Moody’s believes incoming Japanese Prime Minister Sanae Takaichi will not derail the Bank of Japan’s rate hike plans. Analysts see continued upside for the profitability of major Japanese banks despite political shifts, highlighting stability in the financial sector.

Tokyo

Moody’s analysts maintain a positive outlook for Japanese banks, particularly the three major institutions, citing strong fundamentals and the expectation of gradually rising profits. The analysis is based on the assumption that Japan’s monetary policy will continue to tighten, with interest rates expected to rise, though the pace and timing remain uncertain.

The discussion also highlights the potential impact of Takaichi’s policy stance, which emphasizes ultra-loose monetary policy and increased government spending. If these policies succeed in boosting economic growth, both major and regional banks could benefit from increased business opportunities and credit demand. The ability of the new leadership to implement these policies effectively remains a key factor to watch.

Moody’s sees profit upside for Japanese banks after Takaichi

So we have pretty strong marks on the Japanese banks and in the three mega banks in particular. So we do expect that they will maintain strong fundamentals in the next next year or so. So on the profitability side we still haven't changed our view that profits will continue to rise gradually. So we're still pricing that monetary policy will continue. I mean interest rates will continue to go up. But the the the uncertainty is the pace of that increase and the timing of that increase. Right. So we're still pricing some profit upside for the Japanese. So listen you're a credit your ratings guy. I know. Right. But do you have any sort of sense how it could go. Because the what we've been calling the Takaichi trade so far is OK. She said publicly before I want ultra loose monetary policy. I want big spending as well. That's exactly what my mentor Abe Shinzo was going for. And I want to continue that tradition or legacy. People are latching onto that. Markets certainly are. Right. But in reality how able is she going to be to translate those wishes into actual policy action. Because in my mind you know if you want a weaker yen that's not the way to fight your number one political problem and social problem and economic problem which is which is inflation. So for on the rating side again when you look at banks we focus a lot on monetary policy. Right. And we take the view that the B.O.J. is independent and remains independent in its policymaking. So it's going to be interesting how the vote goes pretty soon on the policy rate. But we do expect that interest rates will continue to edge a bit higher. Are you expecting them to hold fire though on the 30th which is the next meeting. Yes. So we either next meeting or the one next. The direction general direction of policy we think will continue to to rates will continue to rise. Right. The other question is again the Japanese banks as you rightly mentioned hold a lot of sovereign paper sovereign securities. Right. But what we've seen over the years is that it's short data. It's short duration. Right. So if rates play against the banks we won't expect much much pain on the banking side. OK. You know this whole idea of of I guess reflation in Japan after years of deflation had a lot of people excited about Japanese financials simply because for the probably more than a decade or so. Right. The only way they've been able to make money as you well know right is to go abroad. And it was growth through acquisition not so much organic growth. But now with rates starting to rise and get back start lifting off the basement. Right. They finally got the opportunity to make money at home. I mean this is a significant moment for Japanese banks and I would assume there would be a lot of attention paid to to the ratings as well. I think you're absolutely right. So that strategy of going abroad to support your business has been playing out relatively well for them. What we also see that again that the domestic profitability is increasing as margins widened. What we also see and I think that this is maybe a bit not in the spotlight. The Japanese banks are very good and better at fee business. Right. So fee business is a transactional business related to CIP or wealth management both onshore and offshore. Hence the Japanese banks are pretty good at that. So that supports their overall profitability. It's still pretty low but it's it's rising. That's that's the good good part. All right. Sure. Yeah. And Eugene what do you make of the Takaichi trade that we've seen so far. I mean I know it's been just a couple of days but it was just really massive moves that weekend and the rates were very very volatile. But once the dust settles if you really look at some of the policies that Takaichi San has been pushing for it's really about boosting consumption. It's boosting the regional economy infrastructure and also the defense sector. So what are some of the implications that could come out of that for banks in Japan. I think I think if the if the policy moves are successful in boosting economic growth in the country obviously banks will benefit. The major banks will benefit. The smaller banks will benefit. So then we'll have more business opportunities more credit demand. Right. So and again back to my point about fee business. So I think this stands to the financial sector stands to benefit. The key question again is whether the upcoming prime minister will be able to deliver on those promises. I think that's that's the big question we're watching.

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