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Your Guide to Japanese Investment

Interview - February 3, 2025

With services catering to both domestic and international investors, Tachibana Securities is guiding its clients to sound investments, giving them some well earned peace of mind.

CHIHARU HIROSE, PRESIDENT OF TACHIBANA SECURITIES CO., LTD.
CHIHARU HIROSE | PRESIDENT OF TACHIBANA SECURITIES CO., LTD.

This has been a record-breaking year for the financial markets. For example, there has been a surge of private equity deals and IPO activity, with 97 companies going public, raising over JPY 570 billion. We’ve also seen the Nikkei 225 breach the JPY 40,000 mark. This has drawn unprecedented foreign capital into the Japanese economy, with foreign investment at a ten-year high. What were the core reasons for the extraordinary performance of Japan’s financial markets, and what makes Japan attractive to foreign investors today?

To answer the first question, it’s useful to consider the background behind the increase in Japanese equity prices. First, it is because of the continuous growth of the value of Japanese enterprises, which is reflected in earnings per share (EPS) and dividends. There has been significant and continuous growth in those areas. However, at the same time, the valuation was staying at a certain level. Therefore, from an external perspective, it seemed the stock was undervalued, and it was easy to acquire, so that was one point. Another point is that the American economy and the global economy were doing well, which had a positive impact on Japanese enterprises.

I think that was the foundational environment that made this happen, but there are also three pillars of changes or challenges that have been happening in Japanese equities. The first one is that Japan is now finally getting out of the deflation environment. The second one is corporate governance reform. The third one is that Japan is now turning into a country that is able to do asset management. I think those pillars combined had a strong appeal for investors.

I would like to talk in a bit more detail about those three specific changes that happened.

First, regarding finally getting out of the deflation environment, it’s because Japan is now in an economy where there is a shortage of workers or laborers, and that has led to wage hikes, which is a virtuous cycle. Actually, in last year’s spring labor offensive, there was a call for a 5% wage hike, and I believe that this year, the same trend is going to continue, which is to say another wage hike is going to be called for or announced.

Second, talking about corporate governance reform, this is actually an accumulation of the activity that’s been happening over the past decade.

 

I remember the Stewardship Code from the Abe administration in 2014.

Yes, that’s right. Mr. Yamaji at the Tokyo Stock Exchange (TSE) has also been very vocal in giving a strong message. I believe that this is bound to continue, and the management in all Japanese enterprises is now really focusing on their share prices. They’re being very mindful of that, which is having a positive effect on the overall environment in Japan.

Third, regarding becoming a country where asset management is possible, actually, in the previous administration of Prime Minister Kishida, new initiatives like the Nippon Individual Savings Account (NISA) started happening. But it’s not just that. We have to remember that back in the 1980s, the US and Europe were already implementing initiatives to get individual capital to go more towards asset management, including pensions, etc. They were already starting this, and now Japan is finally looking at that and deciding it is time to follow that movement. Japan is now designing systems so that we can do that. That’s the third pillar.

The increase in IPO activity came from a strong push from the government, where there’s now been an activation of new businesses, and even from individual investors who want to find new places to invest. From their perspective, it’s also a good thing that these new IPOs are happening, and their expectations are becoming stronger for that.

Having said that, I would say the volume of Japanese IPO activity is still quite small, and there are a lot of companies for which it’s still difficult to see if they have a path toward global growth. In that sense, compared to the foreign IPO market or sphere, I believe that there’s still much more room for the Japanese IPO atmosphere to develop.

Speaking personally, looking back to the 1960s, companies like Sony and Honda established themselves with huge growth. Then, in the 1990s, companies like SoftBank, Fast Retailing, and Nitori were new big companies with good stories and growth. I think that maybe now we’re facing a time when another group of those kinds of companies will become big names in the future, and I have high expectations for that. From that perspective, we are carefully looking at the IPO market.

 

If you look at those three big points you mentioned, corporate governance and Japan turning into an asset management country are internal factors, and the return on inflation is external. You could put it on the same level, for example, as the difference in interest rates between Japan and the rest of the world or the downfall of China’s investment environment that brought capital into Japan. The big question that many investors are asking themselves now is whether external or internal issues have the most impact. I think the question was made even more pressing in August with the market crash that led to the unwinding of the yen carry trade following the Bank of Japan’s increase in the interest rate. This also has to be put into perspective with the recent political change that occurred in Japan, where the LDP lost its majority. As we look towards 2025 and 2026, do you believe that those internal reforms will be enough to carry the bullish momentum forward?

To answer that question, when we think about the investment environment from the retail investors’ perspective, I think these three points are in a triangular relationship, and each of them has its own impact. The basic concern is getting out of the deflationary situation and going into inflation since Japan has been facing deflation for the past three decades, and wages have not been going up. However, this trend is now going in the reverse direction, so that’s the foundation of the environment that we are in right now.

On top of that, we have this corporate governance reform that’s been happening for the past decade, and we have the initiatives to go towards an asset management country. These are happening at the same time. Each has its own impact. I think you’re trying to ask which of those will have the most impact in the future. I believe that the biggest will be corporate governance reform, and I expect that to have a significant impact.

You mentioned that getting out of deflation and going into inflation are external factors. In a sense, it is external, but it’s not just the yen depreciation that’s affecting this. As I mentioned earlier, I think it’s something internal to Japan because Japanese enterprises are facing a shortage of labor, and because of that, they have to raise wages, so I think this is an inflation that’s unique to Japan. In that sense, it’s not completely external.

I also want to talk a little about the market crash that happened in August this year and what we should understand about that. The background behind that was a combination of a couple of factors. It was Governor Ueda of the BOJ talking about the interest rate hike and also the American presidential election going back to scratch at that time. You also mentioned the yen carry trade position, where if the dollar was strong, that meant that the Japanese equity was high, so it was like an equal state, and then there was an unwinding of the trade position.

So, it was a combination of those factors, but I think we should really look into two aspects of this market crash. First, this happened when the financial closing or the results meetings happened for the first quarter in Japan. At that time, a lot of companies were announcing upward revisions, and some companies, like Cannon, were talking about their second share buyback. There were also companies that were talking about increased dividends. When we look at the past in terms of Japanese companies, when a big shock occurred, such as the Lehman shock or any major earthquake, Japanese companies would hunker down and not do anything. Then, they would look at what the others were doing, and when they finally felt comfortable, they would take action. Because of that, they were lagging behind other global corporations. That was what was happening in the past. However, this time, when the Japanese equity prices went down, they looked at the situation and were quick to come up with messages and announcements. I think this really expresses how much drastic change there has been in the Japanese market. So, that’s one major takeaway.

Second, when we look at the Nikkei average, it was JPY 31,000 at that time, and the TOPIX was 2,200 points, but when we look at the dividend yield, it was over the 2.7% benchmark. When we compare that with the dividend yield that happened in previous shocks, it was the same. Retail investors look at these dividend yields and perceive them as an important indicator or index. When we look back at August, the dividend yield was kept at the same level. That means that these investors were still taking a positive stance towards asset management, and it was probably not just the Japanese investors, but maybe the foreign investors were taking the same stance as well.

I think those are the two major takeaways that we really should look back on when we think about that market crash.

 

That’s very interesting. Personally, I believe it was more a question of positioning from the big institutional investors than an actual fundamental issue.

Looking back at 1987, when the American Black Monday happened, after KKR made a major acquisition of Nabisco, there was a lot of M&A activity happening after that. I believe that Black Monday was a turning point for American companies, and I think that for the market crash that happened in August, we can even call it the Japanese Reiwa Era Black Monday. I have expectations that this can be a turning point for Japanese corporations because, after Black Monday in America, there was a major hike in share prices in the 1990s and the 2000s. A similar thing may happen in Japan.

 

The Japanese revamp of NISA was aimed at moving some of the trillions of Japanese yen held by households into investments in riskier assets like the Japanese stock market. The most popular investment vehicle among Japanese households has traditionally been mutual funds tracking US and other global stocks. Do you believe NISA will be successful in reversing that trend and driving more investment into Japanese stocks from Japanese households, and if so, what services and products does your company offer to stimulate investments in Japan?

Talking about NISA, it is said that the number of accounts in Japan has now surpassed 24 million, and about 67% of those 24 million accounts are held by people under 60 years old. This mostly represents the workforce generation. The investment amount is still quite small, and they tend to invest in mutual funds, for example. The younger generation also tends to look at Japan less than overseas by investing in all-country or US funds, for example. We understand that this is happening, and we have to do more about those two-thirds of people’s financial asset allocations, so there’s improvement to be had. It’s going to take some time, but at least the younger generation has started to invest, so that’s an important thing, and we don’t want to take a pessimistic view of this. We will positively keep monitoring the situation.


Tachibana Securities Headquarters


In terms of what Tachibana Securities is doing, we are a company that is dedicated to equities. We are a broker for investment into individual Japanese equities, so that’s our business. In order to recommend investments in these individual equities in Japan, we need to really understand the industrial situation in Japan. For us, that’s important to help us select good equities. Our business is trying to shift money away from bad opportunities to good ones, so we are not really focusing on funds; rather, we’re focused on advising our customers about investment opportunities for individual Japanese equities. That’s what we do, and we’ve been doing it for the past seven decades.

 

If you look back two years, Japan’s market was extremely undervalued. At today’s valuation, I think stock picking has become more important than ever. This is something that we see in the amount of interest foreign investors pay to Japanese equities, and there are many people looking to Japan to find hidden gem companies, small to midsize enterprises (SMEs) that have the potential to capture the global market share of a niche application. What sectors do you believe today have some of those kinds of hidden gem investments, and how do you provide foreign investors access to those unique Japanese companies, considering that it’s quite difficult for foreign investors to have the market research capabilities to understand Japan’s unique corporate structure?

Saying which sectors have the hidden gems in Japan is really difficult to do, but Japan’s strength has long been manufacturing, so maybe one sector would be that, especially the companies that are involved in AI or semiconductors. There are a lot of businesses that are niche but very appealing, and I believe that there’s bound to be some global standard technologies springing up from those kinds of companies, and then, after that, they will grow internationally. I can see such stories, so that would be one recommendation.

Another sector might be a little surprising, but with more inbound tourists coming to Japan, we have this omotenashi concept about the service industry, so this might be another sector that’s a hidden gem.

Another sector would probably be content businesses, as I believe that there’s still much more appeal that we can offer to the global market, even more than what we have today.

Of course, for companies to become big names globally, having talented managers with a global sense and ambitions will be very important. For example, it would be like Mr. Son at SoftBank or Mr. Yanai in Fast Retailing. There is currently a generational change happening in management with people in their thirties and forties taking over management positions, and I believe that some of them are going to have this mindset of not only wanting to do their business in Japan but also wanting to go out into the global market. I think that’s something that we should focus on and keep looking for these younger generations of management that are trying to change Japanese companies.

To answer your question about providing access for foreign investors, we have a team that is taking care of that, and we’re trying to cater to the direct inquiries coming from our foreign clients as much as possible. We also have our reports. We always monitor the clients’ investment history, and we try to participate in companies’ results briefing as much as possible, and the next day, we release a memo about it. We’re not able to do this for every single report, but for the unique and interesting ones we publish, we make sure that we translate those into English, and we provide those to our clients overseas.

 

A couple of weeks ago, we interviewed Ichiyoshi Securities, and we spoke at length about this. Japan has attracted a lot of attention from foreign investors over the past two years. I think when you look back, the market was so undervalued that you could broadly invest in an index like the Nikkei and expect everything to go high. However, at today’s valuations, there is a real need to engage in stock picking to find companies that add a lot of value. The reality is that the corporate governance reforms have been great, but you still have a lot of firms that aren’t up to global standards. When we were talking with Ichiyoshi Securities, they explained that this was a big business opportunity for them because foreign investors who don’t have as much access to information as Japanese investors do are looking for a door to enter a market where stock picking is more important than ever. As such, they saw a lot of expansion from institutional foreign investors in terms of inquiries and investments. Do you agree with this opinion, and how important do you believe the international aspect of your business will be over the next year?

I fully agree that our stock picking is becoming very important, and of course, our business is about finding those appropriate individual Japanese corporations, so this is what we do. Our clients are value investors, so we place a huge importance on activist types of services. When we compare Ichiyoshi with ourselves, they have research capabilities and a lot of staff that can convert their capabilities into English, so that’s what they are strong at, whereas on our side, we place importance on one-on-one service. Of course, with that model, there is a limit to how much we can do, but we want to keep focusing on what we think is important, and depending on the volume, we want to cater our services and provide them wisely. Considering that, we agree overseas businesses are something that we want to do.

Tachibana actually has a subsidiary in Hong Kong, although there are not many staff members there. Their initial role was booking, but now we understand that there’s a lot of need to provide information, like CSA and unbundling, etc., so we will continue to leverage our Hong Kong subsidiary office to provide more information to overseas investors. Of course, as I mentioned, we have some limitations on the number of staff and the volume of our business, so we don’t do this often, but we also collaborate with agents sometimes.

I’m not sure how important this would be for foreign investors, but in Japan, there’s going to be a revision of the takeover bid (TOB) regulations, so we expect that there’s going to be an enhanced need for handling TOBs. Therefore, Tachibana is considering being able to handle TOBs, how we can do that, and what kind of structure we should use.

 

Your regulatory capital adequacy ratio (CAR) is over 521%. You are supported by over JPY 74 billion of net assets as well. In 2024, your operating revenue was up 101%, and your net income rebounded from the year before. Your ROE was over 4.5% at that time. Can you elaborate on the strong performance from this year and how you reviewed it in comparison to the previous years?

In terms of our financial performance, our revenue is based on three pillars. The first is commissions, the second is trading revenue, and the third is the interest rate revenue. For the commission pillar, it’s quite simple; it’s just the commission for the trading of stocks. For trading revenue, we are a little different from other securities firms because our asset trading positions have security certificates, and having these certificates and being able to trade them lets us book some positive trading revenues. For the interest rate revenue, if the interest goes up, significant revenue is generated.

Last year, we performed very well because stock prices were good, our commissions were going up, and the interest rate was going up a little. With those combinations, it generated positive revenue for our company. In terms of how we evaluate this, the trading part was quite positive, and when we look at the interim situation right now, it is actually going negative compared to that, so trading revenue is quite volatile. For the trading position, the book value is extremely low, and it’s with the share price each fiscal year that there’s that volatility happening, so as a company, we exclude that volatile bit when we are assessing things. We make sure that for the other parts, we have organic growth. That’s what we aim for.

When you hear that, it might be a little off your expectations, but I want to boast that we have a very strong internal reserve, and we also have very robust assets in our company. That is because we are in a very volatile stock market, and we don’t want to cause any trouble for our clients and customers, so we have this robust internal reserve for that. It is actually our founder’s and our management's policy that we are not supposed to do forced sales to our customers. We want to avoid that situation.

 

Imagine that we will come back to interview you again in 2033, which will be the 80th anniversary of the company. What ambitions or dreams would you like to have achieved by then, and what would you like Tachibana Securities to look like?

When we look at the number of shareholders in Japan today, it is a little over fifteen million right now, but we want to see that increase, maybe up to even double that, to 30 million individual retail shareholders. That’s one thing. Also, when we look at the allocation towards stock right now, the stock weight is only about 15% in Japan, but in European countries, it’s about 30%, so I am dreaming of such a state where we can bring up the number of shareholders and level of stock weight to that kind of level. I believe our dream and mission as a company is to do something for that. Tachibana Securities has many people with full experience. There are many sales representatives with a lot of experience in this field. Actually, it’s my 40th year since entering Tachibana, and the average age is quite high, but everyone loves stocks. It’s a group of people who love being in this business.

So, when you come again for our 80th anniversary, I hope we can say that the number of deposits coming from clients to our company has grown and that we’re able to provide or recommend stocks or stock certificates to our customers appropriately. I strongly believe that I will be able to say that to you when you come back.

 


For more information, please visit their website at: https://www.1ban.co.jp/english/

 

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