Japan megabanks report solid Q1 profit amid hope of BOJ windfall

Two of Japan’s megabanks reported solid quarterly profit on Monday amid hope that the Bank of Japan’s policy change would herald a sea change in their business after years of being squeezed by rock-bottom interest rates.

The central bank’s relaxation of its cap on bond yields boosted the prospect of a steeper yield curve creating a windfall for lenders, sending Japan’s benchmark index of banking stocks to eight-year highs.

Higher government bond yields will in the long run lift returns on bond holdings at major lenders, which previously had limited options on where to park massive deposits and so escaped to higher-yielding assets overseas such as US Treasuries.

The tailwind comes as top banks revamp their business structures to withstand ultra-low rates at home, by slimming domestic retail operations, beefing up presence in Asia through acquisitions and ramping up US investment banking.

Sumitomo Mitsui Financial Group (SMFG) and Mizuho Financial Group, Japan’s second- and third-largest lenders by assets respectively, on Monday stuck by their full-year net profit forecasts, which point to their highest earnings since the mid 2010s.

For April-June, SMFG’s net profit dropped 1.8 per cent from the same period a year earlier to 248 billion yen ($1.75 billion). That compared with the 225.74 billion yen average of two analyst estimates compiled by Refinitiv.

Mizuho reported a 53.9 per cent rise in net profit for the quarter.

Biggest lender, Mitsubishi UFJ Financial Group (MUFG), will report quarterly earnings on Tuesday.

Japan’s Nikkei share average reached a four-week high on Monday, as a calm bond market following the Bank of Japan’s surprise policy tweak and growing optimism from a slowing of US inflation boosted investor sentiment.

Earnings reports also produced some standout winners, with Toyota Group’s logistics company Toyota Tsusho surging almost 10 per cent and helping lift the auto sector.

The Nikkei gained 1.26 per cent to 33,172.22, and was up as much as 2 per cent earlier in the session, while the broader Topix gained 1.39 per cent to 2,322.56. Of the Nikkei’s 225 components, 191 rose and 34 fell.

The BOJ “has maintained easy monetary policy for now, so recent uncertainty has receded, which I think has provided a major reassurance for the market,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management.

“Today will probably be the high for this week. Since policy accommodation hasn’t strengthened, a continued weakening of the yen and rise in stocks seems unlikely.”

On Friday, the BOJ kept stimulus settings unchanged but announced it would conduct bond buying operations at a yield of 1% instead of the official 0.5 per cent ceiling under its yield curve control.

The benchmark Japanese government bond yield rose to a nine-year high of 0.605 per cent to start Monday trading, but failed to push above that as the central bank conducted additional purchase operations to slow its rise.

Japanese stocks also got a lift from Friday’s Wall Street rally, after data showed US inflation rising at the slowest pace since early 2021.

Precision machinery was the best performing of the Tokyo Stock Exchange’s 33 industry groups on Monday, gaining 3 per cent. Transport equipment was a close second, rising 2.83 per cent.

Toyota Motor rallied 3.29 per cent and Toyota Group supplier Denso added 3.76 per cent.

Other notable winners included Uniqlo parent Fast Retailing and chipmaker Renesas Electronics, up 1.98 per cent and 4.59 per cent respectively.

At the other end, Sumitomo Pharma tumbled more than 10 per cent after disappointing trial results for its schizophrenia treatment, while robot maker Fanuc lost 7.27 per cent after earnings disappointed.

Meanwhile Japan’s benchmark 10-year government bond yield surged to a nine-year high on Monday, spurring the central bank to conduct additional purchase operations to slow its rise.

The 10-year yield rose as much as 6 basis points (bps) to 0.605 per cent, a level last seen in June 2014. That handily exceeded the 0.5 per cent official ceiling under the central bank’s yield curve control (YCC), but well back from the 1 per cent upper tolerance limit signaled in a surprise policy tweak on Friday.

The Bank of Japan (BOJ) conducted an additional 300 billion yen ($2.11 billion) purchase operation mid-morning, which saw the yield retreat as low as 0.59 per cent, although it had returned to 0.605 per cent as of 0545 GMT.

Policymakers “said they’d let the market decide the yield level with the BOJ as a kind of referee, but it’s ambiguous,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.