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HONG KONG: Japan’s banking sector has attracted larger foreign investment flows than other sectors as investors see it as the biggest beneficiary of potential monetary tightening.
Analysts say Japan’s escape from decades of deflation and high interest rates will mean stronger profitability for banks, supporting their share prices.
Why it matters
The Bank of Japan will wrap up a two-day policy meeting on Wednesday and is likely to raise rates and scale back bond purchases after ending its negative rate policy in March. Investors who have watched the Nikkei rise 20% over the past year are trying to pick winners as the central bank prepares to exit a decade of monetary stimulus.
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Banking and automobiles are two sectors that have seen net inflows of foreign investment so far this year.
Banks attracted about 472 billion yen ($3.1 billion) in net stock buying in the year to July 25, more than double the inflows into the auto and parts sector, JPMorgan’s quantitative strategy team said.
context
After years of being squeezed by negative interest rates, Japan’s three largest banks expect record profits next year, helped by improving interest margins and growing funding needs.
Shares of Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial Group and Mizuho Financial Group have risen 53%, 39% and 36% so far this year, respectively.
Overseas investors are also buying more domestically oriented stocks, such as services and pharmaceuticals, on expectations that the yen will appreciate further.
Key quotes
Yue Bamba, head of active investing in Japan at BlackRock, said: “We are moving from a very difficult period to a more favorable environment for all banks. We think their outperformance can continue… Even if interest rates gradually rise, it will bring direct benefits from an ROE perspective.” Zuhair Khan, senior portfolio manager at UBS, said: “The large banks will be the beneficiaries of rising interest rates because they have more lending opportunities than regional banks, but I believe this benefit is already reflected in the stock price.”
($1 = 153.7200 Japanese Yen)
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