Bank of Japan's Policy Tweak Benefits Banking Sector, Says Goldman Sachs
Increased Flexibility on Yield Curve Control
Goldman Sachs suggests that the Bank of Japan's (BOJ) recent decision to enhance flexibility on its yield curve control (YCC) is positive news for the banking sector. The BOJ had implemented a bond-buying program in 2016, imposing a strict 1% cap on 10-year Japanese government bond (JGB) yields. However, the central bank recently announced that the 1% cap would now be considered a reference point, allowing the 10-year yield to rise slightly above this limit. This adjustment is expected to result in a more controlled rise in yields, benefiting natural buyers of JGBs like banks.
Implications for Banks and the Market
Goldman Sachs analyst Makoto Kuroda explains that the flexible YCC enables a more controlled yield rise, removing the previous "line in the sand" constraint. This controlled manner of yield increase is crucial for banks as it facilitates easier purchase of bonds. While banks are anticipated to experience higher earnings due to the rise in JGB yields, the market will only reflect this once the banks begin buying JGBs, according to Kuroda and fellow analyst Yuka Azami in a note to investors.
Interest Rate Normalization and Focus on Japanese Banks
Kuroda further emphasizes that Japanese banks are expected to benefit from the BOJ's interest rate normalization. The analyst predicts that the BOJ's forward guidance revision and exit from negative interest policy will likely occur in 2024, a year earlier than initially anticipated. This projection is contingent upon the confirmation of a virtuous cycle between wages and inflation through "shunto wages," which refer to annual wage negotiations between labor unions and Japanese employers held in spring.
Bank Stock Picks: Mitsubishi UFJ Financial Group and Mizuho
Goldman Sachs identifies Mitsubishi UFJ Financial Group (MUFG) and Mizuho as top picks within the Japanese banking sector. The firm expects MUFG to benefit from steady growth in domestic and corporate lending, as well as a recovery in capital and bond markets following Asia's economic reopening. Mizuho, on the other hand, is favored for its improving earnings resulting from consistent growth in lending to domestic and overseas corporations. Catalysts for growth include the BOJ's YCC adjustment, corporate governance reform on the Tokyo Stock Exchange, and potential stock market rallies or a weak yen.
Goldman Sachs maintains a buy rating on both MUFG and Mizuho, setting a target of 1,500 yen ($10.03) for MUFG, implying an 18% potential upside from its Nov. 6 close, and 3,050 yen for Mizuho, indicating around a 20% upside.
— Reporting contributed by Naman Tandon and Lim Hui Jie, CNBC.
Impacts of BOJ's Policy Tweak on New Business Formation
The Bank of Japan's (BOJ) recent decision to increase flexibility on its yield curve control (YCC) has significant implications for new businesses in the banking sector. Goldman Sachs suggests that the policy tweak is good news for banks, as it allows for a more controlled rise in yields, making it easier for banks to buy bonds.
Yield Curve Control and Market Implications
This policy change removes the previous "line in the sand" constraint, enabling a more controlled yield rise. For new businesses in the banking sector, this controlled yield increase could lead to higher earnings due to the rise in Japanese government bond (JGB) yields. However, these benefits will only be reflected in the market once the banks begin buying JGBs.
Interest Rate Normalization and Its Effects
Furthermore, the BOJ's anticipated interest rate normalization in 2024 could also benefit new businesses. This normalization, contingent upon the confirmation of a virtuous cycle between wages and inflation, could lead to a more stable and predictable business environment.
Insights from Top Bank Stock Picks
Goldman Sachs' top picks within the Japanese banking sector, Mitsubishi UFJ Financial Group (MUFG) and Mizuho, also provide valuable insights for new businesses. The firm's positive outlook on these banks, based on factors such as steady growth in domestic and corporate lending and potential stock market rallies, underscores the opportunities that new businesses in the sector could capitalize on.
Overall, the BOJ's policy tweak and the subsequent market implications offer crucial insights for new businesses in the banking sector, highlighting potential strategies for growth and success.