Japan's Banking Sector Receives Boost

A small change to Japan's interest rate policy has had a big impact on the country's financial stocks. If this shift in policy is sustained, it could lead to even more gains for these stocks.
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Japanese banks and insurers have seen their shares surge since the Bank of Japan 8301 0.00%
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The Bank of Japan (BOJ) unexpectedly raised its effective cap on 10-year government bond yields to 0.5% from 0.25% about two weeks ago. The BOJ has long intervened in the bond market to keep yields of that tenor within a specific trading range around zero.
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Since then, shares of many Japanese financial companies have seen double-digit gains. The country’s largest bank, Mitsubishi UFJ Financial Group Inc., has soared 15%, while insurer Dai-ichi Life Holdings Inc. has gone up 14%.
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The reason is simple: Banks and insurers can now reinvest their capital into bonds with higher yields, while longer-term loan rates like mortgages should also rise. A 0.25 percentage point increase may not seem like much, but for Japanese banks, which have suffered from anemic growth and paltry returns for years, it could be a helpful boost. More importantly, if the tweak signals a shift in Japan’s ultralow interest-rate regime, more rate increases could be on the way.
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The Bank of Japan (BOJ) has insisted that its recent policy move is not true monetary tightening, but rather a technical tweak to smooth the yield curve of government bonds. This is because the 10-year yield was artificially low due to the central bank's policy.Indeed, the 10-year yield was suppressed relative to other tenors and it moved the most after the BOJ's move, from around 0.25% to 0.44%. However, the whole yield curve has shifted upward, with Japan's 30-year yield increasing by around 0.1 percentage points, for example.
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Japanese banks are still trading at deep discounts to their tangible book values. MUFG, for example, trades at 0.7 times, while Mizuho Financial Group Inc. is at 0.6 times. Some smaller regional banks are even cheaper. In comparison, JPMorgan Chase & Co. trades at nearly two times its tangible book value. Japanese banks have long traded cheaper than their global peers, but their valuations have fallen even further since Japan embarked on its negative interest-rate policy in 2016.
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Japanese banks may not have been the best investments in the negative interest-rate era, but that could change quickly if Japan’s rate policy really is at a turning point. If rates start to rise, Japanese banks could see their profits increase, making them more attractive investments.