Nomura: rates not retirements

Japan’s leading brokerage house has ceded control of its fortunes to the US. Nomura’s share price is highly correlated with the yield on 10-year US Treasuries. Since the end of 2013 both have essentially moved sideways. Nomura has decided to try something different to weaken the link: betting on small Japanese enterprises.

Nomura’s revenue was lower in the last financial year than in 2015, in part due to lower brokerage and trading revenues. Meanwhile, foreigners have made fortunes from Japan’s private equity bonanza. Nomura wants a piece of that action. On Wednesday, it announced the establishment of a merchant banking business with an initial upper investment limit of ¥100bn ($895m), focused initially on domestic small and medium-sized enterprises.

The venture is small. KKR alone closed a pan-Asia fund worth $9.3bn in June. And Nomura may well be late to the party. To be fair, the bank’s existing client relationships give the group an advantage in accessing deals. Retiring Japanese founder-bosses willing to sell may be one source of business. Nomura has seen the number of M&A-related inquiries from SMEs triple in the past year. The move may also provide future capital from which it can earn investment banking fees.

Nomura needs to take some action. Despite local equity prices touching 25-year highs, its operating profits have stagnated over the past three years. Its share price, too, has side-shuffled over that period. This move into private equity, if successful, will probably be the first of several such steps.

It will take time to bear fruit given the long-term nature of private equity investments. Shareholders are likely to wait a while for any normalisation of Japanese interest rates, too. That leaves investors in Nomura and other financials stocks — the sector is still among the top five in the Topix — watching the movements in the US yield curve and trying to divine the Federal Reserve’s future actions.

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