Japan equity fees top China for the first time since 1999

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Japan has surpassed China as a driver of investment banks’ revenues from equity fees for the first time in almost 25 years, as global investors shun Chinese markets and a sustained rally in Tokyo stocks drives listings.

A rush of equity business in Japan has pushed the country’s contribution to banker fees to more than $440mn so far in 2023, about 30 per cent of the total in the Asia-Pacific region, according to data from Dealogic.

China accounts for $367mn, or just under a quarter of banker fees in the region, when share sales in China and Japan offered exclusively to domestic investors are stripped out. The data includes fees from IPOs, follow-on share sales, block trades and convertible bonds.

The crossover comes as regulators in Beijing have restricted the flow of Chinese IPOs to New York and Hong Kong, directing many listings from sectors deemed strategic such as semiconductor and electric vehicle production to Shanghai and Shenzhen. US investors are also shunning China over concerns about deteriorating relations between Washington and Beijing.

Meanwhile, Japanese companies are turning to a buoyant, liquid domestic market both to list new companies and to raise new capital. In contrast with Chinese shares, which have fallen to the lowest level since before the Covid-19 pandemic, Tokyo stocks have risen almost 20 per cent this year.

Japanese companies, which collectively hold vast portfolios of shares in other listed companies, are taking advantage of high prices to offload these crossholdings in a series of block trades for which bankers take a fee.

Japan is expected to build on its banking fee lead as a rush of deals comes to market in the final months of the year.

“Robust activity in Japan IPOs, follow-ons and convertible bonds, have been driven by the strong performance of the secondary market throughout the year,” said Akshay Sawhney, co-head of Asia Pacific equity capital markets at Bank of America.

“As a result, and as China IPOs have dried up, Japan will probably finish 2023 as the biggest market in Asia Pacific in terms of [the equity capital markets] wallet.”

Bankers in Tokyo said that business in Japan is booming, at a time when the Tokyo Stock Exchange and investors are putting companies under intensifying pressure to raise corporate value by increasing their price-to-book ratios and improving governance.

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A series of IPO deals delayed by both the pandemic and Japan’s relatively late reopening are likely to move forward in the coming months, said Yusuke Minowa, head of Japan equity capital markets at Goldman Sachs.

Minowa pointed to robust demand for listings by Rakuten Bank and SBI Sumishin Net Bank, now roughly 20 and 30 per cent above their debut prices respectively, as a signal of investors’ strong appetite for new Japanese equities.

“Despite launching amid the fallout from SVB’s collapse, and from a sector with no track record, both issues have performed strongly in the after-market, giving you a sense of the strength of the demand for Japanese issuance right now,” said Minowa.

Convertible bond issuance has surged in connection to Japanese companies increasing capital spending to “de-risk” their supply chains as a result of rising US-China tension, said Takaaki Suzuki, head of global capital markets in Japan at Morgan Stanley.

Bankers said that as Japan’s long battle with inflation appeared to be drawing to a close, companies were changing their spending strategy.

“In Japan, we are seeing the 30-year deflation economy becoming an inflation economy. So because of that, lots of corporates are changing their business models, digitising or decarbonising, and that is driving capex,” said Suzuki.