ECONOMIC SPOTLIGHT - TOKYO HARD ON FOREIGN TRADERS
Overseas securities firms are spending
millions of dollars to set up operations in Tokyo, but many
will end up losing money, industry sources said.
    For banks and securities firms eager to establish
themselves as international players, building a presence in
Japan has become an imperative. Thirty-six are already licensed
to trade securities on the Tokyo Stock Exchange, the world's
second largest. More than 50 are expected by year-end.
    But, as deregulation erodes brokers' profits and the global
share-buying spree is predicted to subside, only those
securities traders with first-class financial muscle will
survive, the sources said.
    "There will be foreigners' fallout. They come in here with
too glib ideas about how they can survive," said David Miller,
director and general manager of Jardine Fleming (Securities)
Ltd's Tokyo branch.
    Despite soaring share prices, sharp falls in commissions on
stock transactions have hurt even brokerages that came to Tokyo
early.
    "Japanese equities are no longer a very profitable business.
The margins are nothing like they were two or three years ago.
Things are not as rosy as they may seem," Miller said.
    Publicly reported earnings of foreign securities houses in
Japan for the half-year ended September 30, 1986, showed
Salomon Brothers Asia Ltd on top with profits of 1.7 billion
yen. Most other firms reported hefty gains over the year
before. But industry sources say the figures do not fully
reveal the costs of running an international brokerage in the
world's most expensive city.
    Salary packages with free housing for novice analysts
routinely run more than 100,000 dlrs a year. Miller, whose firm
had earnings of 1.4 billion yen for the half-year to September
1986, said costs for an operation strong enough to endure are
10 to 15 mln dlrs a year. "I'd be surprised if more than two or
three were making money if they honestly accounted for their
costs," he said.
    To bring commissions closer to world rates, the Finance
Ministry slashed fixed brokerage fees last year, especially on
large-lot deals. In a few years, all rates may be negotiated as
they are in New York and London, industry sources said.
    Since last October's Big Bang deregulation of London's
financial markets, at least half the equity trading deals there
have generated no commission income at all. Stockbroking firms
are unlikely to make money until some are forced out of
business, analysts said.
    The first foreign firms to set up here, especially the six
admitted as members in February 1986, have an advantage over
the latecomers, they said. The six are <Merrill Lynch Japan
Inc>, <Goldman Sachs International Corp>, <Morgan Stanley
International Inc>, <Vickers Da Costa Ltd>, <Jardine Fleming
Securities Ltd> and <S.G. Warburg and Co (Japan) Ltd>.
    The memberships, which cost about five mln dlrs, allow
firms to execute their own trades and, unlike houses with
branch status, avoid paying away 27 pct of their commissions to
have member firms place trades.
    Members can also communicate instantly with the exchange
floor, a vital source of information in a market that tends to
follow the leader. Sources said seven to 10 more seats on the
exchange are likely to open up sometime in 1988.
    For non-member firms, wrestling away market share from
tenacious Japanese and foreign firms is costly and intangibles
sometimes prove even more important than exchange membership.
    "Your name is better known if you're a member of the right
club," Miller said. "It's easier to hire ... New people."
    To inaugurate its Japan operation, <SBCI Securities (Asia)
Ltd> flew out the Basel Ballet last January for receptions in
Tokyo and Osaka. The firm, 50 pct owned by <Swiss Bank Corp>,
gave guests gifts of Swiss chocolates and Swatch watches.
    "It's expensive, but a party like that is a token of the
serious way we regard our development in Tokyo," SBCI's Tokyo
branch manager Gregory Shenkman said.
    To establish its position quickly, SBCI hired a 26-strong
research unit from <W.I. Carr (Overseas) Ltd>'s Tokyo office.
    "I was very lucky," Shenkman said. "I was anticipating a
considerable struggle to organically develop a research team.
    "I am not particularly optimistic for the prospects in the
Japanese equity market for continental European banks who have
little experience in equities outside their domestic equity
market," he said.
    But the prospect of closing down operations may be worse.
    "One would be ill-advised to open here and close, and then
decide to open again two or three years later. I'm not sure the
Japansese community would respond well to that sort of
attitude," he said.
 REUTER
