2012 CEO Message

To our share holders and customers:

Winston Churchill once said, "Democracy is the worst form of government except all the others that have been tried". We can maybe switch the word “democracy” to “capitalism”. The world is heading in a direction of modifying capitalism, and such trend seems to be rampant especially in Japan.

I simply believe that the world can be divided into two sectors in terms of risk taking, namely individuals and nations. “Capitalism” is the system where individuals take risks, while “Socialism” is the system where nations take risks. This is of course an exaggeration. In fact, the real world consists of the combination of the two systems. However, I am particularly concerned that Japan is rapidly losing the balance of the two, that is the current Japanese government is steering the country toward the “Socialism”. Individuals may be able to temporarily reduce their load by shifting risk to nations, but instead, they end up losing their freedom. The idea that a nation, one of the largest organizations in the world, actually bears responsibility for its citizens is a mere illusion. It will finally backfire on them.

The last year was a painful, heart-aching year. The Fukushima Nuclear Accident, a human-generated disaster, was a good proof of it. Many disaster victims including the Tsunami survivors have been making efforts to reconstruct their communities on their own while containing their unfocused anger. The Japanese citizens confronted similar difficulties in the aftermath of the country’s defeat in the World War II, but the “citizens” played a primary role in the reconstruction of Japan. This demonstrates that the self-help and autonomous efforts by “citizens” are the driving force for the country's recovery and growth. As the history shows, any non-autonomous systems should be minimal or the nation stops growing.

Have you ever heard of “Ressentiment”? This is a philosophical term introduced by Kierkegaard, a Danish philosopher. According to Wikipedia, the term is “a sense of hostility directed at that which one identifies as the cause of one's frustration, that is, an assignment of blame for one's frustration, mostly directed at the strong from the weak…”. In the view of Nietzsche, people with “Ressentiment” are those who are restricted from taking actions for some reasons and thus compensate for their feelings with imaginary revenge…” Although there may be many interpretations of this, I believe everyone has this Ressentiment. The strong and the weak are like the winners and losers of “Rock, Paper, Scissors”. The positions as the strong and the weak are switched often for everyone. The problem is many journalists misunderstand that it is their mission to fuel the Ressentiment everyone has. Of course there are a number of journalists who stay true to a spirit of journalism, but I think the problem is deep-rooted in that these agitators are not aware they are seized with “Ressentiment.”

Basically, the “citizens” are too sensible to be driven by such “Ressentiment”. However, noises raised by “silent minorities” are often interpreted as “public opinions”, giving rise to what we call “populism” and politicians tend to be swayed by the noises. The people in Japan, especially those making autonomous efforts, must have hoped that the political parties or politicians that may be described as “the representatives for Ressentiment” are given a hard blow.

I heard from one of my acquaintances who lived many years in UK that one notable public figure in the country said, "I cannot help being envious of Japan. While the rest of the world is caught up in “Ressentiment” a significant majority of Japanese people first question their responsibilities and hardly pass the blame to others. This was especially notable in the disastrous situations after the Great East Japan Earthquake and Fukushima Nuclear Accident. If we are hit by similar disasters, many protesters against the government will easily turn into mobs. English people are fundamentally individualistic, but they are spoilt, undisciplined, and greedy and there is an overwhelming culture of “entitlement”. They are wholly dependent on the government. Japanese people are far different, though this is one of the reasons why the country lacks talented leaders including political leaders. In my view, Japanese do not expect much from leadership. In fact, they act autonomously as an individual but act non-autonomously as a member of an organization. All the irrationalities seen all across Japan may be attributed to the lack of talented leaders. Japanese people who endure the irrationalities without complaining look like martyrs. Compared to its shallow politicians, the general public is relatively competent. Japan must be a typical 21st Century nation. The country was first infected by the disease for advanced country and has continued to struggle with the disease for 20 years. In this sense, Japan is a front runner for global challenges. They should not underestimate their country." I’ m not sure whether he is praising or dispraising, but he sounds sarcastic like many of English people but understands the true nature of Japan.

After the World War II, the US-USSR Cold War continued for many years. Since the 1990s when the Berlin Wall collapsed, the communism / socialism self-destructed and almost all socialist countries including China have shifted to the market-oriented economy / capitalism, bringing a great victory to the West regime led by US calling for democracy / liberalism / capitalism. In fact, the Pax Americana had been robust until recently. However, since the global financial crisis triggered by the bankruptcy of Lehman Brothers, the US-style capitalism, which was identified as a main pillar for the prosperity of Western nations, has revealed its structural fragility and has been increasingly chaotic. Recently, the trend is quite apparent in Europe, particularly in the Euro zone. At the beginning of the last year, almost no experts predicted the collapse of Euro. As far as the market is concerned, the “collapse of Euro” is already within the scope of the assumptions. The magma for a new crisis is growing day by day; we should brace for magma eruption this year. We have got too accustomed to news of economic crisis; the 2010s may be later described as one of the most difficult eras like the “Era of Great Depression in 1930s”.

A period as long as the average human life-span has passed since the Great Depression in 1930s. History is created by people and people have learned a lot from the past experiences. In fact, one of the most significant reforms since the Great Depression is that the central bank system, which did not function properly back then, has been increasingly sophisticated. While the trend that individuals try to temporarily reduce their load by shifting risk to nations seems to be rampant globally, the worst defect of the Euro zone, namely the "single-winged" financial function flying without fiscal function, is now posing a big threat to the capitalism. If we fail to find solutions, the Euro crisis will hit hard the economy of the world including Japan just like “a huge meteorite fall ”. Since economic events are linked globally today, unlike in the era of the Great Depression, we need to get prepared for a new series of meteorites which are unpredictable for anyone. As I mentioned in the beginning, however, a shift from Capitalism to Socialism cannot be a solution, as this is nothing but the Ressentiment of the entire society. The phenomenon looks nothing but a “huge meteorite” to me.

In ancient times, dinosaurs became extinct due to “a huge meteorite” that hit the earth, but cockroaches survived. It is believed that the difference in their “adaptability to environment” determined their destinies. Everything does not become extinct in an environmental catastrophe; only the nations that failed to adapt to a catastrophic situation become extinct. The same applies to enterprises. However, they are just organizations. There is no reason to believe that organizations and individuals have to share the same destiny. Individuals that have a high level of adaptability to environments can avert a catastrophic situation by establishing a new organization, for example. Any organization is just a group of individuals. The human history is filled with catastrophic events. However, the history is the result of individual decisions and actions; people can learn from and change the history. Humans are, of course, social animals. Individuals are limited in power and influenced by their destinies, but it is also true that those who are willing to adapt to changing social needs can significantly change their destinies.

I said organizations and individuals were different in nature. In this context, as the president &CEO and an individual committed to the management of Matsui Securities, I have been exploring the optimum measures to “adapt to environments”. When I was looking for a fundamental principle, one of my acquaintances told me about a principle called "Occam's razor." In short, it means that fundamental theories can be identified by shaving away unnecessary assumptions. This is quite similar concept of “Zabo”, I quoted as a Zen concept at my message to shareholders and customers in the past. (“Zabo” means “To embrace something new, whatever it is, you have to abandon old things. New things can only be absorbed when you have created vacancy. Therefore, do not hesitate to discard old things.”) It gave me the excellent insight since I believe that streamlining is the most important practice in the management of a company. When I heard the story about Occam's razor, I instinctively replied, "Well, cockroaches are simple creatures. I think the most important thing in adapting to environments is to become slimmer and lighter by trimming the fat off." I still think the idea is not bad. A philosophy can be meaningful only when it is put into action. The most important thing is to make specific plans based on the principle and execute them.

At the press briefing on the quarterly financial results about two years ago, I told the audience, "we should brace for a possibility that the daily trading value in the three exchanges constantly fall below 1 trillion yen, from the current level of 1.5 trillion yen. Many say that the markets have reached the very bottom, but I've learned from the experiences since the collapse of the bubble 20 years ago that such optimistic predictions do not pan out very often. I requested our employees to make provisions so that the company remains profitable even if the daily trading value declines to as low as 0.5 trillion yen. Diversification of business will not work today as this will only increase costs and losses in times of deflationary economy. So, our mission is to make maximum efforts to eliminate unnecessary costs."

Back then, the media reported that the idea of daily trading value falling below 1 trillion was way too pessimistic, but it unfortunately turned into reality. In fact, the daily trading value has declined further to 0.5 trillion yen since the end of 2011. The markets are open but inactive. Matsui Securities has remained positive financial results partially due to the contribution of net interest income under the current level of the margin balance which exceeds 1 trillion yen in the whole market despite the daily trading value as low as 0.5 trillion yen. However, if this situation prolongs, the margin balance will decrease gradually and even Matsui Securities can fall into the red for the first time since its listing on the Tokyo Stock Exchange 10 years ago. No doubt the same applies to our rivals. Diversification should be a drag on business performance. In times of deflationary economy, increasing cost can be fatal.

Last year, we launched the Real Time Gross Settlement (RTGS) service for margin transaction and I declared that I have an intension to destroy the business I created. We have launched the service just recently, but the trading volume has been limited due to liquidity issues as we initially expected. Currently, we consider implementing drastic measures. We cannot disclose details yet as it will take a few months before implementing these measures as they are drastic, not just a simple reform plan.

For businesses other than the equity business, we commit to a “slash-and-burn method of cultivation” in intensifying competition with rival companies. In fact, we significantly lowered our commission for futures trading last year. If our rivals follow us, we will further lower it. The online FX trading business pioneered by Matsui Securities will no longer generate profit due to accelerated fierce competition. We would like to launch the investment trust business if we can have the chance to fundamentally reform the scheme which is currently sales-oriented. I believe that the scheme is outdated and the investment trust business should be production-oriented. The scheme where the distribution companies receive extortionate trust fees from the investors is unacceptable for me. It would be acceptable if face-to-face distributors that reasonably bear personnel expenses for consultation receive such fees, but online distributors should have a totally different commission system. They will not be compensated for by no-load (no sales commissions). I believe ETF (Exchange Traded Funds) is the ideal form of investment trusts in Japan.

Ihara Saikaku, an old Japanese poet and writer approximately 400 years ago, explains in one of his works titled “Nihon Eitai-gura” that cost-cutting can be saved a little, pursuit of economic interests can be paid more, timely withdrawal can be deserved much more than these, moreover the maximum reward can be derived by being selfless toward its own business, though I think the order of the first two should be reversed in times of deflationary economy. Anyway, I think the most important action in the face of a drastic change is “timely withdrawal”. Retail customers constantly change their behaviors in line with the changes of the times. Going forward, the business will no longer be differentiated only by the levels of commissions or other minor changes like the introduction of new trading tools or applications. We are striving to promote our strategy to build a unique brand called “Matsui for Your smart phone”. We are willing to invest in the development of the IT system, but do not consider this as the fundamental initiative measure for differentiation. The RTGS service for margin transaction is also the result of our “timely withdrawal” from the commission-based business and our efforts to transform our business into settlement/interest-oriented model. It is essential for differentiation to fundamentally transform the conventional business model and to timely withdraw the business which is expected to be limited growth potential in the future.

While the focus of exchange functions has shifted from conventional matching (intermediary) to settlement, categories such as cash and derivatives have become less important. The functions of brokers, of course, will change going forward accordingly. This means we cannot make money just by offering brokerage services. Professional skills and expertise are required to respond to such changes. The philosophy to underpin a new business model or what Saikaku called “being selfless” is more important. It is a depthful word, which can be interpreted literally, but I myself have interpreted the word as “thinking of the business in the context of social benefits” or “entrepreneurship”. It's the general public who decides whether this deserves the maximum reward or not. The history of Matsui Securities for nearly 100 years since inception in 1918 is built on an accumulation of valuable experiences.

I have never considered Matsui Securities as an IT firm. This does not mean that I undervalue IT firms, but I dare say the IT industry did not mature in Japan, unlike in US, due to the lack of this “being selfless”. If you consider the IT business as a means to pursue economic interests, the industry will never develop fully, which must have disappointed Saikaku if he was alive today.

I'm now very much inspired by the great wisdoms of our ancestors. I would like to commit myself to the management of the company primarily through self-help and autonomous efforts based on the positive interpretation of the words of the English gentleman I mentioned above. Your continued support is greatly appreciated.

Michio Matsui
President & CEO
Matsui Securities Co.,Ltd.