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Tuesday was a historic day for Japanese lenders. Japan’s central bank set its policy rate in a range of zero to 0.1 per cent, marking the first interest rate rise in 17 years and ending an era of negative rates. Japanese banks’ earnings should be the first to reflect this shift.
The Bank of Japan signalled the beginning of an end to its ultra-loose monetary policy by also removing its yield curve controls, a policy that caps the yields of 10-year Japanese government bonds. This has been in place since 2016. This shift away from decades of massive monetary stimulus should mean further increases are on the cards.
But moving interest rates closer to the central bank’s 2 per cent inflation target could take much longer than expected. The pace of further rate rises will depend on several factors, not least whether local companies and households are able to handle higher borrowing costs.
That is especially a concern given high levels of national debt. Japan’s debt reached a record $8.6tn at the end of last year, according to government data. At over 250 per cent of gross domestic product that is the highest across major economies in the world.
For a country where negative rates have been around for so long, even 0.1 per cent rise is a big deal. Local banks have over $700bn in reserves that are currently paying no interest, according to central bank data.
It is not just banks that have piles of idle cash. In Japan, corporate savings have been on the rise for more than two decades. The lion’s share of those additional funds have been left in cash, reflecting conservative management styles and concerns about future funding uncertainty. Even accounting for a significant rise in share buybacks in fiscal year 2023, and excluding financial groups, Japanese companies have 49 per cent cash on their balance sheets as a proportion of net assets, according to JPMorgan.
Shares in Japan’s largest lender, Mitsubishi UFJ Financial Group, are already up more than 80 per cent in the past year. Peers Mizuho and Sumitomo Mitsui Financial Group have climbed around two-thirds. Shares of Mitsubishi UFJ trade at just over its tangible book value. Its valuation has more than doubled over the past three years to be in line with regional peers, reflecting expectations for rate increases.
Local banks already have a strong local retail investor base that relies on bank dividends as a source of stable income. As profitability improves, so should their appeal for foreign investors that have overlooked the sector.
june.yoon@ft.com