Economic Growth, Financial Markets in Japan, and Emerging Markets - George Soros (2002)

Japan's securities markets increased their volume of dealings rapidly during the late 1980s, led by Japan's rapidly expanding securities firms. There were three categories of securities companies in Japan, the first consisting of the "Big Four" securities houses (among the six largest such firms in the world): Nomura, Daiwa, Nikko, and Yamaichi. The Big Four played a key role in international financial transactions and were members of the New York Stock Exchange. Nomura was the world's largest single securities firm; its net capital, in excess of US$10 billion in 1986, exceeded that of Merrill Lynch, Salomon Brothers, and Shearson Lehman combined. In 1986, Nomura became the first Japanese member of the London Stock Exchange. Nomura and Daiwa were primary dealers in the United States Treasury bond market. The second tier of securities firms contained ten medium-sized firms. The third tier consisted of all the smaller securities firms registered in Japan. Many of these smaller firms were affiliates of the Big Four, while some were affiliated with banks. In 1986 eighty-three of the smaller firms were members of the Tokyo Securities and Stock Exchange. Japan's securities firms derived most of their income from brokerage fees, equity and bond trading, underwriting, and dealing. Other services included the administration of trusts. In the late 1980s, a number of foreign securities firms, including Salomon Brothers and Merrill Lynch, became players in Japan's financial world.
Japanese insurance companies became important leaders in international finance in the late 1980s. More than 90% of the population owned life insurance and the amount held per person was at least 50% greater than in the United States. Many Japanese used insurance companies as savings vehicles. Insurance companies' assets grew at a rate of more than 20% per year in the late 1980s, reaching nearly US$694 billion in 1988. The life insurance companies moved heavily into foreign investments as deregulation allowed them to do so and as their resources increased through the spread of fully funded pension funds. These assets permitted the companies to become major players in international money markets. Nippon Life Insurance Company, the world's largest insurance firm, was reportedly the biggest single holder of United States Treasury securities in 1989.

The Tokyo Securities and Stock Exchange became the largest in the world in 1988, in terms of the combined market value of outstanding shares and capitalization, while the Osaka Stock Exchange ranked third after those of Tokyo and New York. Although there are eight stock exchanges in Japan, the Tokyo Securities and Stock Exchange represented 83% of the nation's total equity in 1988. Of the 1,848 publicly traded domestic companies in Japan at the end of 1986, about 80% were listed on the Tokyo Securities and Stock Exchange.
Two developments in the late 1980s helped in the rapid expansion of the Tokyo Securities and Stock Exchange. The first was a change in the financing of company operations. Traditionally large firms obtained funding through bank loans rather than capital markets, but in the late 1980s they began to rely more on direct financing. The second development came in 1986 when the Tokyo exchange permitted non-Japanese brokerage firms to become members for the first time. By 1988 the exchange had sixteen foreign members. The Tokyo Securities and Stock Exchange had 124 member companies in 1990. In 1990, five types of securities were traded on the Tokyo exchange: stocks, bonds, investment trusts, rights, and warrants alone.
Japan's stock market dealings exploded in the 1980s, with increased trading volume and rapidly rising stock prices. The trading recorded by the Nikkei 225 stock average, compiled by the Nihon Keizai Shimbun (Japan Economic Daily), grew from 6,850 in October 1982 to nearly 39,000 in early 1990. During one six-month period in 1986, total trade volume on the Tokyo exchange increased by 250% with wild swings in the Nikkei. After the plunge of the New York Stock Exchange in October 1987, the Tokyo average dropped by 15%, but there was a sharp recovery by early 1988. This was the height of the Japanese asset price bubble, which collapsed in the year 1990, and was followed by the lost decade.

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