Once bitten, Japan's big brokers play it safe amid Abenomics boom

TOKYO Wed May 1, 2013 6:09am EDT

TOKYO (Reuters) - With losses from ill-fated expansions still fresh in their minds, executives at Daiwa Securities Group (8601.T) and other top Japanese brokerages are waiting to see if the "Abenomics" boost has staying power before they invest aggressively again.

The industry has enjoyed bumper profits largely as a result of a 60 percent rally in the Nikkei average since mid-November, sparked by hopes the economic policies of Prime Minister Shinzo Abe would jolt the economy out of its two-decade slumber.

That rise has pumped up the industry's bread-and-butter businesses of broking stocks and mutual funds.

Daiwa, Japan's second-largest brokerage, reported on Wednesday that its net profit totaled 48.7 billion yen ($500 million) in the January-March period, blowing past analysts' expectations to mark its best quarter in seven years.

Despite the dramatic upswing in the market - trading volume has ballooned and hit a record high in April following the central bank's surprise monetary easing - neither Daiwa nor its bigger rival Nomura Holdings Inc (8604.T) has indicated it has any intention to expand.

"We are not thinking that these good conditions will carry on forever," Nomura's Chief Financial Officer Shigesuke Kashiwagi said last Friday after Nomura reported a near-quadrupling of quarterly profit on a 27 percent jump in sales.

Nomura's caution stems in part from its purchase of chunks of failed Wall Street bank Lehman Brothers in the wake of the global financial crisis of 2008, a move that saddled it with a high-cost structure that took years to get under control.

Nomura is still working through a $1 billion cost-cutting program launched last year, about half of which was targeted at its European operations. Daiwa has also reduced hundreds of overseas jobs and its cautious about expanding outside Japan.

Daiwa Chief Financial Officer Mikita Komatsu said on Wednesday the broker was not looking to hire more people or make big investments, and would instead focus on using its existing operations to capitalize on renewed interest in Japanese shares.

"We may pick our spots when it comes to investing in opportunities overseas, but you won't see any major investments," Komatsu said at an earnings briefing. "We consider it our core mission to expand the investor base in Japan."

TAX-FREE INVESTING

Japan's top brokers have all started to position themselves to capture clients generated by a new tax-free investment scheme aimed at prompting individuals to shift more of their $15 trillion in personal assets into equities and mutual funds.

The program will allow brokerage and bank account holders to invest as much as 1 million yen a year without paying tax on any returns. The Japanese government has set a target of attracting inflows of more than $260 billion by 2020.

The scheme is one factor behind optimism at SMBC Nikko Securities, which stands out as the only leading broker with solid expansion plans.

Japan's third-largest brokerage said last month it wants to add another 25 branches to expand its retail network by more than 20 percent over the next three years. It is also planning to boost its staffing by 600 to 8,600.

"For the first time in a long time we've got the winds at our back," Akira Inoue, head of finance at SMBC Nikko, told a briefing on Tuesday.

(Reporting by Emi Emoto and Chikafumi Hodo; Editing by Daniel Magnowski)

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