The recent steep drop in Japanese bank shares signals potential for a strong recovery. In early August, the Topix Banks index fell 26.5%, surpassing the broader Topix index’s 20.3% decline. Both experienced their largest three-day drops in over four decades.
Signs of a rebound appeared Wednesday, with the Topix Banks gauge rising 7.9%, outperforming other sectors. The underperformance of banks during the selloff seemed counterintuitive, as higher interest rates usually boost bank profits. The Bank of Japan’s (BOJ) interest rate hike on July 31, coupled with Governor Kazuo Ueda’s signals for future rate adjustments, surprised investors.
Speculators heavily sold bank shares to unwind trades quickly, but hedge funds’ current lighter positioning suggests stability ahead. The Topix Banks index offers a 3.8% dividend yield, higher than the broader Topix.
Despite recent losses, bank shares have risen 17.5% this year. For those wary of yen volatility, bank shares offer limited foreign-exchange exposure, making them attractive compared to more currency-sensitive sectors like automakers.