Japan financial stocks are going through a rough stretch because of prolonged under ultra-easy monetary policies rolled out to boost the ailing economy. And if this was not enough, at its January-end meeting, Bank of Japan (BoJ) set its key interest rate at negative 0.1% to boost inflation and economic growth. Under this scheme, BoJ would charge banks for keeping some of their additional reserves at the central bank (read: Japan's Economy Slowed in Q2: ETFs in Focus).
BoJ then hinted at further cuts in interest rates if the economy fails to improve desirably, though it is yet to take any such step. However, the introduction of negative interest rates weighed on the financial sector as these stocks perform favorably in a rising rate environment (read: Top and Flop ETFs of 1H).
Japan’s financial overseer expects negative rates to weigh on the profits of the country's three big banks by at least 300 billion yen ($2.96 billion) for the year through March 2017 as their interest rate income will be hit hard.
As per the Financial Services Agency (FSA), “Mitsubishi UFJ Financial Group Inc's (8306.T) profit will fall by 155 billion yen. Sumitomo Mitsui Financial Group Inc's (8316.T) profit will be reduced by as much as 76 billion yen and that of Mizuho Financial Group Inc (8411.T) will be cut by 61 billion yen.”
Plus, negative rates and a super-easy monetary policy could not put a cap on the currency yen as this safe haven currency has shot up this year as manifested by 19.5% gains (as of August 16, 2016) witnessed inCurrencyShares Japanese Yen ETF (FXY). Yen added great strength by virtue of its safe-haven nature in the wake of the global market turmoil and a muted greenback (read: Can Yen ETF Keep Up its Momentum?).
Under Lackluster Japanese Banking Results
Already, Mitsubishi UFG’s June quarter earnings sawnarrower loan margins and a 32% year-over-year plunge in net income to JPY189 billion – shy of analyst expectation of JPY249 billion.
The company’s results also showed that a higher supply of cheap money did not translate into higher demand as Bank of Tokyo-Mitsubishi UFJ, the company’s top banking unit, witnessed a 4% decline in the domestic loan balance in the June quarter. If this was not enough, a stronger yen weighed on the financial institution’s overseas income, as noted by an article published onBarrons.com.
Are All Grave at Japanese Banks?
First, BoJ’s latest decision not to lower rates further into the negative territory in its latest meeting helped the banks. Second, a sturdiness has been noticed in the trading business of such financial institutions despite a dismal profit picture. As per Wall Street Journal, the banking area of Mitsubishi UFGrecorded double the rise in trading profits last quarter. Net trading profits of Mizuho grew over 100%(read: Can Japan ETFs Soar Without Helicopter Money?).
Having said this, we, along with several other analysts, believe that just solid trading income is less likely to give support to banks that are suffering from a falling interest rate margin. Domestic loan growth has also been lackluster, as per the sources. The movement of yen is also crucial.
ETFs in Focus
We highlight here the pure-play Japan financial ETF namelyWisdomTree Japan Hedged Financials Fund . The top three positions of the fund are Sumitomo Mitsui Financial Group (10.31%), Mitsubishi UFJ Financial Group (9.98%) and Tokio Marine Holdings Inc (7.87%).
Diversified Banks is the largest sector of the fund with about 30% exposure followed by regional banks (26.92%) and Property & Casualty Insurance (16.16%). The fund charges 48 bps in fees and it has lost about 28% so far this year (as of August 15, 2016) as the twin attacks of stronger yen and negative rates have dulled demand for the hedged Japan financial ETF. The fund was up about 2.2% in the last one month (as of August 15, 2016) (read: Why Japan ETFs Are on an Incredible Run).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
Image: Bigstock
Is Japan Financial ETF Under Pressure?
Japan financial stocks are going through a rough stretch because of prolonged under ultra-easy monetary policies rolled out to boost the ailing economy. And if this was not enough, at its January-end meeting, Bank of Japan (BoJ) set its key interest rate at negative 0.1% to boost inflation and economic growth. Under this scheme, BoJ would charge banks for keeping some of their additional reserves at the central bank (read: Japan's Economy Slowed in Q2: ETFs in Focus).
BoJ then hinted at further cuts in interest rates if the economy fails to improve desirably, though it is yet to take any such step. However, the introduction of negative interest rates weighed on the financial sector as these stocks perform favorably in a rising rate environment (read: Top and Flop ETFs of 1H).
Japan’s financial overseer expects negative rates to weigh on the profits of the country's three big banks by at least 300 billion yen ($2.96 billion) for the year through March 2017 as their interest rate income will be hit hard.
As per the Financial Services Agency (FSA), “Mitsubishi UFJ Financial Group Inc's (8306.T) profit will fall by 155 billion yen. Sumitomo Mitsui Financial Group Inc's (8316.T) profit will be reduced by as much as 76 billion yen and that of Mizuho Financial Group Inc (8411.T) will be cut by 61 billion yen.”
Plus, negative rates and a super-easy monetary policy could not put a cap on the currency yen as this safe haven currency has shot up this year as manifested by 19.5% gains (as of August 16, 2016) witnessed inCurrencyShares Japanese Yen ETF (FXY). Yen added great strength by virtue of its safe-haven nature in the wake of the global market turmoil and a muted greenback (read: Can Yen ETF Keep Up its Momentum?).
Under Lackluster Japanese Banking Results
Already, Mitsubishi UFG’s June quarter earnings sawnarrower loan margins and a 32% year-over-year plunge in net income to JPY189 billion – shy of analyst expectation of JPY249 billion.
The company’s results also showed that a higher supply of cheap money did not translate into higher demand as Bank of Tokyo-Mitsubishi UFJ, the company’s top banking unit, witnessed a 4% decline in the domestic loan balance in the June quarter. If this was not enough, a stronger yen weighed on the financial institution’s overseas income, as noted by an article published onBarrons.com.
Are All Grave at Japanese Banks?
First, BoJ’s latest decision not to lower rates further into the negative territory in its latest meeting helped the banks. Second, a sturdiness has been noticed in the trading business of such financial institutions despite a dismal profit picture. As per Wall Street Journal, the banking area of Mitsubishi UFGrecorded double the rise in trading profits last quarter. Net trading profits of Mizuho grew over 100%(read: Can Japan ETFs Soar Without Helicopter Money?).
Having said this, we, along with several other analysts, believe that just solid trading income is less likely to give support to banks that are suffering from a falling interest rate margin. Domestic loan growth has also been lackluster, as per the sources. The movement of yen is also crucial.
ETFs in Focus
We highlight here the pure-play Japan financial ETF namelyWisdomTree Japan Hedged Financials Fund . The top three positions of the fund are Sumitomo Mitsui Financial Group (10.31%), Mitsubishi UFJ Financial Group (9.98%) and Tokio Marine Holdings Inc (7.87%).
Diversified Banks is the largest sector of the fund with about 30% exposure followed by regional banks (26.92%) and Property & Casualty Insurance (16.16%). The fund charges 48 bps in fees and it has lost about 28% so far this year (as of August 15, 2016) as the twin attacks of stronger yen and negative rates have dulled demand for the hedged Japan financial ETF. The fund was up about 2.2% in the last one month (as of August 15, 2016) (read: Why Japan ETFs Are on an Incredible Run).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>