Japan’s export-driven economy has been especially hard-hit by the worldwide financial crisis. The nation’s real gross domestic product contracted at an annualized rate of 12.1 percent in the fourth quarter — the biggest decline of any developed economy — the benchmark Nikkei 225 stock average plunged a record 42.1 percent last year, and foreign investors pulled a net ¥3.7 trillion ($42 billion) out of the country in 2008, the highest net outflow in more than two decades.
The exodus goes on: Japan-focused mutual funds saw net redemptions in ten of the first 11 weeks of 2009, according to Cambridge, Massachusetts–based Emerging Portfolio Fund Research.
As investors flee, demand for equity research is declining. Many firms have scaled back their equity research operations in Japan, leaving those analysts who remain to grapple with fewer resources in the midst of the greatest economic crisis in more than 60 years. The ones who have done the best job of rising to the challenges created by this newly constrained environment can be found at Daiwa Institute of Research, which leads the 2009 All-Japan Research Team, Institutional Investor ’s annual ranking of Japan’s top equity analysts. Daiwa wins 24 total team positions, six more than a year ago, while last year’s top-ranked firm, Nomura Securities Co., slips to second place, with 18 total positions, down from 24. UBS, which was tied with Daiwa for second place in 2008, slips to third, with 17 positions. Tied for fourth place with 15 positions each are Goldman Sachs (Japan), which advances from No. 5, and Nikko Citi, which vaults all the way from No. 9. Results are based on responses from more than 195 investment firms worldwide managing an estimated $1.5 trillion in Japanese equities.
Sumiyuki Kazama, Daiwa Institute’s director of equity research, says a lack of political leadership has prevented Japan from responding to the financial crisis in a timely manner. In September, Yasuo Fukuda became the second prime minister in two years to resign after falling out of favor with the Japanese people; Fukuda’s outspoken and controversial successor, Taro Aso, had an approval rating of less than 10 percent as of early March, and many political analysts doubt that he will triumph in the next general election, which must be held no later than September.
"We need greater stability in politics, with more leadership," says Kazama. "We have able bureaucrats who draft sound laws, but our politicians must follow through and implement the new legislation. The economy struggles because our leaders often do not."
While waiting for the Japanese economy to recover, Daiwa has shifted its focus to China, which is likely to see annual GDP growth of 6.5 percent this year, according to the World Bank. "China’s economy is growing while Japan’s is contracting, so China is more appealing," Kazama explains.
Nomura also has its sights set on the Mainland — and not just because of Japan’s dismal near-term prospects. Last fall the firm’s parent company acquired the Asian and European operations of bankrupt Lehman Brothers Holdings. Nomura is in the process of "unifying its research by treating Japan as part of Asia," according to equity research director Nobuyuki Takagi.
No. 8 Credit Suisse is one of very few firms strengthening its presence in Japan. The giant Swiss bank added two equity analysts last year, bringing its total to 25, so that it is prepared when the nation’s economy bounces back — not that a rebound is expected anytime soon.
"Japan is still an export-driven economy dependent on external demand, and its recovery won’t be possible without a recovery in U.S. consumption first," says Kyoya Okazawa, Credit Suisse’s head of equity research in Tokyo. "It will take considerable time for U.S. consumers to deleverage. I expect the next peak in the market to come in 2012."
The analysts who do the best job of providing exactly that kind of information can be found on our annual ranking of the All-Japan Research Team . To view profiles of the winners, click on a specific sector below.