In the Land of the Rising Sun, Nomura Holdings Inc (NMR) based in Tokyo, Japan, is hoping to benefit from a rise in M&A activity and trading fees as the country's economy continues to turn the corner.
The Nikkei Index blistered to a 52 week high of 17,563 during May of 2006 and has since pulled back 16% mirroring a similar pull back in the U.S. Dow Jones Average. While dwarfed in comparison to Japan's mega banks Mizuho Financial Group and Mitsubishi UFJ Financial Group (MTU), Nomura's fast growing Domestic Retail and Global Markets business segments, has led to solid financial results and growth prospects for the future.
Japan's recovery has been aided by an interest rate that is virtually zero for the past several years, as the country worked to combat a stagnant economy, inflation and rising prices -- otherwise known as stagflation. The Bank of Japan (BOJ) has been signaling that it will end the flow of virtually free money available for consumers and businesses in the near future.
Merrill Lynch (MER) is aware of the opportunity to profit from a rising interest rate in Japan and has established an office in Tokyo staffed with a former top ranking bond trader from Goldman Sachs (GS).
Nomura's Domestic Retail includes on-line stock brokerage services for customers, which increased revenues 55% from the same period one year prior. The Domestic Retail segment manages more than 39 million yen for customers who include Japan's rapidly aging workforce. Nomura's Global Markets increased its revenues 84% on strong derivative trading in both fixed income and equities trading. While revenues from equities comprised 45% of Nomura's revenues for all of 2005, the rising yields on Japanese bonds and an improving economy could drive both equity and fixed income revenues to new heights.
The effects of a rate increase
When a country raises interest rates, it makes the currency more attractive since investors are more likely to see an increased return on their investment. Raising interest rates can also have the negative affect of hurting exports as the countries goods become more expensive to the outside world.
Rising interest rates can also lead to big profits for financial firms such as Nomura who will participate in the increase bond trading activity and traditional brokerages services that should resemble the profits enjoyed by U.S. firms like Lehman Brothers (LEH) and Goldman Sachs.
For investors who are weary of investing in ADRs, it should be noted that Nomura does report its earnings based on U.S. accounting standards. Not that those accounting standards haven't been called into question, but at least you know you have rules in place the place revenues and expenses in their proper place on the income statement.
Bank of Japan Corruption Catalyst
When allegations of insider trading of BOJ officials hit the press, the Nikkei average dropped precipitously down 4% in one day to 14,218. While it was a major shift backwards, the fundamentals of Japan's recovering economy have not changed, as evident by the Nikkei's current closing price of 15,124.