 1979, Nikko had offices or subsidiaries in Frankfurt, Luxembourg, Paris, Hong Kong, and Singapore in addition to its London and New York operations. Japanese stocks and bonds became increasingly popular overseas, particularly in Europe, and by 1980, Nikko, riding the wave of Japanese industrial strength, was competitive with Europe's largest securities companies.

As countries relaxed their regulations on financial services in the 1980s, the securities industry became increasingly globalized. Nikko's skyrocketing profits reflected those developments. In fact, Japanese securities companies, Nikko included, were soon ranked among the world's largest financial services companies. Domestic competition among the Japanese "Big Four" was fierce. Nikko continued to look overseas for new opportunities. Since the United States represented the largest single market in the world, Nikko resolved to establish itself there.

In the mid-1980s, the Ministry of Finance approved substantial changes in Japan's capital market controls. Japanese securities companies found new opportunities in the new varieties of bonds that were now permitted. European issues of Japanese bonds denominated in yen became very popular. As the yen took on greater significance as a benchmark currency, Nikko further solidified its position in the Euromarkets. The company's progress in the United States, however, was not as spectacular.

Nikko had difficulty penetrating American markets for several reasons. Its primary operations in the United States during the mid-1980s revolved around U.S. treasury bonds. The company was designated a primary dealer in U.S. government securities by the Federal Reserve in 1987, and Japanese investors had a large appetite for U.S. treasury bonds. Since it did not have a base of domestic investors in the United States, Nikko focused on investment banking services rather than brokering. But nearly all the Japanese securities houses were treated with caution by American investors and corporations issuing debt or equities. Nikko had trouble competing with the investment banking services of large U.S. companies like Goldman Sachs, First Boston, or Salomon Brothers.

Furthermore, some analysts considered the Japanese style of management poorly suited to the complex world of investment banking. In Japan, decisions requiring immediate resolution were deferred to top management, and further held up by the consensus approach characteristic of Japanese business. These problems were compounded in October 1987 when the New York stock market crashed and Nikko's mainstay--Japanese investors--were scared out of the markets. Although still committed to entering American markets, Nikko needed to regroup and develop a new strategy.

Nikko set out to diversify its services, purchasing 20 percent of the Blackstone Group in 1988. Blackstone, an American merchant bank, specialized in friendly takeovers, the only kind the Japanese will contemplate. As demand for mergers and acquisition assistance grew in the late 1980s, Nikko's connection with the American company proved an excellent arrangement. Nikko also became heavily involved in swaps, designing an advanced method of valuing swaps called "zero coupon valuation" that was superior in many ways to those used by some of Wall Street's best known investment banks. Nikko also established a presence in the American commodity futures industry in the late 1980s. Through these new services Nikko hoped to attract U.S. customers and broaden its Japanese base.

Nikko was ranked fifth among the world's securities firms in 1988. Along with Japan's other "Big Four" firms, Nikko was designated "omnipotent" by a Tokyo Business Today writer. By 1989, Nikko had established 14 subsidiaries and nine representative offices around the world to market, underwrite, and distribute all the securities traded in Japanese markets. The firm had distinguished itself in four primary areas: computerized investment technology, a 100+ branch national network, a strong mergers and acquisitions record, and activity in the high-potential regions of the pacific Rim and southeast Asia.

But Nikko's plans for the future were brought to a halt by upheaval in Japan's major brokerage houses. The Tokyo stock market dropped suddenly in 1990 and continued to decline in 1991. That year, Japan's securities market was rocked by the revelation of tobashi, the Japanese practice of reconciling the accounts of favored clients to compensate for stock losses. Analysts estimated that Japan's "Big Four" had reimbursed over 225 favored clients close to $1 billion from the 1990 Tokyo market crash to mid-1991. Nikko and Nomura were also linked to underworld boss Susumu Ishii and his Inagawa-Kai crime syndicate. The revelation of these scandals prompted an extraordinary deluge of public and private censure in Japan that culminated in the resignations of Nikko's and Nomura's top executives. Japanese Finance Minister Ryutaro Hashimoto took a ten percent pay cut for three months in acknowledgment of his office's negligence in regulating the market.

By the end of 1991, Nikko's pretax profits of ¥11.3 ranked it behind the Tokyo offices of two United States firms. Salomon Brothers' and Morgan Stanley's accomplishment was partially ascribed to the bans assessed by the Ministry of Finance on Nikko for their indiscretions. In the final assessment, most of the charges against Nikko were dropped because the firm had not technically broken Japan's vague securities laws.

Despite public disgust over the brokerage scandals, many analysts agreed that the "Big Four" would emerge from the embarrassing events of 1991 intact. Nikko hoped to reduce its dependence on the Japanese market in the 1990s by diversifying internationally. The firm worked to build its corporate finance capacity in Europe. And the problems of the parent notwithstanding, Nikko Securities Co. International, a U.S. subsidiary, found success in the derivatives arena and established a strong presence in America's futures markets.

Principal Subsidiaries: The Nikko Securities Co. International, Inc.; The Nikko Securities Co., (Europe) Ltd.; The Nikko Bank (U.K.) plc; Nikko Bank (Switzerland) Ltd.; Nikko Bank (Deutschland)GmbH; Nikko Bank (Luxembourg) S.A.; Nikko France S.A.; Nikko Investment Banking (Middle East) E.C.; Nikko Nederland N.V.; The Nikko Securities Co. (Asia) Limited; The Nikko Merchant Bank (Singapore) Ltd.; The Nikko Securities Co. (Australia) Ltd.; The Nikko Securities Co. Canada, Ltd.; The Nikko Futures (Singapore) Pte., Ltd.; Nikko Capital Services, Inc.; Nikko Espana Sociedad de Valores S.A.; Nikko Italia S.p.A.; Nikko Securities Indonesia; P.T. Nikko Securities Indonesia.

Further Reading:

• Baba, Kuniko. "Big Four Chill Doesn't Temper U.S. Growth," Futures: The Magazine of Commodities & Options, September 1992, pp. 58-64.
• King, Paul. "Japanese Banks in Europe: The New Phase--a More International Approach," Euromoney, July 1992, pp. S20-S24.
• "Tokyo's Stock Scandal Keeps Growing," Financier, August 1991, pp. 31-34.

Source: International Directory of Company Histories, Vol. 9. St. James Press, 1994.

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