At BOJ Meeting, Bulls Look for Reasons to Shore Up on Bank Stocks
At BOJ Meeting, Bulls Look for Reasons to Shore Up on Bank Stocks
(Bloomberg) -- In one of the most anticipated Bank of Japan monthly meetings, equity bulls are this week waiting for any signal from the central bank they can use as an excuse to bid up financial stocks.
Should the BOJ decide to stand pat as expected, it’ll be taken as a sign of confidence in the country’s economy and serve as a reason to pick up stocks with cheap valuations, namely financial shares. If the central bank deepens negative interest rates in October, analysts say the move will be accompanied by measures to prop up lenders’ equity prices in the medium term.
“If there’s no deeper cut in negative interest rates, the odds are the market will view the longer-end yields as having bottomed in August and September,” said Makoto Furukawa, the chief portfolio strategist at Mitsubishi UFJ Morgan Stanley in Tokyo. “Stocks with cheap valuations like banks and materials-sector companies, which have been oversold, will continue their rebound.”
If the BOJ does take a step, it will also likely give lenders some help, having learned a hard lesson with negative interest rates, analysts say. Pushing rates below zero took a toll on the banking sector’s profit margins, drawing criticism from the industry.
“The move to change monetary policy is most likely an effort to alleviate pressure on Japanese banks, which have long complained of the intense pressure a flat yield curve puts on profitability,” Paul Hsiao, a Hong Kong-based economist at PineBridge Investments, said in an interview.
Some 59% of 46 economists expect stimulus to remain unchanged at the end of a two-day meeting Thursday, though an increasing number think the bank will lower its negative interest rate in the near-term, according to a Bloomberg survey this month. The poll showed that more than 70% of analysts expect more easing by January next year, compared with less than two-thirds a month ago.
The central bank has kept its key policy rate unchanged for almost four years since introducing negative interest rates in January 2016. Now, with Japan still a ways off from reaching its 2% inflation target and against a backdrop of rate cuts from Australia to South Korea, some investors are betting the BOJ may be ready to move in the coming months.
Steeper Yield Curve
Unlike the first time around, a further reduction in short-term rates may be introduced together with additional yield-curve control for a steeper curve for example, according to Nomura Securities. This will aid Japanese banks, which usually borrow short term and lend long term.
Although Nomura’s main scenario for the October meeting is no change to policy, the brokerage still hints at the possibility of a potential rate cut being accompanied by plans to prop up the longer end of the yield curve.
“If the longer end of the yield curve is firmly supported, 20-year yields could be lifted 10 basis points and the dollar-yen rate may rise 2%,” Yunosuke Ikeda, chief equity strategist at Nomura, said in an interview.
Under such a scenario, Ikeda estimates the Topix index will get a 2% boost in the space of a week to a month, and banking-sector stocks will see a 4% lift. The Topix Banks Index is little changed this year, with a valuation of 0.4 times its book value. That compares with a 10% gain in the benchmark Topix, which is now trading at 1.2 times book value.
Tweaking Reserves Portion
Another option for the BOJ is to tweak the portion of reserves on which negative yields are applied. Currently, commercial bank reserves at the BOJ are divided largely into three tiers and a rate of minus 0.1% is applied on one of them, referred to as the “negative interest-rate balance.”
JPMorgan Securities Japan also raises the possibility this three-tier system for bank reserves may be changed in a way that allows a greater portion of the reserve to be subject to positive interest rates.
“We thus see little need to view deeper NIRP as bad news for bank stocks,” Ryota Sakagami, chief Japan equity strategist at the brokerage, wrote in a note dated Oct. 18. “If bank stocks correct in response to headlines about negative interest rates, we think this would increase their attractiveness.”
BOJ Governor Haruhiko Kuroda has repeatedly said cutting the negative rate is an option should the central bank need to give more support to the economy and prices, and this has heightened awareness among investors.
For now, the BOJ is considering refraining from extra stimulus at its October meeting but will look for a fresh way to show its continued readiness to take action, according to people familiar with the matter. This will likely mean the BOJ will take action in December, according to Nikko Asset Management.
John Vail, the Tokyo-based chief global strategist at Nikko Asset, agrees any deeper rate cuts into negative territory would be accompanied by complementary measures including tweaks to the tiering system of bank reserves and adjustments to BOJ’s yield-curve control. This, he says, will be an “excellent package.”
There is risk and likelihood, however, that the immediate reaction to a steeper, negative interest rate will be to dump financial stocks.
JPMorgan’s Sakagami clarifies that his view for strength in the banking sector is for the “medium term,” and stocks will likely be sold in the short term. “We therefore recommend buying on weakness, particularly for interest-rate sensitive stocks,” he wrote.
--With assistance from Shoko Oda.
To contact the reporters on this story: Min Jeong Lee in Tokyo at mlee754@bloomberg.net;Toshiro Hasegawa in Tokyo at thasegawa6@bloomberg.net
To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Teo Chian Wei, Cecile Vannucci
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