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Scandal Helping U.S. Brokers Boost Share of Trading in Japan : Securities: Disgusted with the practice of reimbursing favored customers for losses, more investors are moving to foreign firms.


TOKYO — While Japanese securities companies are being publicly flogged for their role in the slew of scandals that have surfaced this summer, American and European brokers are quietly boosting their market share here.

In the last two months, foreign brokers handled more than 18% of all trades made on the Tokyo Stock Exchange, up from about 10% at the beginning of the year.

The increase is partly a statistical quirk. Foreign investors, who see Japanese stocks as a bargain after their more than 40% drop in the past year and a half, have nearly tripled their net investment in the market over the past few months. Japanese investors, by contrast, have turned sour on the market and are sitting on the sidelines. Since foreign investors tend to use foreign brokers, their increased activity has helped boost the foreign share of all trades.

But foreign brokers said they also are seeing an increase in the number of Japanese investors that are disenchanted with Japanese brokers and are crossing the line, breaking the tight grip that the "Big Four" Japanese brokers have long held on the market.

"We believe the whole situation will be changed in five years," said Richard Greer, branch manager of Baring Securities (Japan) Ltd., a British brokerage that has seen its Japanese market share triple in the past two years. "The Big Four brokers will have much less power."

The Big Four--Nomura Securities Co., Nikko Securities Co., Yamaichi Securities Co. and Daiwa Securities Co. and their affiliates--have traditionally accounted for more than half of all stock trades and virtually all underwriting in Japan. The four companies' chief executives meet monthly in private meetings to discuss industry business--a cartel that is tough to crack.

Recent scandals have substantially reduced public trust in the Big Four and revealed some cracks that could ease the way for foreign brokers to handle more of the large pools of capital held in Japanese insurance funds and trusts.

More than 130 public organizations, local governments and corporations have temporarily suspended ties with Japan's Big Four following revelations that they spent more than $1 billion compensating favored customers for trading losses and--in the case of Nomura and Nikko--had extensive ties with gangsters. Of 30 blue chip companies recently surveyed by Kyodo News Service, 23 planned to either cancel or substantially shrink funds entrusted to Japanese securities companies, mostly to the Big Four.

Many canceled because of the poor performance of the funds.

Foreign brokers also think they can win over many disenchanted companies by offering more sophisticated financial products and better research.

"Foreign brokers are more active in exploiting the inefficiencies in this market," said Greer. He argues that lack of research on companies in Japan frequently results in overvalued or undervalued companies on the Japanese stock exchange.

Japanese fund managers questioned in surveys have consistently given high marks to foreign brokerage houses' research. One of the reasons is that in their reports foreign brokers can be more independent in their buy and sell recommendations.

Japanese brokers seldom make a sell recommendation in a research report for fear of insulting a company that might be an existing or potential customer in its underwriting business.

Most Japanese brokerages have small research staffs blindly recommending shares promoted by the Big Four.

Japan's push to show that its financial markets are open will also help foreign brokers. "Until now, institutional clients would just deal with the Big Four," said Robert Zielinski, an analyst at Jardine Fleming. "Now that looks bad, so they are beginning to throw in some foreign brokers."

Not all foreign brokers will be winners. Five years after American and British brokers began pouring money into fancy offices and hiring away executives at top salaries to help tap the booming market, the Tokyo Stock Exchange has suddenly turned into a backwater.

Trading volumes are a fifth of their level just two years ago.

In the six-month period ending Sept. 30, nine of Japan's top 14 securities companies will lose money while the rest will suffer earnings declines of 50% to 90%, according to a forecast by the Nihon Keizai Shimbun, a business daily.

Even though the foreign brokers may hold a larger share of the trades, with the total pie much smaller, Zielinski estimates that only half of the 25 foreign brokerage houses will turn a profit this year. Many expatriate brokers expect large layoffs if the Japanese stock market does not turn up in the next four months.

In the year ended March 31, profit at Salomon Bros.' Tokyo office plunged, and most analysts expect its performance to get worse before it gets better.

Although the firm's market share rose by 50% the past six months, its trading volume dropped in half.

Those that survive the shakeout could be well placed to benefit from the long-term changes beginning to take place in the Japanese stock market.

Foreign advances into the Japanese market will be slow because "Japan is based on a lot of people scratching each others' backs," said Greer. "The key thing is to be committed to the market."

Foreigners' Share of the Tokyo Market

Overseas brokerages' participation in trading on the Tokyo Stock Exchange has climbed notably over the last year. Figures are percentages of total trades on the exchange.

Source: Baring Securities Japan

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