BoJ's Latest Rate Hike to Have 'Limited Impact' on Earnings

by: Steven Towns

Preliminary research by Japan's Dai-ichi Life Research Institute shows the latest Bank of Japan quarter-point rate hike to 0.50%, will not have too much of a negative impact on corporate earnings and in some cases will actually be helpful.

The Nikkei Weekly reports Dai-ichi Life estimates a 0.6% decline in corporate pre-tax profits for every 0.25% increase in short-term interest rates.

For manufacturers, the rate hike could be helpful for those firms with positive balance of payments, which stand to benefit from having lower interest expenses and/or higher interest income. Last year, listed manufacturers as a whole reported a swing to the black in terms of balance of payments, to ¥42 billion ($350m), from -¥23 billion in 2005.

Regarding banks, the latest rate hike will be hurtful in the near-term over the next couple of months due to higher costs of capital, but will help margins over time as lending rates are increased.

There are four major Japanese financial stocks trading in the U.S., including Japan's largest property/casualty insurer Millea Holdings. (See list directly below)

    Mitsubishi UFJ Financial Group (NYSE:MTU)
    Mizuho Financial Group (NYSE:MFG)
    Nomura Holdings (NYSE:NMR)
    Millea Holdings (MLEA)
    NIS Group (NIS)

Disclosure: The author owns shares of NIS Group.