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The appointment of British-born and American-tested Howard Stringer as Sony Corp.'s chief executive officer last month was perhaps the most visible sign yet that Japan Inc. is shifting to a more global, less idiosyncratic business model.
In research, too, the past year has brought changes that aligned Japan’s investment banking industry more closely with its counterparts around the world. U.S.-style regulations reflecting an Eliot Spitzer sensibility continued to be rolled out, ending the side-by-side working arrangements of Japanese analysts and investment bankers. Quarterly reporting, partially introduced in 2003 as a requirement for companies to produce a quarterly business summary, was extended in 2004 to include a wider range of financial data. And a rapidly proliferating hedge fund industry bumped up overall demand for research. At the same time, the buy side -- whose own research is growing increasingly sophisticated -- requested wider and deeper reporting that incorporates data from across Asia.
None of this comes as a walk in Yoyogi Park for Japanese analysts; workloads are rapidly increasing even as business pressures drive down pay for all but the top researchers. “We can’t work any harder,” says Nobuyuki Takagi, head of Japanese equity research at Nomura Securities Co. “We’re at full capacity and are delighted to be so.”
That hard work is paying off for Nomura, the biggest brokerage in Japan, with 60 analysts covering Japanese equities in Tokyo. Once again the premier independent institution takes first place in Institutional Investor’s All-Japan Research Team rankings, a prize it has claimed in 11 of the survey’s 12 years of publication.
Second place again goes to UBS, widely respected for its commitment to research and the Japanese market even when the latter sputtered in recent years. When other firms, including ABN Amro, Commerzbank and WestLB, exited the Tokyo market and most others cut staff, UBS was one of the few firms actively hiring analysts.
The approach appears to be paying off. UBS nearly doubles its number of first-teamers, from seven to 12 out of a total of 30 analysts, giving UBS more top-ranked researchers than any other brokerage. “We hired the sorts of people who are prolific writers, which means we’re getting a lot more impact,” says Philip Higson, head of equity research at UBS in Japan. Third place goes to Daiwa Institute of Research, fourth to Goldman Sachs (Japan) and fifth to Nikko Citigroup.
This may be a good time to ramp up services in Japan. The country’s financial outlook finally seems to be improving, as its so-called lost decade is gradually being consigned to the history books. In 2004 the Nikkei 225 index grew by 7.6 percent, after rising 24.5 percent a year earlier. At the same time, 175 companies launched initial public offerings -- the third-highest number for a single year. The economy, meanwhile, continues to recover: The Bank of Japan expects 1.5 percent GDP growth for the year through March 2006, compared with 2.5 percent for the year-earlier period.
The good economic news and new regulations are placing heavier demands on analysts. Greg Jones, co-head of equity research at No. 6–ranked Deutsche Securities, says that Tokyo analysts now spend far more of their time doing nonanalytical activities, such as meeting CEOs, marketing company services and building connections between clients and corporate managements. Ten years ago, he says, an analyst’s main job was to write reports.
Full-scale quarterly corporate reporting also put analysts to the test over the past year. With many companies reporting for the first time in 2004, analysts had to scramble to keep up with a flood of new information. “Analysts had to go to four or five announcements on the same day and write memos all night,” says Masatoshi Makino, research chief at Daiwa. Even worse, since Japanese quarterly reports do not require auditing, some companies reported large fluctuations in the final quarter.
Meanwhile, institutional investors continue to raise the bar by building their own armies of analysts. Nomura Asset Management, for example, has increased the size of its buy-side analyst team by 50 percent, to 42, since 2001. “The [buy side] strives to add value with analysis and investment ideas,” says Kochiro Chiwata, head of research at Nikko Citi, a joint venture between Nikko Cordial Corp. and Citigroup. “If we can do it better, buy-side analysts will lose their jobs. If we can’t, we will.”
The rise of hedge funds is also adding to the analytical workload. Hedge funds have grown markedly in Japan in recent years: According to Daiwa Securities America, a U.S. sell-side subsidiary of Daiwa Securities Co., total hedge fund allocations to Japanese equities increased to an estimated $84 billion in the first half of 2004 -- up 17 percent from the second half of 2003 -- while the number of Japan-dedicated hedge funds reached 190, more than double the number at the end of 2002. That’s great for business, but it also means that Tokyo researchers have had to meet added demands for actionable ideas.
No matter the client, brokerages have found it necessary to show their stuff by offering differentiated strategies. Some draw attention to their big stables of analysts and full-line coverage; others highlight innovation. Deutsche Securities, for instance, has folded its equity, high-grade and high-yield research teams into one global company research group -- a move the firm has undertaken worldwide to analyze companies more thoroughly and reduce pricing inefficiencies.
Several firms also are marketing their improved coordination between operations in Japan and elsewhere in Asia. Nomura, for instance, is holding themed investor presentations using sector analysts from across the region. In one case, Electronics/Consumer analyst Eiichi Katayama, a third-teamer, gave an investor presentation on liquid-crystal-display panels in conjunction with his counterparts from Taiwan and Hong Kong.
Nomura isn’t alone. Daiwa’s Makino notes that his firm opened a Shanghai office last year to cover Chinese companies and is increasing the number of analysts it has in Taiwan and South Korea -- a response to increased investor demand for themed reports and comparisons among global companies across sectors and countries. “If you’re writing a report about Sharp’s LCDs and want the big picture, you have to talk about Samsung,” Makino says. But Nikko Citi’s Chiwata contends that this trend is not just about China or Asia: “Connecting the dots all over the world has been a major theme.”
UBS, well regarded for its global coordination in research, is gaining a reputation for its quantitative research. This year, UBS quant analyst Masayoshi Yoshihara breaks into II ‘s first team, moving up from his 2004 second-team spot. Two other names that are new to the winners’ circle are Goldman Sachs Auto Parts analyst Hiroshi Kuriu and UBS Energy & Utilities analyst Toshinori Ito, who were both ranked as runners-up last year. Kuriu made a shrewd call on Keihin Corp., an auto-parts manufacturer affiliated with Honda Motor Co., upgrading its shares to outperform from underperform in late April 2004, at a time when the company was forecasting an operating loss. The company has since revised its forecast and improved operating results. By October, Keihin’s stock price had risen 70 percent. Ito wins praise for identifying the upward potential in oil refinery shares, owing to industry consolidation. Stock prices surged at three of his buy recommendations, TonenGeneral Sekiyu, Showa Shell Sekiyu and Nippon Mining Holdings.
Just like analysts everywhere else in the world, Japanese researchers tend to jump around. Mariko Watanabe and Makio Inui left HSBC Securities (Japan) and Nikko Citi, respectively, last year to join UBS, and both move from lower rankings into the first team. Financials/Banks analyst Hironari Nozaki, who quit HSBC for Nikko Citi last year, retains his first-team position. Investors point out that Nozaki makes a formidable team with Nikko Citi regional Japanese bank analyst Toyoki Sameshima.
Team players are now more valuable than ever. Nikko Citi’s Chiwata reports that as the demands on researchers grow, the ability to manage group efforts is one of the qualities he’ll be seeking in his staff. “I don’t think analysts can live alone,” he says. “Those who have always worked by themselves and can’t work with others will disappear.”
The ranking was compiled by II under the direction of Director of Research Operations Group Sathya Rajavelu, Assistant Managing Editor for Research Lewis Knox and Senior Editor Jane B. Kenney, with Associate Editor Sivert Hagen and Researcher Katsuko Usami.
