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Categorized | Capital Markets, Equities

Banks advance after BoJ policy overhaul

Posted on September 21, 2016

Views Of Mizuho Financial Group Inc. As Mizuho Set to Punish Bank Executives Over Crime-Group Loans...A pedestrian walks past the corporate logo of Mizuho Financial Group Inc. displayed outside the Mizuho Bank Ltd. headquarters in Tokyo, Japan, on Friday, Oct. 25, 2013. Mizuho Financial Group Inc. may cut pay and add new board members to mollify investors, lawmakers and regulators after failing to end loans to crime groups in the biggest scandal of President Yasuhiro Sato's two-year tenure. Photographer: Kiyoshi Ota/Bloomberg©Bloomberg

European financial stocks followed their Japanese counterparts higher on Wednesday, after the Bank of Japan stopped short of taking interest rates deeper into the negative territory that has hurt the profitability of lenders in both regions.

At their widely anticipated meeting, officials kept their benchmark rate at minus 0.1 per cent and instead opted to cap yields on 10-year benchmark government bonds at zero in a move that has the potential to help banks by steepening the yield curve.

The Topix Banks Index, home to the shares of Japan’s largest lenders, rose almost 7 per cent to its highest level in six months. By late-morning trading in Europe, the Euro Stoxx Banks Index was up just over 3 per cent.

“The BoJ’s decision to keep its short-term interest rate unchanged and steepen the yield curve is definitely positive for financial sectors such as banks and insurance,” said Hiroyuki Ito, portfolio manager of the Fidelity Japan Fund.

Banks dominated the list of leading shares on the Euro Stoxx 600, the European benchmark. Barclays was among the biggest gainers, up 3.5 per cent in London. Holland’s ING rose 3.5 per cent, while France’s Société Générale was 3.2 per cent stronger.

In Tokyo, shares of Fukuoka Financial surged 9 per cent, Chiba Bank jumped 6.8 per cent and Mizuho Financial climbed by a similar amount. Overall, the Nikkei 225 was up 1.9 per cent.

    Alongside the initial positive reaction of financial stocks, investors also voiced doubts over how much further the rally could go given the 30 per cent advance in Japanese bank shares since they hit their low for the year in early July.

    Tomoya Masanao, head of portfolio management Japan at Pimco, described the policy as only “marginally positive for bank stocks”. He added: “The sustainability of the risk asset rally is questionable. The BoJ’s policy exhaustion is increasingly clear.”

    On wider global markets, benchmark Japanese government bond yields, which move inversely to the price, reacted to the BoJ’s new strategy, adding 2 basis points to minus 0.03 per cent. The yen weakened to ¥102.78 a dollar before returning to trade little changed at ¥101.78 a dollar late in the European morning.

    Japan’s central bank also vowed to maintain the size of its government bond buying “more or less in line with the current pace” of ¥80tn a year, and deliberately overshoot its inflation target of 2 per cent.

    “The BoJ will now be acting to reduce JGB volatility,” analysts at Mizuho said. “This is a welcome development which will ultimately be fruitful for government bond markets globally.” They added that “in exerting ‘yield curve control’, the near-term uncertainty as to the efficacy of the policy will be whether or not the BoJ will undershoot on the quantitative side.”

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