Small brokers suffer in Japan

Tokyo - Mid-term earnings announcements by Japanese securities houses yesterday revealed a big gap between the fortunes of large and small companies, indicating doubts among investors about the soundness of Japanese brokerages, writes Richard Lloyd Parry.

In the first six months of the fiscal year, Nikko - one of the Big Four brokers, with Nomura, Daiwa and Yamaichi - increased its pre-tax profits by almost 1000 per cent. On the other hand, of the 10 second- tier brokers, nine suffered losses due to slack stock trading in the first quarter. Only one of the smaller houses, Kokusai, was in the black, with profits of 3.25bn (pounds 20.3m)

"Since Barings' collapse, institutional investors have cut the number of brokerages they use," one analyst said. "Even individuals are worried about the financial health of smaller brokers and tend to place their orders with the big ones. The gap is likely to continue to become bigger unless management at smaller brokerages decide on what securities business they will focus [on].''

Further retrenchment is likely among the second-tier brokerages. "But there's a limit to the number of people you can lay off, and a few of these guys have cut back about as much as they feasibly can," one Tokyo- based analyst said.

Bond transactions, buoyed by Japan's all-time low interest rates, were key to success, analysts said. Nomura's half-year profit on bond transactions was a record 39.19bn, almost four times the previous year's.

But stockbroking commissions, the mainstay of the securities houses' business, continued to drag after a sluggish six months on the Tokyo stock exchange. Average trading volume on the exchange during the six- month period fell by 10 per cent from a year earlier to about 313bn a day. Only Nomura saw an increase in commissions, by a token 0.8 per cent.