Buying Japanese Banks

Japan as Ben Laidler ( wrote today, is a lower risk, lower valuation market vs US and Europe. I looked at a few large banks and found the risk reward appealing.

At some point the BOJ may hike rates or stop the bond yield intervention. If that happens the YEN falls (gains value vs the USD) and the bank lending rates increase. Bank Net Interest Margins (NIM) have been close to 1% for more than 20yrs and the sector ekes out 7% ROE (return of equity) and 5% EPS growth while trading at 7x PE. Imagine what would happen if NIM increases to 1.5% or 2%. Bank revenue could increase 50% +!  I’m going to buy a position in Sumitomo, it looks a bit cheaper that the other two.  

While consumer inflation is running under 2% wholesale hit 9% this week and its likely companies will pass on costs to consumers or suffer a sharp contraction in margins. At the same time the Bank of Japan continues its decades long zero rate policy and management of the yield curve (JGB 10yr at 25bp). This very large spread between US 10yr and low borrowing cost vs much of the world has led to a YEN devaluation on carry trade (borrow cheap in Japan, use the cash to buy government bonds at higher ylds and make a spread). That is positive for exporters but feeds into inflation as Japan imports all its Oil/Gas and much of its food.

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