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Japan ECM ready to shine

22 Jan 2013

Japan has not been a source of much hope for those in the financial markets in recent years, but equity analysts and investors are starting to become more bullish on the country. It may be too early to break out the champagne, but ECM bankers look set for a good year in a country that rarely offers much in the way of dealflow.

Japan has long been regarded as a basket case among world economies, its aging population and anaemic growth inspiring little appetite from foreign investors and scant business for foreign bankers. But while the country’s long-lasting problems have not gone away, its new prime minister has managed to sprinkle a bit of magic dust that could conjure up a boon for ECM bankers this year.

Shinzo Abe’s election has, despite our scepticism at the time, lifted confidence. The Nikkei 225 is up around 3% this year — following a jump in December after the election — and Patrick Moonen, senior equity strategist at ING Investment, thinks it could go a lot further still. He predicts a big rise in Japanese equity prices if Abe pushes forward with his policies, and after the Bank of Japan committed to a 2% inflation target this week, it is clear that his premiership is already bearing fruit.

It is not just politics that should inspire ECM bankers. Aozora Bank raised ¥146.1bn ($1.653bn)last week, and after a ¥663.25bn listing from Japan Airlines late last year, it is clear that the country’s equity market is open for business. Bankers expect a big book of convertible bonds from the country this year, and after ABC-Mart’s ¥33bn Euroyen deal closed successfully last week, it is hard not to be bullish about the country.

There is a risk, of course, that such confidence is simply an example of an availability bias: putting too much emphasis on recent, and eye-catching, events when looking ahead. Just as those who see a plane smash into the ground on the television news may become irrationally scared of flying, those who see an airline smash records with its IPO may become irrationally bullish about the market.

But there are good reasons to be optimistic. For one thing, market decisions are not freak occurrences. The probability of another plane crash is not, all things being equal, increased by the severity of the previous crash. But an eye-catching deal can prove the strength of demand in a market, making issuers more likely to push ahead with deals and investors hungrier for risk.

The success of Aozora Bank’s recent listing, and last year’s jumbo deal for Japan Airlines, do have a real effect on the market.

Only way is up

There is also a sense that things can only get better. Bankers admit that the Japanese market is unlikely to be too bad for them this year, simply because it was so lacklustre last year. This argument is not borne out by pure volume data, but it is easy to see the motivation behind it.

Japanese companies raised $12.1bn from listings on the Tokyo stock exchange in 2012, according to Dealogic. That was a jump of more than 637% from the year before, an incredible growth.

So why the cynicism?

One reason is that demand for the JAL deal was overwhelmingly retail, which makes some bankers feel it does not really count. Since the airline offered flight vouchers to investors that held their stock for more than a year — on option not really available to other issuers — the critics might have a point.

The biggest reason, however, is the amount of time Japanese ECM bankers spent watching and waiting last year. Even with the huge growth in volumes, they still only managed to close 12 deals. That appears to have become a psychological barrier for local bankers as they have closed exactly that number of listings in each of the last three years.

Unless bankers can pull off a few more jumbo deals — something that not only seems unlikely, but is also a poor thing to rely on — they are going to have to pick up the pace.

It is clear that things have not improved much for ECM bankers just because a few big deals have gone successfully. They still need to generate a lot more business from their clients in the country, and hope that aggressive monetary stimulus leads to plenty more companies wanting to list. But things are starting to look better; investors can stop worrying about crashes — and get ready for take-off.

22 Jan 2013