Investors Flock to Japanese Bank Stocks... "Interest Income to Rise When Monetary Easing Ends"

As market expectations grow that the Bank of Japan (BOJ) will put an end to its accommodative monetary policy, financial firms are increasing their allocation to Japanese bank stocks in their equity portfolios. This is based on the anticipation that if the BOJ shifts to a tightening stance, the benchmark interest rate will rise, boosting the interest income banks can earn. The fact that wages, which have stagnated for 30 years, are now showing an upward trend is also expected to have a positive effect on bank stocks.

Head Office of Mitsubishi Tokyo UFJ Bank, Japan's Largest Mega Bank [Image Source=Yonhap News]

On the 12th (local time), Yutaka Uda, Chief Investment Officer (CIO) of Everrich Asset Management in Japan, forecasted that the BOJ could end its ultra-low interest rate policy as early as this year, and that Japanese bank stocks could double in value over the next 18 months.

Accordingly, Everrich Asset Management has significantly increased the proportion of bank stocks in its portfolio for the 'Japan Growth Fund,' which invests in Japanese listed companies. The shares of Japan’s financial holding companies, Mitsui Sumitomo Financial Group and Mitsubishi UFJ Financial Group, have increased by 69.69% and 75.38%, respectively, compared to the previous year within the overall portfolio. The fund’s total assets amount to $108 million (KRW 143.316 billion), and it has recorded a 38% return so far this year, ranking in the top 2% by performance among competing funds.

Japan-based investment advisory firm Atom Capital Management is also reported to have purchased Japanese bank stocks after the BOJ widened the fluctuation range of its Yield Curve Control (YCC) policy’s long-term interest rates from ±0.25% to ±0.5% in December last year. Atsuko Tsujiya, CEO of Atom Capital Management, projected, "Currently, bank stocks have a low price-to-book ratio, so their prices could rise by another 30%."

Masanari Takada, a derivatives strategist at JP Morgan Securities, stated, "Investors are currently overvaluing bank stocks."

Investors are increasing their bank stock allocations in their portfolios because they are betting that the BOJ will end its accommodative monetary policy in the first half of next year. According to Quick, a financial information service affiliated with the Nihon Keizai Shimbun, 29% of market participants expect the BOJ to change its policy between April and June, following spring wage negotiations next year. If the BOJ shifts to a tightening stance, it is highly likely that the negative interest rate policy, which keeps short-term rates at -0.1%, will be abolished, leading to an increase in benchmark interest rates and thus boosting banks’ interest income.

The signs of wage increases after 30 years of stagnation among companies are also expected to be a positive factor for bank stocks. Japan’s wage growth rate this year averaged 3.58%, up 1.51 percentage points from last year. This is the first time in about 30 years, since 1994, that the average increase has exceeded 3%. Wage growth boosts household consumption, which promotes corporate economic growth and can positively impact banks’ lending businesses.

Yutaka, CIO of Everrich Asset Management, said, "Japan is showing solid economic growth, so it will be difficult for the BOJ to reduce inflation below 2% within the next three years. We also plan to increase our allocation to bank stocks further if necessary."