As expectations grow that the BOJ will raise its policy rate to 1.25%, bank stocks may be approaching a turning point in their earnings environment. At the same time, some expect a narrowing gap between short- and long-term interest rates to put pressure on earnings.
The Bank of Japan is widely expected to raise its policy rate to 1.25% at its monetary policy meeting on the 18th, and bank stocks are moving toward this “terminal point.” Expectations of higher interest income following rate hikes since the end of large-scale monetary easing have driven bank stocks higher.
The rise in bank stocks has been supported by a significant gain in the Tokyo Stock Exchange's banking sector index over the past 2 years, but concerns are growing that a narrowing gap between short- and long-term interest rates could put pressure on net interest margins.
Against a backdrop of expectations that the BOJ will accelerate the pace of rate hikes, a scenario has emerged in which short-term rates rise sharply and the yield curve flattens. In that case, bank stocks could lose momentum amid concerns about an economic slowdown ahead.
Some market participants are already focusing on the “end of rate hikes” as the BOJ's policy rate approaches a neutral level. Around 1.75% is cited as an assumption for the terminal rate, although some expect the increase to remain within the range of neutral rates.
Bank stocks have potential catalysts including solid earnings growth and improved capital efficiency, while some expect further upside over the next 6 months to 1 year.
Overall, bullish views currently predominate, but over the longer term, concerns are also emerging about higher funding costs and an increase in loan losses.