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As Japan Slid Into Recession, These Research Firms Stepped Up

Daiwa Securities Group leads the 28th annual All-Japan Research Team.

2020 had an inauspicious, if not unexpected, start for the world’s third-largest economy. 

For the first time since 2015 — and as predicted by the country’s top research firms last year — Japan slipped into a recession during the first three months of 2020, ushered in by an increased consumption tax, natural disasters, and trade troubles with China. 

But as the country moved from a “gentle recession” into a “technical recession” marked by two consecutive quarters of negative growth, the worst was yet to come as the novel coronavirus swept the globe and upended every aspect of life in Japan.

By the end of the summer, the economy had recorded its worst contraction on record of almost 8 percent, even as the country contained the Covid-19 pandemic better than its Western counterparts.

“The health impact of [Covid-19] for Japan [has been] mild so far,” said Takaaki Muramatsu, director of research at SMBC Nikko Securities. “It has forced companies to become more efficient and has given a big kick start to the digital transformation of almost every part of Japanese life. This process will be central to Japan’s new normal.” It is also driving consolidation in many industry segments and has pushed managers to raise margins, he added. “Companies are getting more profitable and Japan is becoming a better place to invest.”

To help them navigate this “new normal,” investors have once again turned to a cadre of Japanese-based research firms, based on the results of Institutional Investor’s 28th annual All-Japan Research Team. This year, some 860 directors of research and heads of investment firms with major securities holdings in Japan rated the top firms across 31 sectors. These scores were then weighted by the size of each respondent’s research spend.  

In this commission-based leaderboard, Daiwa Securities Group defended its No. 1 spot. The Japanese bank was followed by Mizuho Securities, which improved from third to second place. SMBC Nikko Securities likewise jumped one spot to third, while Nomura took fourth this year. In a nod to the close competition among these four domestic firms, only five team positions separated Daiwa’s total of 26 from Nomura’s 21.

JPMorgan Chase & Co. was the only international firm to crack the top five, with 14 total team positions. 

When the same scores were weighted by each voting firm’s Japanese assets under management, Daiwa took No. 1, Mizuho and Nomura tied for second, while SMBC Nikko placed fourth, followed by JPMorgan in fifth.

Two additional commission- and AUM-based leaderboards for individual analysts were also produced. These closely mirrored their team-based counterparts, with Daiwa placing first in both. 

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Hidekatsu Watanabe, head of Japan equity research at Mizuho Securities, reported that the firm was quick to transition to a work-from-home environment, even before former Prime Minister Shinzo Abe’s government declared a state of emergency in April of last year. With business travel grounded, client interactions are dramatically up from last year, he said.

“Investors have been working remotely as well,” Watanabe said. “In particular, as investors have not been able to physically visit Japan like they used to, their demand for analyst service has actually gone up. Our research readership has increased significantly in the past 12 months.”

But only focusing on the evolution of the workplace is shortsighted, Watanabe added, since the working world was already moving toward greater use of technology — the Covid-19 pandemic only accelerated it, he said.

When the pandemic recedes, there will be some form of return to the physical office, from face-to-face meetings to in-person mentoring of new and junior employees, according to Watanabe. 

“There will, however, be other changes to the world around work that will become more apparent with time,” he said. “Clearly the shift to online consumption will only continue. As offices in central business districts scale down and commuting patterns change, businesses that rely on other businesses will need to redistribute themselves to catch the redistributed demand: restaurants will relocate, property prices will adjust, etc. We might see more localization, especially as the pandemic has coincided with a breakdown of the relationships of globalization and may have actually accelerated the latter. Changes in mobility patterns may lead to changes in energy policies, which will also be affected by a new sensitivity to climate change.”

Japan will be well-poised to absorb those shifts, according to Yunosuke Ikeda, chief equity strategist at Nomura Securities. “The Tokyo stock market has shown impressive resilience amid the pandemic and the Nikkei index reached the 30,000 mark for the first time since the economic bubble burst in 1990,” Ikeda said. “This might be partly explained by aggressive easing by global central banks, but we think it is mostly attributable to the Covid-triggered revolution toward more efficient lifestyles and business activities.”

Yuki Saito, a managing director in Nomura’s research planning department, believes the firm’s competitive advantage lies in publishing more “deep dives” as well as thematic, cross-sector and cross-region reports. “We are also focusing on creative research initiatives with more attention to ESG” and sustainable development goals, said Saito.

At SMBC, environmental, social, and governance research has likewise “become a very important part of our products,” according to Muramatsu. “Sell-side research plays an important role in making sure investors focus on this important area.”

As for the pandemic, Mizuho’s Watanabe said while the “unprecedented string of fiscal and monetary response measures has enabled Japan to evade a labor and financial crisis," the country is not out of the woods yet. 

Current Prime Minister Yoshihide Suga unveiled a third $700 billion stimulus package in December, adding to the $2.2 trillion in aid previously introduced in April and May.

Share prices are now well above where they were pre-pandemic, Watanabe added, which is unsurprising given the expectations for economic recovery post-Covid and the “game-changing moves” in monetary policy. 

It’s also an environment that will reward quality equity research firms.

“As the changes spurred by Covid-19 and the volatility in economic and financial markets continue, the role of sell-side research will remain important, but investor expectations will also rise and low-value-added research is likely to suffer from poor ‘monetization,’” Watanabe said. “We think the increased uncertainty is an opportunity for good research.”

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