Goldman Sachs Bullish on Japanese Banks: Analysts Cite Interest Rate Normalization and Corporate Governance Reforms

The Bank of Japan has decided to maintain its ultra-loose monetary policy, leaving interest rates unchanged in September. Short-term interest rates remain at -0.1%, while the 10-year Japanese government bond yield is capped at around zero. These decisions were widely expected and aim to support the country’s economic stability.

The Tokyo Stock Exchange has introduced a series of restructuring rules, including corporate governance reforms. One notable rule requires companies trading below a price-to-book ratio of one to “comply or explain” their capital efficiency. This significant shake-up in Japan’s stock markets is the first in over three decades, resulting in major stock indices reaching levels not seen since 1990.

Analyst Makoto Karuda believes that Japanese banks are currently undervalued, with attractive valuations. She compares their current price-to-book ratios of 0.6 to 0.8 to the levels of 0.9 to 1 that banks traded at in 2015 before the Bank of Japan’s negative interest rate policy. A price-to-book ratio below one is generally considered a good investment for value-seeking investors. Karuda also reveals Goldman Sachs’ stock picks in the Japanese banking sector, including Mitsubishi UFJ Financial Group (MUFG) and Mizuho. Both stocks are traded on the New York Stock Exchange and are expected to benefit from long-term yield rises and corporate governance improvements.