Not So Slowly, Japanese Reforms Take Shape

Institutional Investor’s 2017 All-Japan Research Team talks governance reforms, forex, and Trump.


In mid-April, Japanese Prime Minister Shinzo Abe appointed two new members to the Bank of Japan policy board: Goshi Kataoka, an economist at Mitsubishi UFJ Research & Consulting, and Hitoshi Suzuki, an executive at the Bank of Tokyo-Mitsubishi UFJ. If they are approved, they would round out a nine-member board that supports monetary stimulus, an integral part of Abe’s three-pronged approach to reviving Japan’s economy, dubbed “Abenomics.”

The “third arrow” of Prime Minister Abe’s efforts includes corporate governance reform, such as diversifying the makeup of corporate boards to include outside directors. Athough many parts of the campaign to return Japan to 2 percent inflation have had limited success, some analysts see changes taking shape.

“We’ve seen more and more Japanese companies improving shareholder return, especially through share buybacks and dividends,” says Katsushi Saito, head of Japan equity research at Nomura. “Also, profitability indicators like ROE have become [key performance indicators] of more companies than before.”

Nomura and Mizuho Securities Group tie for first place in the first-ever team-based ranking of Institutional Investor’s All-Japan Research Team survey. More than 1,100 investors who collectively manage $1.5 trillion in Japanese equities and $1 trillion in Japanese fixed-income voted for the top analysts in 27 industry sectors, five macro disciplines, and two new fixed-income sectors. Participants voted for individual analysts, and the votes were combined to form a firm’s team ranking in each sector.

In the individual-analyst ranking, Mizuho tops the leaderboard for the fourth consecutive year, with 32 total team positions, 11 of which are first place. Nomura maintains second place with 29 total team positions, and SMBC Nikko Securities takes third with 25 positions.


The Trump Effect Extends Across the Pacific

Clients have been naturally concerned about the possible effects of Donald Trump’s presidency on the global markets, says Yohei Osade, Mizuho’s global head of Asian equity research, specifically on the yen-dollar exchange rate, which can affect corporate earnings.

“At Mizuho we revisit our forex assumptions every three months and, when necessary, adopt an agile approach to update our bottom-up analyst forecasts,” Osade says.

Hisashi Moriyama, head of Japanese equity research at J.P. Morgan, agrees that geopolitics has been a major focus for investors at this stage. “That said, underlying economic data continues to be supportive of a growth outlook,” he adds. “At J.P. Morgan we continue to focus on economic and corporate fundamentals, which [are] ultimately the sustainable driver for markets and share prices.” J.P. Morgan advances to sixth place in the analyst ranking, up from 11th last year. Over the past year, Moriyama says, the firm hired Ryota Sakagami, chief Japan equity research strategist, plus two new analysts covering banks and health care.

Improvements Still Needed

The sell side could improve by beginning to provide relative rankings of corporate transparency within sectors, as well as thoughts on how companies have changed over time, says one voter at a U.S.-based investment firm.

“Analysts have unparalleled perspective on how these companies have changed, but we usually only hear of results. We would like to hear about how corporate direction and priorities have changed,” the voter explains. (II keeps the identities of voters confidential unless instructed otherwise.)

Disclosure among Japanese firms is also improving in light of Prime Minister Abe’s reforms, says Takaaki Muramatsu, director of research at SMBC Nikko Securities, which took third place in the team-based ranking. He adds that “M&A and changes to companies’ business mix are also changing the definition of the traditional Japanese sectors.” SMBC analysts are having to collaborate more than ever as a result, Muramatsu says.

As disclosures continue to diversify, investors are also broadening their field of view, says Osade, becoming increasingly interested in longer-term corporate value and factors such as ESG.

“Overall, we are being forced to re-analyze the input/output equation, an endeavor that very much tests the mettle of equity analysts,” Osade says, noting that Mizuho remains focused on two key factors: underlying intrinsic value and clear communication with clients.