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Rating Action:

JAPANESE SECURITIES INDUSTRY FACES CHALLENGES OF DEREGULATION AND GLOBAL COMPETITION, MOODY'S REPORTS

11 Mar 1997
JAPANESE SECURITIES INDUSTRY FACES CHALLENGES OF DEREGULATION AND GLOBAL COMPETITION, MOODY'S REPORTS TOKYO, March 11, 1997 -- In a continuing environment of market stress, Japan's Big Four securities firms are facing "the dual challenges of deregulation at home and of building new strategies and products to compete in the rapidly expanding global capital markets," Moody's Investors Service warns in its annual report on the industry.
The rating agency says, however, that credit quality continues be supported by the adequate capitalization common to the Big Four, as well as access to "substantial domestic distribution capability."
"We believe that Nomura (senior at A1) and Daiwa (senior at A3) are well-established and have substantial resources to defend their large domestic market shares in a deregulating market," the report says.
By contrast, Nikko (A3) is currently on review for possible downgrade. According to the rating agency, "we will consider the impact of pending deregulation on Nikko's predominantly domestic franchise." Moody's explains that Yamaichi (Baa3) is less robust and more vulnerable than its Japanese peers, adding that "the company's rating is supported by our expectation that Yamaichi would receive government support in a stress scenario."
The rating agency also concludes that the number of Tier-Two companies in Japan's securities industry is likely to significantly decline over time through consolidations and failures. "We anticipate that a rise in commercial affiliations will occur among foreign and Tier-Two firms," the report says, "and that this situation will provide access to domestic markets for the former, and a new range of products for the latter."
Domestic Revenue Dependence
Japanese securities firms have been characterized by volatile earnings and a dependence on domestic revenues--specifically, on equity brokerage commissions, which typically comprise 20%-50% of total revenue for a Big Four firm. Fixed commission rates are expected to be eliminated, however, and growing competition is being unleashed by the government's removal of intermarket barriers. "Consequently, this revenue source will be under severe and growing pressure," Moody's concludes.
In order to compensate for this shrinking domestic revenue base, the rating agency says that the Big Four will be compelled to introduce and promulgate new products and services at home. "Simultaneously," the report explains, "the firms' managements will find it necessary to strengthen their overseas capabilities to successfully capture market share of global capital flows against fierce competition."
Overseas Challenges
Attaining a prominent global presence will be quite challenging for Japan's securities firms, the report concludes. "Compared with large international rivals,' " Moody's writes, "the Big Four's current international businesses are narrow, principally involving raising yen capital, providing two-way securities trading with Japan, and making markets in +plain vanilla' products."
Adding to their difficulties, Moody's says, is the fact that offshore subsidiaries of the Big Four often operate as independent and opportunistic business units rather than parts of a comprehensive global business strategy.
A key component of a successful global strategy must be a fundamental shift in management style and philosophy, Moody's emphasizes.
Alert to the Dilemma
Japanese managements are clearly alert to their firms' dilemmas, as is the government. The Hashimoto plan, which is designed to deregulate Japan's financial markets by 2001, is written to encourage a freer marketplace and enhance transparency.
Moreover, the Big Four are well-positioned to defend their large domestic market share, Moody's says. "They are sufficiently resourced, have large retail and institutional client bases in the domestic markets, and they benefit from good access to international markets," according to the report.
No Related Data.
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