History tells us that the first phase of monetary tightening by the Bank of Japan marks the end of the rise in bank stocks. The Wall Street adage “buy on rumors, sell on facts” seems to apply.
Since the Bank of Japan slightly revised its yield curve control (YCC) policy contrary to market expectations in December 2022, the banking industry index of the Tokyo Stock Price Index (TOPIX) has increased by 68%, compared to 39% of TOPIX. has significantly outperformed. The yield on 10-year government bonds rose to nearly 1% at one point.
Bank of Japan revised monetary easing, raising permissible upper limit on long-term interest rates to 0.5%
When looking at the price movements of bank stocks, there are important hints from the case from 2006 to 2007, when the Bank of Japan last tightened monetary policy. The Bank of Japan ended its quantitative monetary easing program in March 2006, and raised the policy rate (uncollateralized overnight call rate) from zero to 0.25% four months later. Raising interest rates leads to an increase in deposits, so banks are supposed to be the beneficiaries, but stock prices at the time peaked at the end of quantitative easing.
If the Bank of Japan announces normalization of monetary policy, “that’s the end of this story,” said Richard Kay, a fund manager at Comgest Asset Management. He points out that the market has been talking about policy revisions for three years, and that “bank stocks have risen considerably on the back of expectations.”
At the earliest, the Bank of Japan may end its unprecedented monetary easing measures, including lifting the negative interest rate policy introduced in January 2016, at its monetary policy meeting on the 18th-19th next week. It would be the first interest rate hike in 17 years. According to a Bloomberg survey, a growing number of market participants expect negative interest rates to be abolished next week.
Expectations for Bank of Japan to lift negative interest rates in March soar, almost even with April – Survey
The overnight index swap (OIS) market, which reflects the outlook for monetary policy, is pricing in the possibility of a rate hike of up to 0.25% by the end of the year. Mitsubishi UFJ Financial Group (MUFG), one of the three megabanks, also sees the possibility of raising the policy interest rate to 0.25% by October at the latest.
MUFG Managing Director: There is a high possibility that negative interest rates will be lifted in March – Are current account tier 1?
While the market is pricing in the lifting of negative interest rates, domestic and foreign institutional investors such as JPMorgan Asset Management and Nomura Asset Management are cautious about increasing their weight in bank stocks from now on.
Michiko Sakai, portfolio manager at JPMorgan Asset, said in her analysis, “The market has already factored in that interest rates will reach zero to some extent.” Although they are “a group of companies that I would like to own” in terms of profitability, etc., they currently hold more insurance stocks because they have strong expectations for improvements in corporate governance.
Although there is a possibility of profit-taking selling due to policy changes in the future, rising interest rates are a positive factor for banks’ profits. In terms of stock price valuations for the sector, the TOPIX Banking Index’s expected price-to-earnings ratio (PER) is about 10 times, which is about the same as the average over the past 10 years and that of U.S. bank stocks.
Yoshihiro Miyazaki, chief portfolio manager at Nomura Asset Management, which invests in MUFG and Sumitomo Mitsui Financial Group, said the normalization of monetary policy is “a very epoch-making event for the Japanese economy and for Japanese stocks,” and said that he is betting on bank stocks. Maintains overweight.
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2024-03-14 22:55:00
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