Japan replaces China as driver of investment bank equity fee income

For the first time in nearly 25 years, Japan has replaced China as the driver of equity fee income for investment banks, as global investors shunned the Chinese market and a sustained rally in the Tokyo stock market drove equity listings.

2023 So far, the boom in Japan’s stock market has led to more than $440 million in bank fee income in that country, or about 30% of the Asia-Pacific region’s total. Excluding domestic-only equity sales to domestic investors in China and Japan, China collects $367 million in fees, slightly less than a quarter of Asia-Pacific bank fees. These figures include fees for initial public offerings (IPOs), follow-on share sales, block trades and convertible bonds.

The crossover has occurred as Beijing regulators have restricted Chinese companies from making IPOs in New York and Hong Kong, with many companies in sectors seen as strategic, such as semiconductor and electric car production, turning to Shanghai and Shenzhen for listings. U.S. investors are also shunning China for fear of deteriorating relations between Washington and Beijing.

Meanwhile, Japanese companies are turning to active, liquid domestic markets to get new companies listed and raise new capital. Tokyo’s stock market is up nearly 20 percent this year compared with China’s stock market, which has fallen to its lowest level since before the Covid-19 pandemic.

Japanese companies that collectively hold large amounts of shares in other listed companies are taking advantage of high prices to sell those cross-holdings in a series of block trades, for which bankers receive fees.

Factors driving the growth in Japanese stock-fee revenue:

Beijing regulators are restricting initial public offerings by Chinese companies in New York and Hong Kong
U.S. investors worried about deteriorating relations between Washington and Beijing
Japan’s active and liquid domestic market
Rising Japanese stock market
Japanese companies sell cross-shareholdings in a series of block trades
Implications for investment banks:

Japan is expected to continue to be a leader in bank fees as a large number of deals flood the market in the final months of the year.
Bankers in Tokyo say Japan’s banking business is booming as pressure grows from the Tokyo Stock Exchange and investors to raise corporate values.
A series of initial public offering deals delayed by the epidemic and Japan’s relatively late reopening of the market could move forward in the coming months.
Convertible bond issuance has surged as Japanese companies increase capital spending to “mitigate” supply chain risks amid tensions between the U.S. and China.
Companies are changing their spending strategies as Japan’s long battle with inflation appears to be coming to an end.
Overall, Japan’s replacement of China as the driver of equity fee income for investment banks is a significant development. This reflects the growing importance of the Japanese equity market and the increasing demand for Japanese equities from global investors.