Japanese Lenders Rally on BOJ’s Policy Tweak, Room to Rise, Says Lazard
Japanese lenders are experiencing a rally following the Bank of Japan‘s (BOJ) surprise policy adjustment last month, which positioned them among the best-performing stocks in the country, according to Lazard Asset Management. The sector is yet to fully reflect the BOJ’s decision to raise its ceiling on 10-year government bond yields on July 28. Lenders have already gained 3.9% since the adjustment, marking the third-largest increase among the Topix’s 33 sub-indexes.
The rise in bond yields has provided some relief for banks that have suffered from low interest income due to the BOJ’s efforts to stimulate inflation. A summary of views from the July meeting indicated that a policy board member believes that sustainable 2% inflation is within reach. This transition from deflation to inflation, accompanied by monetary policy normalization, bodes well for Japanese financial institutions, stated Lazard’s June-Yon Kim.
The Japanese Strategic Equity Fund managed by Lazard, with approximately 9 billion yen ($63 million) in assets, has Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc., and Sumitomo Mitsui Financial Group Inc. as some of the largest holdings, making up around 14% of its portfolio. The fund has outperformed the Topix index by more than 30% year-to-date in dollar terms and has surpassed all peers.
However, market sentiment remains divided on whether the BOJ has completed its policy adjustments or if a new phase is on the horizon, according to SMBC Nikko Securities analyst Masahiko Sato. While the central bank’s yield-curve-control policy’s end seems unlikely, reducing weightings in bank stocks could be risky, Sato wrote in an Aug. 3 research note.
Moreover, Lazard maintains a bullish outlook on Japan’s technology companies, anticipating growth in the industry driven by electric vehicles and automation. The fund has an overweight position in the information technology sector, accounting for approximately 10% of its portfolio. Additionally, it is overweight in the materials sector. This year, semiconductor firms associated with artificial intelligence have delivered strong performance on the Nikkei 225 Stock Average.
June-Yon Kim highlighted the peculiar situation in the tech sector, where short-term demand is weak, and fundamentals remain inconsistent, but the long-term outlook is positive.
In summary, Japanese lenders have seen their stocks rise following the BOJ’s policy tweak, with room for further growth. The transition from deflation to inflation and the potential for monetary policy normalization provide a positive outlook for the financial sector. Lazard’s Japanese Strategic Equity Fund has performed exceptionally well, outshining its peers. The market is uncertain about the BOJ’s future moves, but reducing exposure to bank stocks may be risky. Additionally, Lazard is optimistic about Japan’s technology sector, particularly electric vehicles and automation. While the near-term demand may be weak, the long-term outlook appears promising.
