TOKYO -- As the Nikkei Stock Average rose 28% in 2023 and another 8% last month, expectations were that Japanese brokers would enjoy an earnings bonanza.
They did report improvements. Nomura Holdings said its pre-tax profit hit an eight-year high during the three months ending December, while SMBC Nikko Securities returned to operating profit for the April-December period from a loss in the same period in the previous year. But growth in their retail revenue was slowing from the previous quarter in the equity area, raising questions about the durability of the recent stock market rally and the level of domestic participation in it.
From October to December, retail revenue at Nomura fell 9% from the previous quarter and SMBC Nikko's fell 4%, though they were up sharply from a year earlier. During the quarter, the Nikkei Stock Average rallied 5%. Nomura explained that profit-taking had increased among retail investors as share prices zoomed up.
Japanese households are increasing their stock purchases, especially after the government of Prime Minister Fumio Kishida revamped the major tax-free investment program Nippon Individual Savings Account (NISA) in January. It is just that their purchases were not big enough to offset profit-taking and were mostly directed toward foreign stocks rather than domestic ones.
"About 70% to 80% of retail money is currently channeled into foreign stocks via the NISA and investment trusts," said Oki Matsumoto, chairman of the online broker Monex Group and a member of a reform panel at the Tokyo Stock Exchange.
These figures suggest that the efforts of the last two years to make Japanese stocks more attractive to investors -- including moves by the Tokyo Stock Exchange to commend shareholder-oriented companies and demote poorly performing ones, and measures by companies to increase their returns to investors -- haven't won over individual investors yet.
Caution among retail investors was also demonstrated by activity data released by Japan Exchange Group on Thursday. It showed that Japanese retail investors were net sellers of Japanese stocks by about 1 trillion yen ($6.8 billion) between Jan. 4 and 26, when foreigners bought a net 1.9 trillion yen worth of stocks.
"We cannot tell our clients to stop selling stocks," said Takumi Kitamura, the chief financial officer at Nomura. "It is inevitable that profit-taking increases as share prices reach a certain level. There is nothing wrong about investors taking profits. What we try to do is [make it so] that these investors will put their money back to work with us."
There are two types of investors in Japan, according to Shinjiro Yamamoto, the CFO at Mitsubishi UFJ Securities Holdings. The first type is the older generation, many of whom once suffered big paper losses when the Japanese stock bubble burst. "These investors tend to move to lock in profits when share prices rise," he said.
They aren't convinced that the Nikkei Stock Average will scale the 1989 high of 38,915, according to Yamamoto. "They might hold Japanese stocks longer if they start thinking that this stock market rally will be durable and that the Nikkei average can realistically aim for 40,000," he said. The average currently stands at around 36,000, the strongest level in about 34 years.
The second type, he said, is younger and educated about portfolio investments. This type tends to invest for a longer haul. "I think there are more and more investors of the second type," Yamamoto said.
Starting in January, Kishida's government tripled the amount of tax-exempted stock investment to 3.6 million yen a year, removed the five-year limit on the tax exemption period for capital gains, and allowed the investment quota to be reused after selling investments.
The main purpose of the program is to encourage households to make steady, long-term investments and prepare better for life after retirement.
"Compared to before, more investors are focused on long-term performance as opposed to short-term ups and downs," said Satoshi Asai, the CFO at Mizuho Securities. "But such investors still account for a small part of the total investor group. As a result, when share prices rise, retail investors as a group tend to be net sellers."
Asai stressed, however, that the shift is underway. "The question is how fast the shift will be," he said.
Retail investors are motivated not so much by a desire to grow their wealth as by concerns about inflation and the yen's depreciation, said Eiji Sato, the CFO at Daiwa Securities Group.
"We feel that retail investment has gone through a fundamental shift. Today, retail investors are more motivated by a desire to hedge against the risks of inflation and a weaker yen than by short-term upswings in stock prices," Sato said, referring to the yen's fall of about 20% against the dollar in the last couple of years and sustained consumer inflation in Japan.
"Wealthy people who were not interested in investment before are now coming to us, asking to start stock investments," Sato said.
Brokers are adapting to the changing needs of retail investors. They have switched from the traditional style of marketing, which was geared toward commission revenue by having investors trade more, to one focused on working with clients to build wealth on a long-term basis.
The new approach will make investment more sustainable on a long-term basis and less prone to a boom-and-bust cycle, though it will also involve spending more time with clients. According to data from the Bank of Japan, more than half of Japanese households' wealth, totaling 2.121 quadrillion yen -- about $14.5 trillion -- is held in cash and deposits that yield almost no returns.
Brokers and issuers now have their work cut out for them. "Companies are taking steps, such as unloading cross-shareholdings, making their shares more accessible to retail investors and allowing greater shareholder oversight over management," Mizuho's Asai said. "It's up to us to persuade retail investors that these measures are not one-off but represent a fundamental shift in the direction of management."
Monex's Matsumoto concurred. "Market players, issuers and the government -- they all need to do more to make Japanese stocks more attractive."
