Investors eye Japan bank stocks amid expectations of BOJ rate hike

February 20, 2025 (MLN): Japanese bank shares have become highly popular with investors betting on rising Bank of Japan interest rates as uncertainty over the central bank's plans makes the stocks a safer bet than government bonds and the yen.

"We do not know where Japan's terminal rate will be, but it is likely that interest rates will go higher and bank earnings are strong, so bank shares are an overweight," Akutsu said.

The Bank of Japan ended its negative rates policy in March last year and has since pushed its short-term rate up to 0.5% as inflation has crept towards its 2% target, as per Reuters.

However the BOJ has provided few clues on where it expects rates to peak, and market participants who once thought rates would peak at 1% now suspect the terminal rate could be higher.

Yields on Japanese government bonds (JGBs) have soared, meanwhile, with 10-year yields now around 1.43%, double levels of a year ago, meaning the scope to make money short-selling these bonds is limited.

The yen too is not an easy BOJ trade, driven more by the vagaries of U.S. interest rates and the dollar.

Bank shares, however, are hot. LSEG Lipper data shows that Japanese banking sector funds attracted a net $761 million in the second half of 2024, the largest semi-annual inflow in a decade.

Aided by rising rates, all three of Japan's "megabanks", including MUFG and Sumitomo Mitsui Financial Group are on course for record annual income for the fiscal year ending on March 31, 2025.

The banks' sale of their own equity holdings has proven another tailwind. They also pay higher dividends, at a yield of 3.2%, compared with just 2.2% for the overall market, Reuters added.

The banks' price-to-book ratios (PBR) stand at 0.97 compared with 1.5 for the overall market and 1.22 for global banks, an indication they are undervalued relative to their assets.

"Banks had been cutting costs to survive in the environment without interest rates and they made a significant outcome," said Hiroyuki Ueno, chief strategist at Sumitomo Mitsui Trust Asset Management.

"Now they have a tailwind that will boost their top line, their valuations could be much higher."

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