The House of Nomura The Rise to Supremacy of the World's Most Powerful Company

by Al Alletzhauser

The Rise to Supremacy of the World's Most Powerful Company - the Inside Story of the Legendary Japanese Dynasty

Genres: Business, History, Finance, Japan, Nonfiction, Economics, Banking

343 pages, Hardcover

First published January 1, 1990

Reviews

[Mike · Rating 3 out of 5]

A surprisingly good read telling the history of how the Nomura family grew from the latter 1800's into a powerful zaibatsu financial empire, was dismantled after WWII and then rose again to take its place in the global financial world. Written in 1990, when Japan was a giant striding the globe, everyone thought they would rule world commerce. How things have changed since then. But it was still a good read to that point.

The author starts out describing the rise of "trading" in the Osaka rice markets from the 1600's. A fascinating journey through the prewar era brings a few powerful families to the fore. World War II is briefly described but not much time is spent except to tell how the empire is dismantled.

After WWII, the Japanese market goes on pretty much a 45 year bull run. Chaotic, poor, crazy at first, the Japanese slowly get their act together and rise from the ashes. The stories reveal how unique the Japanese are in their approach to building and defending wealth. Corruption and cooperation between the media, government and the banks/brokerage houses/industry abound.

The author does introduce you to many characters and sometimes it is hard to keep track. But still an interesting story and cast of players. One of my "12 oldest books on the shelf" challenge turns out good.

[N · Rating 4 out of 5]

I just read Alletzhauser's House of Nomura (1990, out of print) after an old Japan hand recommended it to me. Highly recommend for anyone who wants to understand the history of Japanese business/markets from the Meiji through Showa eras from the perspective of an outsider turned insider. My summary/review/editorializing of the pre-WW2 era (skip to Four Big Bets section for the more market relevant tidbits).

Since the book released in 1990, the author portrays Nomura as omnipotent and triumphant (it was Japan's most profitable corporation in 1987) in a reverential tone that would seem absurd today. Of course with the benefit of hindsight, we know that Nomura was both partly lucky and partly a beneficiary of circumstances not just in the 1980's bubble but also at its very founding.
Perhaps more interesting is the glimpse into the business world of Meiji, Taisho, and Showa before WWII. What's clear is that Japan had Prussian institutions but an Anglo approach to corporate governance. State capitalism produced large conglomerated oligarchies (zaibatsus) that were run for the interest of shareholders. Behavior typically thought of today as "Anglo-styled capitalism": hostile takeovers, confrontation, shareholder preeminence, creative destruction, cutthroat competition, mobility etc. was a feature of Japanese corporate life. A few elite families dominated pre-WW2 and financial disparities wholly reflected this reality.

After the War, this entirely shifted to an egalitarian culture with corporations operated for the benefit of managers and labor rather than shareholders. Nomura was slightly exceptional for its more entrepreneurial spirit and aggressive culture, but not to the extent most corporations were before the War. The mandarin class gained even more power in this new system so political connections mattered even more after the War.

Mercantile Osaka

In the late Tokugawa (1603 – 1868) and early Meiji (1868 – 1912) eras, Osaka was the center of commerce in Japan whereas Edo (Tokyo), the seat of political power, was the much resented "kanemushi" (money-eating bug). Osaka was host to the world's first futures exchange, Dojima, which traded rice. Money exchanging became the most important, far dwarfing the stock exchange, as Osaka ran on a silver standard and Tokyo on the gold standard. The author points out that Osakans still greet each other with the phrase mokari makka, which loosely translates to "how's business" (though my Osaka friends inform me that this phrase is quite antiquated and fallen into disuse).

Money Changers

In this environment Nomura Tokushichi I (1850 - ?), the illegitimate son of a samurai and a domestic worker, inherited a prosperous money changing shop from his adoptive father. The Japanese, then as even today, regarded money changing as an occupation with low social status , the lowest rung of a class one notch above the untouchables (hierarchy: nobles > samurai > farmers > artisans > merchants > outcasts). However, by the end of the Tokugawa Era, many impoverished noble families had resorted to mercantile activities while the wealthy merchant class exerted tremendous power over the indebted nobles. Tokushichi I became comfortably wealthy and played the part of J.S. Morgan (1813-1890) to his more adventurous son J.P. Morgan (1837-1913)…though with much lower social standing and dominance.

Meiji Restoration

With a new national bimetallic currency and the abolition of feudalism, the Meiji Restoration gradually made money changing obsolete. The Meiji government legalized individual private land ownership and privatized large state-owned businesses. Adopting the centralized Prussian economic model, Japan largely relied on direct finance via banks to allocate capital. However, the formation of companies still required equity issuance, which gave birth to a burgeoning but largely backwater equity market. In Osaka, the stock exchange in Kitahama (in close proximity to the Dojima rice exchange) was open for two short periods a month. The massive bull market of the Meiji era led to the formation of 155 stock exchanges by 1897 of which the Osaka Securities Exchange was one of the largest.

Tokushichi II

Tokushichi I bestowed to Tokushichi II (1878-1945) the benefit of a modest fortune and excellent timing. Like the so-called American robber barons (mostly born in the 1830s), Tokushichi's lifespan happened to align perfectly with crucial events of the Meiji and Taisho eras in relation to equity investing. Unlike his conservative father, the young Nomura Tokushichi II was an inveterate gambler and spendthrift. Tokushichi II's father had to bail him out twice: first when as an apprentice Tokushichi II stole from his employer to speculate in the stock market (and lost) and second when he had a social obligation to indemnify a client who had lost money on his recommendation.

Four Big Bets

Bet 1: Having witnessed the bullish effect of the First Sino-Japanese War (1894-1895) on the stock market, Tokushichi II convinced his father to let him plow half of the family's net worth into a massive expansion of the stock brokerage operation once the Russo-Japanese War broke in 1904. As the stock market rallied as predicted, the gamble paid off and Nomura fully transitioned from a money changer to a stock brokerage.

Bet 2: In 1905, Tokushichi II bet big again when negative rumors circled his brother-in-law's textile business. After investigating the business and finding that the order books were full with wartime orders for uniforms, Tokushichi II accumulated shares at ¥20. Tokushichi II cornered the market, forced a short squeeze, and sent the price to ¥100. The paper profit (¥20,000, then the wages in the lifetime of an average Osakan) equaled the entire original capital invested a year ago to expand the brokerage. After this coup, Tokushichi hired a journalist and moles in trading companies to gather order flow and shipping volume information.

Bet 3: Tokushichi II's bullish bets paid off massively in the 1906 bubble. Seeing a parallel between the Russo-Japanese War and the Sino-Japanese War (which preceded a large bear market), Tokushichi II waited for other major dealers to become net sellers before selling most of his stocks. The determined risk-taker, Tokushichi II went short, but the market kept rising. By January 1907, Tokushichi II, teetering on bankruptcy, sought and received an emergency loan to cover margin calls from a leading Osaka bank by bribing the local branch manager with a senior position at Nomura. The market turned in mid-January 1907 and lost 88% of its value by the end of the year (though the author doesn't make a clear connection to the Panic of 1907, which likely bailed out Tokushichi II). At 28, Nomura Tokushichi II was worth ¥5 million and became a celebrity in the financial community.

Bet 4: With the arrival of WWI, the Bank of England raised the discount rate from 3 to 10%, which precipitated a financial crisis in Japan. Japanese banks called in loans to speculators and brokerages, which in turn sent the equity market into a nosedive and bankrupted a large swath of the financial service sector. Nomura survived this episode in part because at that time it was mostly in the business of earning commissions rather than trading for the house.

Though by now most Japanese speculators understood that war was profitable for the listed corporations, most didn't think that a European war would mean anything for Japan. Tokushichi II speculated that WWI would be bullish for Japanese exporters based on the reports of shortages in Europe. His younger brother, studying in England, sent wireless reports that beat the Japanese newspapers and contained far more objective and accurate information. He also had access to intelligence in the Mitsui House trading empire, which gave Tokushichi II an edge over other speculators. While local Japanese papers gave the impression that the War would end in the winter of 1916, better information directly from his brother in Britain persuaded Tokushichi II to buy the dip that accompanied expectations of peace. The bet paid off as the war dragged on, which augmented Nomura Tokushichi II's already considerable fortune and cemented Nomura's standing as the top/surviving broker in Osaka.

Jesse Livermore

Tokushichi II's story bears remarkable similarity to Jesse Livermore's (subject of Reminiscences of a Stock Operator, 1923). Tokushichi II (1878-1945) was born a year after Livermore and died naturally five years after the latter's suicide. Both had a natural attraction to bucket shops in their youth, possessed high tolerance for risk that resulted in multiple failures, learned early that the stock market was prone to manipulations, and profited from their understanding of war's influence on economic cycles. Both made and almost lost their early fortunes in the Panic of 1907 and made their second fortune during WWI.

Perhaps the key difference between the two men was that Tokushichi II became a big fish in a small pond as a first mover in a nascent market while Livermore was always a minnow relative to the whales who had created their fortunes decades earlier. Tokushichi II used his early winnings to buy social status (eventually elevated to House of Peers in 1928 and repeatedly asked to become Minister of Finance in the 1930's) and ingratiate himself with the business and political elites. He built a network that produced valuable inside and early information. Conversely, Livermore seemed to hurt himself when trading on his "inside information" since he was never truly a member of the business elite himself. While Nomura Tokushichi II earned his fortune from imputing information and later rent seeking, Livermore had to rely more on his technical trading skills.

Nomura Zaibatsu

Once Nomura Tokushichi II exhausted the easy opportunities from stock speculation, he parlayed his fortune into the more stable business of brokering, which became the basis of a fledging pre-WWII zaibatsu with more socially respectable business interests: primarily a bank and a rubber plantation in Borneo. This required him to concentrate more on political protection and opportunism.

The Nomura group never truly achieved the same status accorded to the great zaibatsu merchant houses of Mitsui, Mitsubishi, Sumitomo, or Yasuda. Within Japan, Nomura never earned the same cache or respectability that leading investment houses enjoyed in the US. This may be in part because of its roots in the rough and tumble world of retail brokering (rather than genteel corporate brokering), the strong cultural distaste for seemingly parasitic businesses that deal with secondary markets, and the subordinated role of equities and bonds to bank lending.

[Paul Fulcher · Rating 3 out of 5]

Interesting account of the history of Nomura.

The first half tells the history of the Nomura family and Group up until the end of the Second World War. The author labels this as an authorised family history and as such the tone is respectful, perhaps overly so at times, but with lots of interesting details and as well as telling Nomura's story it provides a fascinating insight into the creation of the securities and stock-broking industry in Japan from the late 19th Century.

There is a distinct change of tone in the second half of the book, which is an unauthorised history of Nomura Securities post WWII, when the firm was no longer owned by the family.

Perhaps the best part of the book tells of how Nomura - and the other giant zaibatsu - were broken-up at the behest of the occupying US administration, or rather the tale of how in reality they weren't really broken up at all with family-owned firms replaced by a spider's webs of cross-holdings between interconnected Group companies.

My main criticism of the book perhaps is unfair, as it is really a result of reading it almost 25 years after it was published in 1990. The last quarter of the book provides a very detailed account of Nomura in the years 1985-1989: I'm sure this level of detail was interesting at the time because the events were recent and many of the characters involved familiar to the reader, but I suspect were the book revised today much of this material would be significantly condensed. The one exception would be the introduction to the book - a chapter billed "The Day Nomura Helped Save the World" where the author claims that Nomura almost single-handedly turned round the world's stock markets post the October 1987 crash.

And the book also suffers from the most common failure of many business books - they are usually written at a time of maximum hubris - indeed one is tempted to believe that a strategy of selling stocks of companies featured in flattering books, magazine articles and business-school case studies would prove rather profitable.

The book describes itself as about "the world's most powerful company" and finishes on 6 November 1989 with the Nikkei index at 36000 and Japanese trade officials berating the US as to the inferiority of the American financial system. The Nikkei was to peak at almost 39000 one month later - and then to march on a firmly downwards path for the next 13 years, eventually losing 80% of it's value. Even today the market is almost 60% down from the level when the book was written, albeit with hope that Abenomics may end the two+ "lost decades".

[Max Bolingbroke · Rating 4 out of 5]

Interesting insights into Japanese business culture 1900-1980. Some random points that jumped out at me:

- A lot of the book revolves around prototypically Japanese themes:
* Seniority: you have to do what your seniors ask you to even it involves enormous personal sacrifice. At one point a Nomura employee is commanded to leave Japan "forever" to build the brokerage business in the US.
* Status and the quest for higher status. e.g. for Nomura Tokushichi II, this meant expanding his father's moneychanging business into the higher-status brokerage area, and later on this means Nomura evolving into a fully-fledged zaibatsu.
* Ossified corporate culture that emphasises fanatical hard work at the lower levels (salarymen are bunked together in spartan accommodation, and then work crazy hours with little equipment to hawk stock to the public) and "padded expense accounts, pretty secretaries" and a generally cushy life for those lucky enough to rise to senior management.
- A lot of insider trading is going on, particularly to benefit powerful politicians and corporate leaders. Corporations would essentially bribe politicians with their own stock to ensure a favourable regulatory environment.
- Corporations are explicitly run for the benefit of their employees rather than shareholders
- Highly profitable "greenmailing" was very prevalent in the 1980s
- Insurance companies and banks were used by the zaibatsu as sources of money with which to gamble on the stock market -- little thought was seemingly given to protecting the interests of depositors/policy holders
- Failed companies would be repeatedly bailed out (cf Varoufakis' "extend and pretend") by the government or related entities to avoid the effects of a corporate failure. Moral hazard obviously abounds..
- After Japan was conquered in WW2, MacArthur tried to disable the zaibatsu. This was an absolutely impossible task given the complexity of the companies, the fact that it could only be achieved by a Japanese speaker with great familiarity with the web of people and companies that comprised the zaibatsu, who would naturally have a great deal of sympathy for the people whose lives he was destroying. The man chosen to do this, Iwajiro Noda, used a variety of ingenious schemes to avoid distributing ownership of the zaibatsu to the public and avoid confiscating too much of the wealth of the Japanese aristocracy who owned them.

[Burt Schoeppe · Rating 3 out of 5]

An uneven book.

I first moved to Japan seven years after this book was published.

Much appears to have changed in those seven years. But that isn't surprising as Japan can change very quickly thanks to the homogeneity of the people.

Some explanation of Japanese cultural phenomena were definitely off.

The early history of the Japanese stock market and the firm was somewhat interesting.

[Cheryl · Rating 4 out of 5]

A historical, almost sensationalized recount of the Nomura dynasty. Leans sympathetic to the Nomuras, despite actions of dubious morality: insider trading, corruption, nepotism, etc… Regardless, a thorough read.

[Long · Rating 3 out of 5]

Interesting enough account in newspaper style. Outsider telling basic facts but lacks personal touch of proper biographies.

[Becca · Rating 3 out of 5]

***Nomura A03*****

[Markku Tauriainen · Rating 4 out of 5]

The House of Nomura - the book is very book and central if you want enlarge your business skills and wareness of the business generally. NOMURA means quota, which sales men had to fullfill daily.

At NOMURA there is a saying - every call is a blod stream to hearth of business, so if phone rings twice you are late - business men are teached to make 30 secundo phone calls, where they smile to opponent and make a booking for face to face meeting. Very simplyfied, strong way of makinf sales 1-10 law and much more.

I read this opus at christmas 1990 and now again at 2011 after published my 1st ever business book INSPIRE ME - Inspire Yourself http://amzn.to/inspire-me-book The book is still marvelous, and still on time. One of the best books ever to be read - if interested on business. Follow my recommendation eighter it is INSPIRE ME or The House of NOMURA - you will benefit a lot - by reading, can catch the wisdom http://about.me/markkutauriainen

[Steve · Rating 5 out of 5]

Interesting read

[Fred Arshoff · Rating 5 out of 5]

Very informative book

[Ray · Rating 3 out of 5]

Interesting enough account in newspaper style. Outsider telling basic facts but lacks personal touch of proper biographies.