Japan: The surprise US election winner

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Japanese bank stocks have shot up in the wake of the US election result. The reasons have to do with shifting sands in bank regulation.

The aftermath of the Trump US election victory produced many oddities, not least this one: why did Japanese bank stocks rally as much as 20% on the news, far more than US banks?

After all, a Trump victory appears to have sounded the death knell for the Trans-Pacific Partnership, from whose ratification Japan was expected to be the biggest beneficiary. Why would MUFG go up by 23% between November 9 and 14, when Morgan Stanley, of which MUFG is a major shareholder, went up by only 7.7% over the same period?

There are several reasons, and not all of them are obvious. A more straightforward one is the fact that a Trump presidency is seen as a swifter path to higher US interest rates, and that’s useful for banks, nowhere more so than in negative interest rate Japan. 

Less obvious is the fact that Trump may inadvertently get them off the hook for Basel IV. In July Shunsuke Shirakawa at Japan’s Financial Services Agency, a member of the Basel Committee, said the proposals could lead to an increase of as much as 70% in the capital banks must hold. Japan is considered particularly exposed to the proposed changes and some of its banks, notably MUFG, which Basel considers systemically important, could face a higher hurdle on leverage ratios than most other smaller banks.

Abandonment

If Japanese banks were going to struggle most with Basel IV’s implementation, it follows that they would benefit most from any prospect of its abandonment.

This brings about other interesting possibilities. If Japanese banks don’t have to worry about vastly increasingly their capital buffers, then they can start to deploy their money – possibly in the acquisition of foreign banks. The US is the most likely target (MUFG has trodden this path successfully, both through its full ownership of Union Bank and its stake in Morgan Stanley) and SMBC, with an enthusiasm for SME lending, might be a natural buyer of a second-tier US institution with a similar mindset. Mizuho is more interested in securities these days, but could be interested in an MUFG/Stanley-style stake in a US bank needing capital – BAML has been mooted locally.

And could they become buyers for those irksome ANZ minority stakes in Indonesia’s Panin Bank or Malaysia’s AmBank that the Australian house has said it wants to shift?

Tokyo investment bankers stand to gain either way. If Basel IV does come in and Japanese banks need a ton of cash, they can help them raise it; if they instead go shopping overseas, investment banks can advise them on it.