For years, Japanese banks were among the least exciting shares in the world, weighed down by ultra-low and even negative interest rates. As bond yields in Japan have climbed, that story has changed. When yields jump, as Japan’s 10-year yield did again this week, bank shares in Tokyo often move in the opposite direction to much of the market. Here is why.
How banks make money
At its simplest, a bank borrows money from depositors and lends it out to households and businesses at a higher rate. The difference between what it earns on loans and what it pays on deposits is called the net interest margin. Our guide to net interest income for bank shares covers the basics.
When interest rates are close to zero, that margin gets squeezed. Banks cannot easily cut deposit rates below zero, but loan rates keep falling, so profits shrink. That is the environment Japanese banks lived in for most of the past two decades.
Why higher yields help
As the Bank of Japan has moved away from its ultra-loose policy and bond yields have risen, Japanese banks can charge more on new loans and earn more on the government bonds they hold as new purchases come at higher yields. Deposit rates tend to rise more slowly, so margins widen and profits improve.
Japan’s largest banks, often called the megabanks, have also benefited from strong overseas lending and fee income. Investors see them as one of the clearest ways to benefit from rising rates in Japan.
The risks in the trade
Higher yields are not purely good news. When yields rise, the market value of bonds a bank already owns falls. If losses on those holdings become large, they can eat into capital. That was a central issue in the 2023 collapse of Silicon Valley Bank in the US.
Rising rates can also put pressure on borrowers. If businesses and households struggle to repay loans, bad debts can rise, offsetting the boost from higher margins. And if yields rise because of fears about Japan’s public finances rather than a healthy economy, investors may become more cautious about the whole market.
The link with the yen
Japanese yields also interact with the yen. Higher yields at home can, in theory, support the currency by making Japanese assets more attractive. In practice, the yen has stayed weak because US yields have risen even faster. A sharply weaker yen can raise the risk of government intervention, which our guide to FX intervention risk explains. Bank shares can be caught up in those swings.
How to follow it
Traders watching Japanese banks tend to follow a few things: the 10-year Japanese government bond yield, Bank of Japan meetings and comments, the megabanks’ quarterly results and their guidance on margins and bond holdings. Results season is especially telling, as banks update investors on how much higher rates are boosting profits and whether any bond losses are building.
A beginner’s takeaway
Japanese bank shares are one of the clearest examples of a sector that can benefit from rising yields, because wider lending margins lift profits. But the trade comes with risks, from losses on existing bond holdings to pressure on borrowers. Watch why yields are rising, not just that they are, and you will have a better sense of whether the move is good news for the banks.
If you want to strengthen how you assess sector trades like this, take our free Trader Assessment and see where your process stands.
