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Japan-Update

Stock rally buoys retail-oriented Japanese brokerages in first half

Fixed-income specialists hamstrung by low rates

TOKYO -- Japanese brokerages with strong retail operations performed well in the April-September half as domestic and U.S. equities soared while those tilted toward fixed-income trading struggled amid historically low interest rates.

Of the 21 brokerages that had reported earnings by Monday, 12 either logged higher net profit or returned to the black for the interim half.

Nomura Holdings said Monday that net profit climbed 1% from a year earlier to 108.7 billion yen ($958 million). Investors flocked to mutual funds focused on Indian equities, as well as low-risk balanced funds. The domestic retail segment more than doubled pretax profit from the year-earlier half.

Nomura's retail assets under management grew to a record 115 trillion yen at the end of September. The robust performance of retail operations helped to offset a struggling fixed-income segment.

Of the five biggest Japanese brokerages, SMBC Nikko Securities' bottom line rose by the most, increasing 31%. Aside from a lowered baseline from a relatively poor showing the previous year, an 18% surge in stock brokerage fees underpinned the big gain.

U.S. stock indexes, which have been hitting all-time highs, are also providing a crucial lift to brokerages on this side of the Pacific. Tokai Tokyo Financial Holdings saw operating revenue from overseas equities exceed that for domestic equities.

"Amid the trend called the fourth industrial revolution, there are numerous [U.S.] stocks that are attractive" to Japanese investors, said Tokai Tokyo Financial President Tateaki Ishida.

Amazon.com and Apple are becoming household names among Japanese retail investors. The turnover of international equities at Daiwa Securities Group reached a new record for a fiscal half. Brokerages are working to improve their ability to provide information on U.S. stocks. Transactions involving international equities provide fatter margins than their Japanese peers, meaning they make a sizable contribution to the brokerages' earnings.

Debt market blues

Investment houses that concentrate heavily on debt instruments ended up falling behind. Bond trading revenue fell sharply at Mizuho Securities, and net profit tumbled 87% to 17.1 billion yen.

"Because bond yields are at historic lows," customers have been less active in the bond market, said Atsushi Takahashi, executive managing director at Mizuho Securities.

Domestically, the Bank of Japan is guiding long-term interest rates to around zero, and U.S. long-dated yields have been low for some time. Investors around the globe have been shying away from bond transactions, leaving brokerages with depleted trading opportunities. The fixed-income segments at Nomura and Daiwa are also facing grim earnings environments.

Meanwhile, the Nikkei Stock Average topped 22,000 this month, reaching its highest in 21 years and three months. Although individuals have been busy dumping holdings and locking in profits, "There are indications funds lying in wait are searching for investment opportunities," said Takumi Kitamura, Nomura's chief financial officer.

(Nikkei)

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