In 2001, according to a prediction in the most recent annual report of Daiwa Securities Co., there will be more futures trading in U.S. Treasury bonds in Tokyo than at the Chicago Board of Trade.
Daiwa also predicts that the Topix futures contract, based on about 1,100 top stocks traded on the Tokyo Stock Exchange, will be the preeminent stock-index futures contract in the world, far outstripping the Chicago
Mercantile Exchange`s popular S&P 500 contract.
Coming from any but a Japanese firm, the forecast would be foolhardy. But given Japan`s rich capital resources, its staying power and the culture`s obsessive attention to quality and service, Daiwa`s forecast is only fair warning.
Last year, with the dollar decline, Tokyo`s stock market surpassed the venerable New York Stock Exchange in market capitalization, measuring the number of shares registered to trade on the exchange times their price. The capitalization of Japan`s ”Big Four” brokerage houses-Nomura Securities Co., Daiwa, Nikko Securities Co. and Yamaichi Securities Co.-is vastly larger than that of the top U.S. houses, and Japanese firms already own pieces of some of the most prestigious names on Wall Street.
Thus, Daiwa`s seers see no reason why a Japanese financial futures exchange-which doesn`t even exist yet as a separate institution-won`t also reach the pinnacle. After all, they were trading rice futures in Osaka when Chicago was still a stinky, 18th Century swamp.
Japanese firms already have proven themselves world-class competitors in financial services in the United States by becoming a significant force in stock, bond and currency trading.
Three of the Big Four-Nomura, Daiwa and Nikko-already are among the elite firms that serve as primary dealers in the U.S. government bond market, and Yamaichi has applied for that status. Three major U.S. brokerage houses-Shearson Lehman Hutton Inc., Goldman, Sachs & Co. and PaineWebber Inc.-are owned in part by Japanese banks or insurance companies.
With some major developments just this year, Japanese firms also have indicated they plan to be big players in the hot merger and acquisition area: Sony Corp. bought CBS Records for $2 billion in January, and Bridgestone Corp. paid $2.6 billion for Firestone Tire and Rubber Co. in May. Then in July, the mighty Nomura, the largest securities house in the world, paid $100 million for a 20 percent stake in the newly formed merger firm of Wasserstein, Perella & Co.
Having thus established themselves on Wall Street, the Japanese are now expanding their efforts west to LaSalle Street.
The increased attention being paid to futures and options trading by Japanese houses is being prompted by continued deregulation of their home markets.
The country`s first financial future, a contract on the benchmark 10-year Japanese government bond, was established just three years ago. Average daily turnover of that contract, one of the most heavily traded in the world, already totals 8 trillion yen.
The ban that kept Japanese institutions from investing in foreign futures markets fell in May, 1987. Later this fall, individual investors also will be allowed to buy foreign futures.
Stock-index futures contracts based on the Tokyo and Osaka stock markets began trading this month.
And next year, Japan`s first separate financial futures exchange, the Tokyo Financial Futures Exchange, will open.
For much of the last three decades, the small American subsidiaries of Japanese brokerages concentrated mainly on selling U.S. stocks and bonds to Japanese investors. But their goal now clearly is to expand beyond traditional investments and beyond Japanese customers in the increasingly global market where futures and options play an integral part.
Japanese securities firms will be trying to build market share in Japan, the U.S., wherever they can find it. It is the same high-volume, low-cost strategy employed by Japanese car companies when they took on Detroit.
Toshio Mori, chairman of Nikko`s international unit, sees a three-legged global futures market developing, with Chicago dominant in dollar-denominated trading, Tokyo in yen-denominated instruments and London in Euro-denominated instruments. At least initially, that tidy demarcation may prevail because the Japanese will be new to the financial futures game and because of cultural differences.
A futures market can`t exist without speculators who offset those wishing to protect their investments, known as hedgers. But Mori said: ”Speculation is considered evil in Japan. The authorities don`t like it. The big institutions say they are hedging even when they are speculating.”
For that reason, Mori expects the ”depth of locals,” the traders who in Chicago provide the speculative liquidity necessary to fuel the market, will be lacking in Japan.
David J. Robin, who is developing the U.S. futures and options department for Yamaichi International (America) Inc., agreed. ”You`re not going to be able to transport the Chicago way of doing things to Japan,” he said. But conversely, he added, ”We`re not going to trade yen-bonds at the CBOT the way they do in Japan.”
The major Japanese firms are taking different approaches to developing their Chicago operations. Nomura, which became a presence in the merger and acquisition field by buying a stake in Wasserstein Perella, is negotiating to buy a controlling interest in a Chicago futures and options broker, GNP Commodities Inc.
The other three plan to build their own operations. ”This firm doesn`t buy. We build internally,” said Yamaichi`s Robin, who was hired from Morgan Stanley & Co.
Daiwa Securities America Inc. has hired John W. Stillwaggon, who has 25 years` experience in the U.S. futures industry, to develop its business. Daiwa is the first Japanese firm to obtain clearing privileges at both the Merc and the CBOT. ”We`re committed to being a major player, to go after market share,” said Stillwaggon.
All of the firms predict a bruising competition that goes way beyond Chicago. ”We`re not competing against other big Chicago firms,” said Robin. ”Our competition is the Nomuras and the Morgan Stanleys of the world.”
Stanford H. Brainerd, senior executive vice president of Yamaichi`s U.S. unit, sees a continued ”blurring of the nationality of securities firms” in which Japanese, British and American firms compete in all markets for clients around the world.
The real quality of that competition may become apparent next year. That is when the Tokyo Stock Exchange plans to introduce a contract that will directly challenge the CBOT`s U.S. Treasury Bond contract.
And that is also when the Merc and the CBOT may begin trading contracts based on the two recently introduced Japanese stock-index futures contracts. Both have applied to the Commodities Futures Trading Commission for regulatory permission to trade the contracts.
The Merc`s Japanese stock-index contract would be similar to a contract now traded on the Osaka Securities Exchange that is based on the Nikkei 225 index of stocks (roughly equivalent to the Dow Jones industrial average here), and the CBOT`s would be similar to the Tokyo Stock Exchange`s Topix contract. While Daiwa`s annual-report writers are predicting a dominant role for the Japanese markets as the new millenium begins, the flip side of that coin is that they see Japanese markets much more open than at present.
By 2001, they predict 1,000 foreign-company stocks will be traded on the Tokyo Stock Exchange (there are around 100 now). They also predict that the Japanese bond market will have thrown off its regulatory shackles to more closely resemble the wide-open U.S. system.
