Bank Stocks Outpace Global Peers on Rate-Hike Bets

2026-07-29

A magnet for foreign money

Japan's bank shares are holding firm. They have risen faster than bank stocks in the U.S. and Europe, supported by expectations that continued rate hikes by the Bank of Japan will widen net interest margins and boost lending. They are also gaining ground as a haven from AI and semiconductor shares, which have been falling sharply of late.

During a visit to Hong Kong and Singapore in early July, SBI Securities senior analyst Toyoki Sameshima was repeatedly asked by hedge funds he met: 'We want to broaden our investments beyond megabanks. Which regional banks have interesting initiatives?'

Sameshima said, 'There was not a single investor who was bearish on Japanese bank stocks. Interest as an alternative to AI and semiconductor stocks is quite high.'

Bank stock rally accelerates

The Nikkei average fell more than 8,600 yen from the end of June in July as AI and semiconductor stocks reversed course. On the 29th, the correction deepened, with Kioxia Holdings and others each falling more than 10%.

Against that backdrop, bank stocks have attracted buying. Mitsubishi UFJ Financial Group took the top spot in market capitalization among Japanese companies on the 13th, the first time a financial institution has led the ranking in 40 years.

The bank share rally, which began in earnest after the Bank of Japan widened the allowable range for long-term interest rate moves at the end of 2022, is now in its fifth year and gathering momentum. Mitsubishi UFJ's year-to-date gain stood at 46% as of the 29th, approaching the 52% rise it posted in 2024, 51% in 2013 and 54% in 2005. It could also mark the biggest annual gain since the bank's listing in 2001.

Margins and lending provide tailwind

The strength of Japanese bank stocks stands out globally. The year-to-date rise in the Tokyo Stock Price Index (TOPIX) industry subindex for banking was 44% as of the 28th. That far exceeded the 15% gain in the KBW Nasdaq Bank Index, which tracks major U.S. banks, and the 18% rise in the STOXX Europe 600 banks index.

Behind the move is a higher market view of the Bank of Japan's terminal rate. While the policy rate is currently 1%, the one-year rate two years ahead in the overnight index swap (OIS) market is trading in the 2.1% range. Among investors in the U.S. and Europe who have experienced inflation after the COVID-19 pandemic, there is also no shortage of views that there is room for it to rise to 2.5%.

Ken Kamoshita, head of equity management at PGIM Japan, said, 'I will keep holding bank stocks as long as expectations for a higher terminal rate do not disappear.'

Many domestic banks, including Mizuho Financial Group and regional lenders, have set their policy-rate assumption at 0.75% in their earnings plans for the fiscal year ending March 2027. As a result, the market is increasingly pricing in anticipated upward revisions to earnings forecasts and stronger shareholder returns, said Nana Otsuki, senior fellow at Pictet Japan.

Corporate demand is also expanding

The source of bank earnings is net interest margin, or the gap between lending rates and deposit rates. In Japan, long years of monetary easing have kept deposit-rate increases in check.

According to SBI's Sameshima, the pass-through rate, which shows how much financial institutions have raised rates in response to policy-rate increases, is around 40% for ordinary savings accounts, while lending rates reach 80% to 90%. That tends to strengthen the view that net interest margins widen when rates rise.

In addition, growth in lending is also providing support. In the Bank of Japan's June loan and deposit data, the average loan balance at banks nationwide rose 6.3% from a year earlier, the biggest increase in 5 years and 10 months.

For a long time, loan growth lagged deposit growth, but since 2022 loans have outpaced deposits, in contrast to deposits, which have been growing only around 1% to 2%.

Labor-saving investment to address worker shortages, as well as investment related to digital transformation, including AI, has been active, and M&A has also increased. Business restructuring is advancing on the back of the Tokyo Stock Exchange's call for management that is conscious of capital costs and share prices, boosting both funding demand and fee income.

The government has also drawn up a plan for public and private sectors to invest more than 370 trillion yen in total by fiscal 2040 in 17 strategic areas including AI. Koichi Niwa, an analyst at UBS Securities, said, 'Corporate lending will keep growing as Japan's economy moves toward normalization.'

Still, Niwa noted that 'there are still many overseas investors who do not hold Japanese financial stocks.' He said they remain focused not only on the macro driver of rising rates but also on assessing the earnings power of individual banks.

A continued shift of investment money that had been concentrated in AI and semiconductor stocks toward Japanese bank shares, viewed as the most attractive haven, may still have further to run.

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