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Nomura has spent most of the past five years trying to break out of Japan. So it's ironic that the investment bank's best full-year results since 2007 were propelled by a revival at home. As with Japan's economic renaissance, however, investors' hopes are running ahead of reality.

In a quarter when Japan's Topix stock market index jumped 35 per cent, the country's biggest brokerage was always going to clean up. Revenue in Nomura's retail division in the first three months of 2013 was 50 per cent higher than in the same period of 2012 as investors snapped up stocks and mutual funds. Pretax profit almost trebled.

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Nomura's wholesale bank, too, had a domestic tinge. Revenue from Japan more than doubled from the same period of last year, and accounted for almost half the division's total income. In other parts of the world, business in the Americas held up best. Europe and the rest of Asia – the areas Nomura hoped to beef up when it snapped up parts of Lehman Brothers in 2008 – were the laggards.

Capital is a bright spot. Nomura's core Tier 1 capital ratio at the end of March was 11.7 per cent. Fully applying new Basel III capital rules reduces that to 10 per cent – still better than several larger rivals. Nomura's problem is generating a return on that capital. The bank's full-year return on equity was an unimpressive 4.9 per cent, which implies it is still destroying value.

Earnings should improve again in the coming year as Nomura gets the benefits of its $1-billion (U.S.) cost cutting program without the associated severance costs. Even so, it faces several potential risks. The most immediate worry is that Prime Minister Shinzo Abe's policies fail to deliver the hoped-for Japanese economic revival, or that his administration proves as short-lived as those of his many predecessors. Meanwhile, Nomura's fixed-income revenues depend on central bank money printing continuing to pump up the bond markets.

Nomura shares, which have more than doubled in value since Mr. Abe was elected in mid-December, now trade at roughly 1.3 times the bank's book value. That leaves precious little room for disappointment.

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