TOKYO :The “Takaichi trade” that propelled Japanese stocks to record highs this week passed by the banking sector, which heavily underperformed the market as investors, bracing for Sanae Takaichi as the nation’s new leader, repriced their exposure.
But not for long, some analysts say, as the economic landscape under a Takaichi government is likely to buoy finance.
Markets have homed in on Takaichi’s support for fiscal stimulus and looser monetary policy – a powerful prop for stocks though it may also delay the Bank of Japan’s planned interest rate hikes, curtailing a future source of bank profits.
Those initial investor calculations saw the Topix banking index fall 0.12 per cent on Monday even as the Nikkei share average soared 4.75 per cent.
To be sure, the pullback in banking stocks pales against their strident rally of 47 per cent since the BOJ ended its radical stimulus policies in March last year, easily outperforming the Nikkei’s 21 per cent jump in that period.
And, according to analysts, lenders may yet again emerge as beneficiaries under expansionary policies – which would need bank financing – while the rapidly weakening yen could impel the BOJ to raise rates regardless of Takaichi’s dovish stance.
This could extend the banks’ bull run, as Japan’s emergence from decades of deflation and the end of rock-bottom interest rates has brought record profits and soaring share prices for its banks.
“Across Japan, both regional banks and the megabanks would benefit from a broad expansionary policy based on economic security,” said Goldman Sachs’ Japan financial analyst Makoto Kuroda.
CAN TAKAICHI SWAY BOJ?
Takaichi’s post-selection press conference centred on economic security, including large-scale energy infrastructure and defence spending, that would require project financing.
Takaichi said she would prioritise economic revitalisation in Japan’s regions, which could drive demand for regional banks’ local know-how, Kuroda said.
After years of negative interest rates, banks have developed business models that are not as reliant on domestic lending spreads.
Japan’s largest lender by assets, Mitsubishi UFJ Financial Group, estimated an average annual boost to pre-tax profits of 166 billion yen ($1.09 billion) from the January 2025 interest rate hike over three years, but this would be less than a tenth of its annual profit, which hit a record 1.86 trillion yen in the last financial year.
“Even the impact of previous rate hikes has yet to be fully incorporated into earnings. There’s still some room for long-term guidances or ROE targets to be revised up,” Kuroda said.
Analysts also say there is limited scope for Takaichi to apply pressure on the central bank despite her previous comments against hiking rates.
Its independence from government interference is guaranteed by law although it has historically been sensitive to political developments.
BOJ Governor Kazuo Ueda has kept his counsel on the policy implications of a new government, but last week he reiterated the central bank’s resolve to continue raising still-low interest rates if the economy and prices move in line with its forecasts.
“Governor Ueda’s term has another 2.5 years to run and he has the law on his side – a law Takaichi wouldn’t even think of changing,” said Nicholas Smith, Japan strategist at CLSA Securities.
“She was also careful to say recently that she will not seek to influence the BOJ,” he said.
In any case, the yen’s rapid decline – falling some 3.5 per cent to more than 152 yen to the dollar since the start of the week – may force the central bank’s hand.
Its decision-making is heavily influenced by exchange rates and a fall to around 160 yen to the dollar would mean an interest rate hike to arrest the currency decline is on the cards, said SMBC Nikko analyst Masahiko Sato.
Moreover, the extent to which Takaichi will be able to implement her programme at all is an open question, as without a parliamentary majority she will be reliant on coalition partners to pass legislation.
She would also have to contend with the Ministry of Finance to secure any fiscal largesse.
“MOF is immensely powerful and only a strong prime minister is able to bend them to her will. It’s still not clear whether Takaichi is such a leader,” CLSA’s Smith said.
“Overestimating the government’s ability to dramatically ramp up spending seems a mistake.”
($1 = 152.9600 yen)
