Japan Banks: Bank of Japan Exits Negative Rate Policy, Move Is Well Anticipated and Reflected

The Bank of Japan, or BoJ, officially ended its net zero interest rate policy March 19 in a move that was well anticipated. The BoJ now guides the overnight call rate at 0% to 0.1% and will also no longer cap the 10-year Japanese government bond rate at 1%. Rather successfully for the BoJ, the announcement resulted in little reaction from the markets. What the move means is that the Japanese banks are earning a positive return on their reserves. We think this shift is already baked into the share prices of the banks we cover. For investors holding for the longer term, our preference would be for Sumitomo Mitsui Financial Group, or SMFG, and Resona, but we would prefer to wait for more attractive entry points. We think Mitsubishi UFJ and Mizuho are slightly overvalued and may not benefit as much as their expanding domestic net interest margins, or NIM, may be partly offset by margin pressure on their relatively significant international operations.