Japan banks: US bank woes makes scrapping yield curve control difficult 

Half a world away from Silicon Valley, Japanese bank stocks have been much more volatile than their US peers.

Shares in the largest, Mitsubishi UFJ Financial Group, down 9 per cent on Tuesday, have fallen 17 per cent since the collapse of Silicon Valley Bank. Peers Mizuho and Sumitomo Mitsui Financial Group also dropped, as did smaller regional lenders. The decline is not because of panic over contagion fears. It reflects concern about future earnings.

Japan’s two decades of zero interest rates encouraged local lenders to increase their holdings of US bond investments as they searched for higher returns in recent years. Losses from these bets will be a real concern.

But the main fallout from SVB for Japan will lie in government bonds yields. The Bank of Japan delivered a shock in December, allowing the 10-year JGB yield to move 50 basis points from its zero per cent target, for the first time in more than six years. Since then, analysts around the world have been betting that it would end its yield-curve control policy around May this year.

That now looks highly unlikely. On Tuesday, 10-year JGB yields fell to 0.24 per cent, the lowest since last November. The two-year yield remains negative.

Shares of MUFG have enjoyed a rare rally since the BoJ policy shift in December, gaining a third up until the SVB collapse. Shares trade at 0.7 times tangible book, more than doubling over the past three years, and finally getting closer to regional peers.

As Japan Post Bank’s secondary stock offering this week shows, local lenders are increasingly losing appeal to foreign investors. Local investors picked up most of the $9.2bn sale. As rates fall further, bank dividends of up to 4 per cent remain one of the few remaining sources of stable returns for Japanese retail investors.

That will eventually put a floor under the shares. But as lenders face a return to low profitability and another prolonged stretch of ultra-low interest rates, there is further for shares to fall.