Japanese banks reap foreign investment amid tightening hopes

Japanese banks have emerged as top investment destinations for foreign investors as anticipation grows for a potential tightening of monetary policy by the Bank of Japan (BOJ).

Analysts believe that an end to decades of deflation and the prospect of higher interest rates will significantly boost bank earnings, driving up their stock prices.

The BOJ will conclude a two-day policy meeting on Wednesday and may increase interest rates while reducing its bond purchases, after ending negative interest rates in March.

As it plans to scale back a decade of monetary stimulus, investors are looking for potential winners in the stock market, with the Nikkei stock index having surged 20 per cent in the last year.

Among the various sectors, banks and automobiles have attracted the most foreign investment so far this year.

Specifically, Japanese banks have garnered an estimated 472 billion yen ($3.1 billion) in net stock purchases up to July 25, surpassing the inflows into the automotive and components sector by a significant margin, according to J.P. Morgan.

Japan’s three largest banks – Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial Group, and Mizuho Financial Group – have reported record profit forecasts for the coming year, driven by improved interest margins and growing lending demand.

Their share prices have surged by 53 per cent, 39 per cent, and 36 per cent respectively year-to-date.

While banks have been the primary focus, foreign investors are also showing interest in domestically oriented sectors such as services and pharmaceuticals, anticipating further gains in the yen.

Zuhair Khan, Blackrock’s head of active investments for Japan, believes that the banking sector is transitioning from challenging times to a more favourable environment.

Zuhair Khan, a senior portfolio manager at UBP, agrees that mega-banks will benefit from rising rates due to their larger lending opportunities compared to regional banks. However, he believes that this advantage is already reflected in the stock prices.

Attribution: Reuters