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Japanese bank stocks rallied on Friday as surging government bond yields and expectations for further Bank of Japan interest rate hikes strengthened the outlook for lenders’ profit margins.
Shares of Mizuho Financial Group, Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial Group, Japan Post Bank and Resona Holdings climbed between 3.2% and 4.5%. The gains helped support a more than 1% advance in Japan’s benchmark Nikkei 225 index.
The rally came as Japanese government bond yields surged during the week. The 10-year JGB yield reached its highest level in about 30 years, driven partly by rising oil prices and concerns that persistent inflation could keep interest rates elevated.
Japanese yields also followed a sharp rise in U.S. Treasury yields, as investors increased bets that the Federal Reserve may need to raise interest rates further to contain stubborn inflation.
Expectations for additional BOJ rate hikes provided another boost to Japanese bank stocks. The central bank raised its benchmark rate by 25 basis points last week and indicated that further increases could follow in the coming months.
Higher interest rates can benefit banks by widening net interest margins, or the difference between income generated from loans and the interest paid to depositors. Investors have increasingly priced in this improved earnings outlook, with major Japanese banking stocks gaining roughly 50% to 90% over the past 12 months.
Japan Post Bank was among the strongest performers. Its large portfolio of Japanese government bonds could benefit as maturing securities are reinvested at higher yields, potentially increasing investment income.
However, rapidly rising borrowing costs also present risks. Higher rates can weaken demand for credit and increase the possibility of loan defaults if households and businesses struggle with larger financing costs.
For now, expectations of higher Japanese interest rates and elevated bond yields are providing strong support for the country’s banking sector, making financial stocks a key driver of the latest Nikkei rally.
