Investors remain wary of increasing holdings in Japanese bank stocks

Global investors, including Nomura Asset Management Co. and JPMorgan Asset Management, are wary of increasing their holdings in Japanese bank stocks despite expectations of improved profitability due to an anticipated rate hike by the nation’s central bank next week.

Nomura Asset has been trimming its Japanese bank holdings, maintaining an overweight position in the sector. Portfolio manager Yoshihiro Miyazaki notes that many investors are overly optimistic about bank stocks in anticipation of higher rates. JPMorgan Asset portfolio manager Michiko Sakai has also reduced bank holdings, citing market anticipation of the Bank of Japan’s move away from sub-zero rates.

Sakai suggests that insurers appear more appealing within the financial sector due to improving corporate governance, while large lenders like Mitsubishi UFJ Financial Group Inc. are less attractive considering risk-reward dynamics.

Since the BOJ’s adjustment to its yield-curve-control policy in December 2022, the Topix bank index has surged nearly 70 per cent, driven by speculation of increased profitability for lenders. However, the correlation between bank shares and yields has weakened recently, indicating diminishing influence of rising yields on bank stocks.

The Nikkei 225 Stock Average has declined from its all-time high amid inflation concerns and anticipation of company wage hikes, bolstering the case for a BOJ rate hike. Without support from bank shares, the overall stock market may be susceptible to a rising rates environment.

Schroder Investment Management’s head of Japanese equities, Kazuhiro Toyoda, who maintains an overweight position in financials, does not plan to increase holdings further. He suggests that while it may take time for the BOJ to assess the sustainability of rate hikes post-negative-rate policy, market expectations could continue to drive bank shares higher.