Daiwa Securities Group - Company History

The call market that rice-trade money opened

Daiwa Securities traces its origins to Fujimoto Shoten, a rice merchant in Osaka. The fourth-generation head of the house, Sumiyoshiya Seibei (住吉屋清兵衛), carried the trade on after the Meiji Restoration under the new surname Fujimoto, and when the harvest failed in 1889 he was directed by the government to import foreign rice from Korea, Saigon and Rangoon. In December 1895 his adopted son Fujimoto Seibei (藤本清兵衛) established the limited partnership Fujimoto Bank[1]. Seibei ran that bank while also serving as a director of Fukushima Spinning and of Dai-Nippon Sugar[2], and he fixed on the fact that Japan had no domestic market in which ordinary banks could raise short-term accommodation money[3]. In May 1902, to open a bill-broking business, he established Fujimoto Bill Broker in Osaka[4], and this became the first step towards the formation of a call market in Japan[5]. The firm started not as a stock shop raised by a market speculator, but as a company whose main business was placing call money and dealing in bills.

In 1903, the year after opening, branches were set up in Kobe, Kyoto, Nagoya and Tokyo[6]. On the outbreak of the Russo-Japanese War in 1904 Seibei bought up treasury bonds and exported them to London, and the volume handled is put at ¥170 million[7]. Working in partnership with Samuel Samuel & Co. to ship treasury bonds to London, the firm was by then already trading on a nationwide scale[8]. In October 1906 the sole proprietorship was reorganised into a joint-stock company, Fujimoto Bill Broker Ltd., with capital of ¥200,000[9]. In January 1907, following a government ruling that bill broking should be governed by the Bank Ordinance, the name was changed to Fujimoto Bill Broker Bank and capital was increased to ¥1 million[10]. The articles of association set out the combined conduct of call money, banking and agency business, and securities dealing was added to the corporate purpose.

From the Dai-Nippon Sugar failure to bond underwriting and the re-import of foreign bonds

On 13 January 1909 Dai-Nippon Sugar, one of the firm's principal counterparties, suspended payments as its president and the rest of the board resigned together[11]. Formed in 1906 by the merger of Nihon Seiseito and Nihon Seito with capital of ¥12 million, it was the largest sugar refiner of the day[12], and Fujimoto Seibei had been connected with it as a statutory auditor from its founding[13]. Speculative forward buying of raw material and forward production, both driven by the sugar consumption tax, had left it carrying stock worth ¥10 million[14] and deepening difficulty. Fujimoto Bill Broker Bank was its largest creditor, with claims of ¥1.642 million[15], of which ¥620,000 was unsecured; the collateral behind the remaining ¥1.022 million consisted entirely of the sugar company's own debentures[16]. At the end of the previous year the bank's capital stood at ¥1 million and the funds it deployed at about ¥20 million[17], so a bad debt of that size could not be called small.

On 18 March 1909 Fujimoto Bill Broker Bank sent every creditor a letter asking for a moratorium on collection, whether or not the claim was secured[18]. The creditors numbered eighty-four banks and thirty-one companies and individuals, with claims totalling just under ¥16 million[19], of which ¥2 million was unsecured and largely held by regional banks[20]. Hiraga Satoshi (平賀敏), a friend of Fujimoto Seibei of long standing who had been manager of the Osaka branch of Mitsui Bank, joined the workout as an adviser[21]. At an extraordinary general meeting on 27 September that year Seibei resigned to take responsibility[22], and at the ordinary general meeting of 18 July 1910 Hiraga became chairman of the board[23]. Most of Seibei's shareholding was transferred to Hiraga and to Muto Sanji (武藤山治), and the founding family left the management[24]. Business resumed on 1 August that year[25], with Asabuki Eiji (朝吹英二), Muto, Shima Tokuzo (島徳蔵), Yagi Yosaburo (八木与三郎) and Yanagi Hirozo (柳広蔵) each depositing ¥20,000 to support the fresh start[26].

After the rescue, the firm moved actively into underwriting public and corporate bonds, beginning in 1911 with a ¥750,000 Osaka agricultural and industrial bond issue that it took on alone[27]. As volumes grew it created a securities department in 1916[28], and in 1918 separated that department from the banking side in both operations and capital, appointing a dedicated manager to it[29]. In 1917 it bought the first and second British war loans and Anglo-French bonds on the New York market and offered them to investors at home[30], taking the lead in importing foreign-currency bonds[31]. Branches and correspondent offices were opened in New York, London and Amsterdam[32]. In 1920 Miki Junkichi (三木純吉), who kept an office inside Bonbright & Co. of New York[33], bought up French-franc four per cent bonds held in France and the Netherlands and sent them to Japan through the Yokohama Specie Bank[34]. Because principal and interest on those bonds were payable inside Japan at a fixed conversion rate of ¥100 to 258 francs, they were foreign-currency bonds in form but no different from domestic bonds in substance[35]. It was around this time, too, that the firm ran a campaign to educate the public about securities investment[36]. In May 1924 it established The Fujimoto Securities Company in the United States, handling investment by Japanese residents abroad and the import and export of foreign bonds out of New York and Los Angeles[37], although both offices were closed in 1934 and 1935. In the Showa financial crisis it was caught by the failure of Suzuki Shoten and the collapse of Kawasaki Dockyard, but against the redemption failures then frequent it mounted a campaign to protect creditors, and had a hand in normalising bond issuance[38].

Bank or securities house: the 1927 ultimatum, and wartime consolidation into Daiwa Securities

The new Banking Act promulgated in March 1927[39] made the taking of deposits together with the discounting of bills the defining test of banking, and prohibited combined businesses other than secured corporate debenture trusts[40]. For a bank that had divided capital of ¥3 million into ¥2 million for the banking department and ¥1 million for the securities department[41], dealing in public and corporate bonds plainly counted as such a combined business. The firm argued for amendment of the bill on the ground that call money was in economic substance equivalent to deposits, and with the help of Ogawa Gotaro (小川郷太郎), a Minseito member of the Diet, it did extract a government interpretation treating bill-broker banks as banks[42], and an extension of the grace period for abolishing combined business from three years to five[43]. Even so, in July 1932, with the grace period running out, no line had been settled, the obstacle being that the outcome of the claims workout surrounding Kawasaki Dockyard remained undetermined[44]. A plan to hive the combined business off into a separate company was drawn up, but since keeping a close relationship with the new company would be at odds with the spirit of the new Banking Act, the firm judged it more advantageous to abolish its deposit and exchange business and survive as a company principally engaged in bill broking and securities dealing[45]. An extraordinary general meeting on 22 December 1932 approved the change to the articles[46], and on 1 January 1933 the business restarted as Fujimoto Bill Broker Securities, carrying over unchanged the combined ¥3 million of capital from the banking and securities departments[47]. Call broking, the original business since the founding, nevertheless continued afterwards, and the firm let go of short-term money broking only when the Securities and Exchange Act came into force in 1948[48].

Three years after becoming a securities house pure and simple, the firm published its Thirty-Year History of Fujimoto Bill Broker Securities in 1936, recording the years it had spent as a mainstay of the call market. In February 1937 the managing director Miwa Kojuro (三輪小十郎) announced the Fujimoto Securities Investment Partnership, which he had devised on the model of the British unit trust[49]. Because investment trusts were not yet permitted by law, the vehicle was constituted as a partnership under the Civil Code so as to avoid creating a trust relationship[50], each pool being made up of 200 units of ¥500, or ¥100,000 in all[51]. The securities purchased were placed in safe custody at the Osaka branch of the Industrial Bank of Japan, and the life of each partnership was set at three years from its formation[52]. The first pool was formed in July that year, immediately after the outbreak of the Sino-Japanese War, and became the forerunner of the investment trust in Japan[53]. When a statement by the Vice-Minister of Finance on 29 October 1941 allowed investment trusts to be carried on[54], Fujimoto Securities began investment-trust business the following year, second only to Nomura Securities[55].

When the Securities Underwriting Companies Control Association and the Short-Term Money Brokers Control Union were formed under the Financial Control Organisations Ordinance of April 1942, Fujimoto Bill Broker Securities joined both, and its chairman Miwa Kojuro became a director of each[56]. Because bill broker was treated as an enemy term, the company renamed itself Fujimoto Securities on 1 July that year[57]. In March 1943 the Japan Securities Exchange Act was promulgated, consolidating eleven exchanges into a single public corporation[58], and the number of exchange members halved from 476 to 217 by the end of June 1944[59]. In the middle of that consolidation, on 27 December 1943, Fujimoto Securities and Nippon Trust Bank merged as equals to form Daiwa Securities, with capital of ¥18.75 million[60]. Nippon Trust Bank, established in March 1920, was an affiliated company whose main business was securities finance[61], providing share finance for the Osaka short-term settlement market[62], and the new company took over the entire business of both firms apart from the bank's banking operations. Miwa became chairman and Kurumatani Umataro (車谷馬太郎), president of the former Nippon Trust Bank, became president; at the same time the head office moved from Osaka to Tokyo[63]. In February 1944 the company bought Matsunaga Teiichi Shoten (松永定一商店), and in July that year it merged Yoshikawa Securities, raising capital to ¥19.25 million[64]. Having widened its scale through the wartime reorganisation of the industry, it soon met the end of the war[65].

Rebuilding through write-down and rights issues, and life as an investment-trust manager

Postwar rebuilding began with a restructuring of capital: in July 1948, under a corporate reconstruction and readjustment plan, capital was written down to ¥9.625 million, and in August it was raised to ¥50 million[66]. To fund equipment and working capital, further increases followed — to $416,667 (¥150m) in February 1949, $555,556 (¥200m) in March that year, $1.4M (¥500m) in April 1952 and $2.8M (¥1bn) in March 1953[67]. When the Securities and Exchange Act came into force in May 1948, the firm abolished its short-term money broking under the provisions of that Act[68]. In 1949 it transferred the bill-broking business to Tokyo Investment[69], and took up new lines instead: acting as a management company for securities investment trusts, lending and safe custody of securities, and receiving subscription monies for public and corporate bonds[70].

Rebuilding advanced through products as well. The convertible bond issued in August 1948 was privately placed, but was the first convertible bond in Japan. In October 1948 the firm registered as a securities dealer under the Securities and Exchange Act[71], and in April 1949 it joined the Tokyo Stock Exchange as a member[72]. It launched the Hinomaru investment trust in 1951, and in June 1952 introduced the first open-end investment trust in Japan[73]. Where the existing unit type was a semi-closed form, redeemable but closed to further subscription, the open-end form permitted both redemption and additional subscription, a complete version of the structure[74]; the trust period ran ten years against two for the unit type, and the management fee was set on a performance basis[75]. It was more than five years before rivals followed[76]. The ground had been prepared carefully: in January 1950 the firm introduced the American corporate-form investment trust, in February 1951 it compiled the operating practice of the British unit trust, and in February 1952 it distributed reference material to every branch and office[77]. In June 1954 it started Tsumitate Open, the first accumulation investment scheme in Japan, applying dollar cost averaging.

By July 1955 the amounts handled as an investment-trust management company came to $77.9M (¥28bn) across thirty-six semi-closed issues and $5.5M (¥2bn) across seventeen open-end formations, more than $83.3M (¥30bn) in all[78]. At that point the firm had, besides the Tokyo head office, twenty-four branches and thirty-one sub-branches and other offices in the main cities of the country, and employed 1,900 people[79]. In the seventeenth financial period, from October 1953 to September 1954, the total value of securities handled was $388.9M (¥140bn), of which share dealing accounted for 59.45 per cent and the underwriting and offering of public and corporate bonds for 21.24 per cent[80]. In November 1953 president Kato Kazune (加藤和根) became chairman of the board and the managing director Okamura Shinichi (岡村新市) became president[81]; in November 1954 the office of vice-president was newly created and the managing director Fukuda Chisato took it[82]. In January 1954 the firm set up Daiwa Land and Building to construct its head-office building[83], and in December 1959 it separated out Daiwa Securities Investment Trust Management, carving the investment-trust business into a function-specific subsidiary[84].

The overseas network a number two put in place early

The building of overseas offices began in earnest with the New York representative office of June 1959[85]. A London representative office followed in April 1964, and in December that year Daiwa Securities America Inc. was established in New York[86]. In April 1968 the firm was licensed by the Minister of Finance as an integrated securities company under the revised Securities and Exchange Act[87], and in February 1970 its shares were transferred to the first sections of the Tokyo, Osaka and Nagoya stock exchanges[88]. In December 1970 it established Daiwa Securities International (Hong Kong) and in June 1972 DBS-Daiwa Securities International Ltd. in Singapore[89], extending its network across Asia.

At home, the shares were listed on the second sections of the Tokyo, Osaka and Nagoya stock exchanges in October 1961[90]. As of 1968 capital stood at $22.2M (¥8bn) and the workforce at 5,704, and as one of the big four the firm ran more than eighty offices nationwide[91], with the New York subsidiary and the London office abroad[92]. Through the securities slump that ran to 1965 it rationalised ahead of its rivals and came to be called Daiwa the soundly managed[93]. It introduced an online system as the mainstay of operating efficiency, and in staff training it built a consultant qualification resting on a demanding examination before the rest of the industry did[94]. In August 1975 it established Daiwa Computer Service, the body from which the Daiwa Institute of Research would later grow[95].

Leading on product: Asian dollar bonds and Euroyen bonds

In 1971 the firm was lead manager for the first Asian dollar bond, an issue for the Development Bank of Singapore[96]. When the Japanese equity market took substantial foreign investment for the first time in the mid-1970s, it won buy orders of US$130 million in a short period from Dreyfus, a large American fund manager[97]. In 1973 it sold the Dreyfus Fund in Japan, the first foreign investment trust to be distributed domestically. In June that year it established Daiwa Investment Advisory, and in 1977 it handled the first Euroyen bond, an issue for the European Investment Bank. In 1980 it sold money-market funds in the United States[98].

The same lead showed in the league tables for lead-manager mandates. In Asian dollar bonds, from the market's start in December 1971 to October 1981, Daiwa underwrote thirty-seven issues against seven for Nomura and four for Yamaichi[99]. In Euroyen bonds, from the market's start in April 1977 to October 1981, Daiwa had eight against four for Nomura and one each for Nikko and Yamaichi[100]. It was Daiwa, too, that led the way in underwriting Euroyen bonds issued by international institutions and the dollar-denominated yen-linked bonds through which Japanese companies sought to raise money while avoiding currency risk[101]. In December 1980 it brought out a bond-type foreign investment trust and, with Dresdner Bank of Germany among others, established a management company in Luxembourg as a joint venture[102].