For nearly a decade Japan, was one of the least popular investment destinations, as deflation dogged both the country’s economy and equity market. But that changed when Shinzo Abe once again entered the prime minister’s office late last year and wasted no time appointing Haruhiko Kuroda, who had frequently criticized the Bank of Japan (BOJ) for its tolerance of deflation, as the new head of the nation’s central bank.

Abe and his Liberal Democratic Party quickly passed a USD142 billion stimulus package aimed primarily at job creation and upgrading Japan’s aging infrastructure. Kuroda committed the BOJ to doubling its monetary base by the end of next year and extended the maturity of the Japanese government bonds it buys from three years to 40 years.

BOJ has also added equities and real estate investment trusts to its buy list in a purchasing program equivalent to USD70 billion per month. That’s a huge commitment on the BOJ’s part, when you consider that the US Federal Reserve’s monthly asset purchase program is valued at $85 billion and the US economy is three times the size of Japan’s.

The goal of both the fiscal stimulus and quantitative easing programs is to stoke Japanese inflation, with the BOJ explicitly targeting annual inflation of at least 2 percent.

So far, the program seems to be achieving its intended results. In the first quarter, Japanese gross domestic product (GDP) grew at a better than expected 3.8 percent annualized pace, but it missed expectations in the second quarter with an increase of just 2.6 percent that was announced a few weeks ago. That missed analyst forecasts of 3 percent or better, but so far, no one is too terribly disappointed.

Revised second quarter GDP will be announced on September 9 and key analysts are all expecting an upward revision to anywhere between 3.1 percent and 3.6 percent.

This isn’t the first time Japan has tried monetary and fiscal easing to jump start its economy, but in the past such programs have been extremely tentative, as the BOJ feared sustained inflation given Japan’s dependence on imported raw material. The programs have also historically been ill-timed, falling in periods where there was little desire to borrow.

This time is shaping up to be different. Across much of the lost decade of 2000-2010, there was virtually no demand for either corporate or consumer loans. Japanese businesses and banks were running massive deleveraging programs from 1990 to 2000 after the Asian financial crisis left all of them gun shy.

Banks were struggling with weak capital levels and huge books of nonperforming loans, while other businesses were fighting an uphill battle as their competitive positions eroded even as they struggled to pay off debt.

This time around, though, Japanese companies have been investing heavily and have been net borrowers since 2011. As a result, net leverage in corporate Japan has been gradually ticking up along with their spending, even as government spending has been growing. So far, that has produced economic growth even as inflation has remained relatively tame.

That’s prompted Japanese consumers to resume spending, with consumer confidence hitting a six-year high earlier this year. Even sales of luxury items are up, with Ferrari sales growing nearly 50 percent over the trailing year as the weakened yen has made foreign-produced luxury items more attainable.

The weakened yen has also helped boost sales at companies such as portfolio holding KEYENCE Corp (Tokyo: 6861, OTC: KYCCF) which is up by 21.6 percent since I added it back in January. Growing inflation expectations has also provided a major boost to Mitsubishi Estate (Tokyo: 8802, OTC: MITEY), our Japanese real estate developer, which has gained nearly 35 percent year-to-date.

But Japan’s massive easing program is also benefiting other types of businesses.

Favoring Equities

The Japanese are notoriously risk adverse, opting to keep most of their savings in cash and government bonds despite near zero interest rates. Stocks and mutual funds have rarely accounted for more than 40 percent of Japanese households, well below levels here in the US.

But that trend has been shifting over the past few quarters, with savers gradually moving towards greater equity allocations and driving demand for retail brokerage services.

Daiwa Securities Group (Tokyo: 8601, OTC: DSEEY) reported that its operating revenues such as commissions received, net trading income and net gain on private equities shot up in its first quarter when it reported results at the end of July. Brokerage commissions received were up 54.5 percent to JPY31.7billion, as sales of mutual funds shot up and operating revenues of Daiwa Asset Management, the firm’s wealth management operations, hit a record high of JPY21.8 billion.

Asset inflows in the company’s retail division strongly favored individuals as flows hit JPY146.5 billion, up from JPY136.3 billion in the previous quarters, while corporate asset inflows fell to a two-year low of JPY11.1 billion. That’s a clear indication that retail investors are skewing their asset allocations more towards equities while corporations are increasingly opting to invest in their own businesses.

As a result, Daiwa Securities Group’s net operating revenues rose to JPY155.2 billion, a 78.5 percent year-over-year increase, while net income was up 17.5 percent to JPY57.2 billion.

From a financial perspective, Daiwa is an extremely strong financial enterprise. Even as revenues and earnings are growing, Daiwa’s leverage is falling with its gross leverage ratio coming in at 17.3 times and adjusted leverage of 12.5 times, well off the high of 20 and 15.2 last year, respectively. Its consolidated capital adequacy ratio also came in at a strong 20 percent based on Basel III standards.

While shares are up better than 82 percent so far this year, they have recently pulled back from a 52-week high of JPY1,033. I believe shares will break higher from here, though, as renewed investor confidence pulls retail investors out of government bonds and into the equity markets.

Daiwa also boasts a robust investment bank business that will benefit from an uptick in corporate actions. While merger and acquisition (M&A) activity has slowed so far this year in Japan largely thanks to an improving business environment, Prime Minister Abe is widely expected to alter tax laws to make it easier for companies to merge.

Historically, Japanese M&A activity has largely centered on companies struggling to survive independently, but if deals could be done on more favorable financial terms, a wave of consolidation could occur.

In a strong financial position and benefiting from secular shifts in asset allocation, Daiwa Securities Group is a new member of our Long-Term Portfolio, as a buy up to JPY1,150 on the Tokyo Stock Exchange or up to USD11 on the OTC market.