Nomura Holdings - Company History

Winding up the money-changing house, and restarting on ¥20,000

The Nomura family business began in 1872, when Nomura Tokushichi I (初代野村徳七) opened a money-changing house, Nomura Tokushichi Shoten, in Osaka[1]. The trade at that time was no more than changing coin and dealing in old gold and silver[2]; shares and public bonds were handled on the side, but the founder’s safety-first policy kept those volumes slight[3]. The turn came in early 1904, when Nomura Tokushichi II (二代野村徳七) took over his father’s business[4]. Looking to expand it dramatically, he wound up the money-changing trade and started afresh as a full securities dealer with ¥20,000 of capital[5]. It was a decision to abandon the founding trade and concentrate on securities, and his management approach was aggressive and modern; within only a few years he had become the leading force in Osaka[6].

What Tokushichi II attacked first was not the market itself but the machinery for reading it. In April 1906 he put the firm’s personnel structure in order and at the same time set up a research department, and alongside it launched the Osaka Nomura Shoho (大阪野村商報) market letter — the first of its kind in the industry[7]. The letter carried the previous day’s market conditions and analysis of the economy to customers[8], and its hundredth-issue commemorative number set out the principle of putting the customer’s interest ahead of the firm’s own[9], stating its position thus: that it researched how each joint-stock company was organised, how it was trading and how it might develop, and that it discharged its duty to its readers by reporting overseas economic conditions and even national finances down to the last detail[10]. The culture later known as the research Nomura had already taken shape at this point[11].

Selling into the reaction, and the change to a joint-stock company

The reading that research underwrote was tested around the Russo-Japanese War. Nomura was active in the post-war share boom and, in the reaction that followed, turned seller, advancing sharply as the selling Nomura[12]. During the First World War it switched the other way, to an aggressive stance, and accumulated an enormous fortune[13]. What let it move from bull to bear market by market was the information the research department gathered[14]. In 1910 it formed a spot-dealing syndicate and became active in underwriting shares and public bonds as well[15], while Tokushichi II himself absorbed new knowledge on inspection tours abroad — expanding the research department, opening dealings with foreign counterparties and moving into bond underwriting[16], so that the business grew in quality and not only in volume.

The growth of the business demanded a remade corporate form. In December 1917 Nomura Tokushichi Shoten was reorganised as a joint-stock company and relaunched as Nomura Shoten with capital of ¥5 million[17]. It was the move from a sole proprietorship to a corporate body, and the shop went on to be the central business of the Nomura house[18]. This company was not, however, the direct parent of the later Nomura Securities[19]. Nomura Shoten was renamed Osakaya Shoten in July 1923[20]; in December 1930, hit by the financial panic, it cut its capital to ¥500,000, severed its capital ties with the Nomura family[21] and left the house as a company whose entire share capital was held by its own directors and employees[22]. The main line of the securities business came out of another company that Tokushichi II founded alongside it[23].

A bank started by a jumped-up stockbroker, and a securities department on its own books

In 1918 Nomura Tokushichi II founded Osaka Nomura Bank and put his hand to banking[24]. There was a cool current of opinion at the time that a jumped-up stockbroker like Nomura had no business starting a bank[25], but he pressed ahead on the view that it would be worth doing if the bank were given characteristics that suited Nomura. As those characteristics he raised a policy of pushing into securities finance, underwriting and lending to small and medium-sized firms alongside ordinary banking business[26], and to that end he brought in Kataoka Otogo (片岡音吾), head of the lending section at the Industrial Bank of Japan[27]. Kataoka would later become the first president of Nomura Securities[28] — which is to say that the man who would carry the securities business was already secured at the moment the bank was founded.

In 1920 government-bond markets were newly opened on both the Tokyo and Osaka stock exchanges[29]. Dealing in national, municipal and corporate bonds, until then merely a part of the listed universe, was separated from equities[30], and Osaka Nomura Bank obtained a government-bond broker’s licence alongside other leading financial institutions[31]. The bank accordingly set up a securities department inside itself, specialising in bonds[32]. What distinguished this department was that it ran on its own profit-and-loss account from the start, built so that it could be made independent at any time[33]. Business expanded steadily on the tide of the new government-bond market, and in 1922 it successfully placed the fourth Daido Electric Power bond and a Hiroshima Electric bond[34]. The step to independence was taken only after a study of how the securities business actually worked in the United States[35].

The securities department became independent in December 1925[36] and began trading in January 1926 as a specialist in public and corporate bonds[37]. Capital was ¥5 million, of which ¥2.5 million was paid in[38], and the presidency went to Kataoka Otogo, a director of Osaka Nomura Bank and head of its securities department[39]. The head office was placed at Azuchimachi, Higashi-ku, Osaka, and the firm set out by converting the securities departments of four bank branches, Tokyo among them, into its own sub-offices[40]. At its founding it numbered 35 staff, 30 apprentices and 13 women clerks — 84 people in all counting hired hands[41] — a small household of only eight sections, for dealing, finance, foreign business, trust, settlement, cash, accounts and general affairs, plus a research department and an inspection section[42]. The senior men and everyone below them were young, and they burned with the spirit of independence, of starting new work with their own hands[43].

The limits of standing on bonds alone, and the widening into equities and investment trusts

So clear was the intention to deal only in bonds that a leading proposal at the time of independence was to name the firm the Nomura Bond House[44]. That President Kataoka sought the future shape of the securities company within the bond market was itself a large part of the reason for going independent[45]. In March 1927 a New York representative office was opened[46]. Trading in foreign-currency bonds swelled around the re-imposition of the gold export embargo, and the office was in profit within only three years of opening[47]. Through the low-interest years running from the re-imposition of the embargo in December 1931 to 1934, Nomura held the throne of the public-bond market on the strength of its foreign-bond dealing[48]. After the embargo returned, however, the Capital Flight Prevention Law and the Foreign Exchange Control Law made free dealing impossible, and the office had to be closed at the end of 1936[49].

The danger of standing on bonds alone showed up in the figures in 1937[50]. As full-scale inflation set in with the outbreak of hostilities with China (日華事変), the equity market was busy while the bond market entered a period of extreme stagnation[51], and Nomura’s bond placement volume and trading volume fell into the worst state since its founding. Inside the firm, younger staff were pressing hard for a move into equities[52]. What decided it was a single remark by President Kataoka himself, who is said to have told a gathering in Shizuoka, I have never said it is wrong to do equities.[53] Coming from a president who had approached the bond business with a securities house’s sense of mission, the remark shifted the mood of the whole company at a stroke[54].

In August 1937 an equities section was created within the head-office securities department[55], and under deputy head Takahashi Kaname (高橋要) it took in Okumura Tsunao (奥村綱雄), Kitaura Kiichiro (北裏喜一郎) and Segawa Minoru (瀬川美能留)[56] — three future presidents gathered in one newly created section[57]. In June 1938 the firm was licensed for equity business and the section was promoted to a department[58]. On entering, what it chose was not the forward clearing transactions (清算取引) that then dominated but spot dealing, and with it a no-stock principle of holding no shares of its own and earning from trading commission alone[59]. Fujimoto, Yamaichi and Nikko, already established in equities, were so far above the clouds that men would say if only we could become a Tamatsuka (せめてなりたや玉塚様)[60]; a late entrant had no way to make a difference but soundness.

The difficult birth of the investment trust, then defeat and nine months without a president

In November 1941, after a difficult birth, Japan’s first investment trust came into being[61]. It started from a question put to managing director Iida Seizo (飯田清三) at the Ministry of Finance[62]: share prices were falling on the war footing, which was awkward — was there a way to absorb the purchasing power that war finance was putting into the hands of the public, so as to prevent inflation and steady share prices[63]? The research department had been studying the British unit trust[64], and Nomura decided to take it on. The hard part lay in selling a product with no principal guarantee to investors accustomed to fixed interest, and the answer settled upon was that if a loss arose on the original unit of ¥500 at redemption the securities house would make good twenty per cent of the loss, and would take ten per cent of any gain[65]. This compensation scheme was a serious matter for a private firm, and when it was put to the board of Nomura Gomei, the controlling body of the Nomura zaibatsu, eight of the ten directors opposed it and only two were in favour; it was voted down[66].

For a zaibatsu that also held a bank, an insurer and a trust company, the worry was that if the securities house could not pay the compensation it might bring on a run on the bank[67]. Even so, a strong national demand pushed the scheme forward[68], and investment trusts grew steadily right through the war: by August 1944 Nomura had set up ¥250 million of them[69], about half of the industry total of ¥528.5 million[70]. They were regarded as killing two birds with one stone — drawing funds up from the public while steadying share prices at the same time[71]. Under wartime controls the reorganisation of the securities industry also went forward, and between 1943 and 1944 Nomura absorbed Daiichi Securities and Kubota Securities[72], reaching capital of ¥12 million in August 1944 and beginning clearing-transaction business as well[73]. The blow of defeat went deep. The half-year to September 1945 produced the first loss since the founding[74]; all overseas assets, Manchuria Nomura and the Keijo branch among them, were lost[75]; and more than half of all its offices — Tokyo, Kobe, Moji, Fukuoka, Shizuoka, Okayama, Takamatsu and Hiroshima — burned down[76].

In the period when there was no real work to do, staff set up desks on street corners and sold lottery tickets, and this experience of street selling fed the later success of the securities-democratisation campaign and of the electric-power distribution share business[77]. Under the occupation the management itself was replaced: Nomura was designated a restricted company in November 1945[78], became a designated company under the public-office purge order in January 1947[79], and in August that year President Iida and three other directors were forced to resign[80]. The president’s chair then stood empty for about nine months, until Okumura Tsunao took it in April 1948[81]. The reopening of the exchanges was postponed indefinitely by a GHQ memorandum, and the rebuilding of the system went forward while over-the-counter trading spread of its own accord[82]. The head office moved from Osaka to Tokyo in December 1946[83]; in November 1948 the firm registered as a securities company under the Securities and Exchange Law[84]; and in April 1949 it became a regular member of the Tokyo Stock Exchange[85].