Nomura Tops Japan Research Ranking for Fourth Year

From October through March the benchmark Nikkei 225 index bolted nearly 40 percent and logged its best back-to-back quarterly advances in more than 40 years. Not surprisingly, money managers around the world are taking a closer look at Japanese equities than they have in a long time, their interest buoyed in part by enthusiasm over the economic reform policies that newly installed Prime Minister Shinzo Abe has pledged to implement.

A key question on many investors' minds: Will this rally last? After all, even though Japan's economy has languished for decades, its stock market has notched some admirable annual gains since the Nikkei index closed at a record 38,916 on the final trading day of 1989. It soared 36.8 percent in 1999, 40.2 percent in 2005 and almost 23 percent in 2012 — but ended last year at 8,455.35, still down a whopping 78.3 percent from that peak. Is the current bull market strong enough to reclaim all of that lost ground, or is it just another short-lived uptick amid the generally downward trend of Japanese stocks?

Investors often put their questions to the sell side to help them determine the best ways to allocate their portfolios. Institutional Investor asked money managers that invest in Japan to indicate who provides the most helpful answers, and for a fourth year running, Nomura Securities Co. tops the All-Japan Research Team, our exclusive annual ranking of the country's best sell-side analysts. The firm's team position total drops by three, to 24; nonetheless, Nomura widens its lead over Bank of America Merrill Lynch, which returns in second place despite a loss of six spots, for a total of 18.

Mizuho Securities Group shoots from ninth place to share the third tier with UBS; each firm captures 15 positions. For Mizuho that's a gain of eight; for UBS, whose rank is unchanged, a loss of seven. Two firms share fifth place: SMBC Nikko Securities, which tied with Barclays for the No. 12 spot in 2012, adds nine spots, bringing its total to 14. Daiwa Securities Group rises one rung even though its total holds steady. These results reflect the opinions of nearly 900 individuals at 280 buy-side institutions that manage an estimated $791.75 billion in Japanese equities.

This year marks the 20th anniversary of the ranking. To commemorate this anniversary, II introduces the All-Japan Research Team Hall of Fame, which honors those analysts who have amassed at least ten first-place appearances.

Honorees include Mitsubishi UFJ Morgan Stanley Securities Co.'s Nobuyuki Saji, who is No. 1 in Economics for a 12th year in a row.

Saji is less optimistic than many market observers about the impact of the prime minister's emphasis on monetary easing and public spending. Yen depreciation drives up the cost of imported goods, he explains, and price increases drive down household real income. The trade deficit for such necessities as clothing, energy and food is currently about ¥32 trillion ($339.51 billion). This shortfall is largely offset by surpluses in other sectors, leaving Japan's net annual trade deficit at roughly ¥7 trillion. "So 10 percent yen depreciation causes those import costs to rise by ¥3.2 trillion, which will lead to higher living costs for Japan's aging population," Saji says.

Plus, the number of Japanese reaching retirement age is spiking. More than one in five citizens is 65 or older; by 2020 that ratio will climb to one in four. "They can be expected to start withdrawing money from bank accounts to make up the difference between their cost of living and their pensions," which could have dire consequences for financial institutions, he points out. "At the same time, [retirees'] medical expenses will increase because of age, and this will lead to an increase in government spending because Japan has universal coverage, so further fiscal expansion will lead to long-term interest rate hikes."

Hajime Kitano, who rises one rung to plant the J.P. Morgan flag atop the Equity Strategy sector, is also skeptical. "The biggest factor affecting the Japanese economy is the high cost of capital," he insists. "Through globalization, convergence of the cost of capital occurs worldwide. Japan has a low expected potential growth rate and suffers from a virtual tight-money policy, and the policies of the Abe administration will likely not solve this. Japanese companies should try to increase sales more than return on equity."

Others are far more upbeat. Kazuhiro Miyake, who captures third place in Equity Strategy for a second year running, predicts so-called Abenomics will help drive up the Nikkei index by 41 percent this year, assuming the current exchange rate of ¥95 to the dollar holds. If the currency weakens to ¥105, the market could skyrocket some 60 percent, the Daiwa Securities Group researcher believes.

Hall of Famer Hironari Nozaki, who claims his tenth straight first-place appearance in Banks, is also optimistic. "Reflation policies will surely assist the recovery of the Japanese economy and take us out of the stagnant decades," the Citi analyst asserts.