In 2024 and 2025, many regional banks reported stronger net interest income and profit growth, supported by rising policy rates. With Ms. Takaichi now at the helm, the key question is whether this momentum will continue.
Japan’s new and first female prime minister, Ms. Takaichi, inherits the economic policy framework of former Prime Minister Shinzo Abe’s “Abenomics,” which centers on bold monetary easing and agile fiscal measures. She considers issuing deficit-financing bonds as a viable option for necessary investments such as defense spending, and does not rule out a consumption tax cut. On monetary policy, she maintains that the current interest rate level of 0.5% should be preserved.
On 10/6/25 – the first trading day following the election—the Nikkei surged 4.75% and the Topix rose 3.09%, reflecting market enthusiasm over Ms. Takaichi’s expansive economic stimulus agenda. In contrast, the bank index edged down 0.12%, as expectations for further rate hikes diminished.
Just last week, futures markets had priced in a 56% probability of a rate hike at the Bank of Japan’s October 25 meeting. That probability has since dropped to 20%, signaling a sharp reassessment of the policy trajectory under the new administration.
However, Ms. Takaichi’s approach signals a potential departure from the Bank of Japan’s current trajectory. At its September monetary policy meeting, the BOJ opted to keep its benchmark interest rate unchanged at 0.5%. However, the meeting delivered two unexpected developments for investors.
The first surprise was the BOJ’s decision to begin selling exchange-traded funds (ETFs) that had been aggressively purchased under its unconventional monetary easing program. The second was a rare dissent on interest rates: while decisions are typically unanimous among the nine-member Policy Board, two members opposed maintaining the current rate and instead advocated for a hike to 0.75%.
The latter move was particularly striking given that BOJ Governor Kazuo Ueda and other senior officials had recently emphasized caution regarding rate hikes. The dissenting votes have fueled market speculation that the Policy Board is beginning to shift toward a tightening stance.
A strategist at a major domestic securities firm noted that the BOJ’s announcement to sell ETFs signals a clearer commitment to monetary normalization. The dissenting votes also raise the likelihood of a rate hike at the October meeting.
The Bank of Japan doesn’t ask for my opinion—but in my view, a cautious and gradual rate hike is warranted.
Much of Japan’s inflation is concentrated in food prices, driven by imported cost pressures. If policy rates remain low, the yen is likely to stay weak, further amplifying inflation and ultimately weighing on real economic growth. That’s why I expected—and still believe—the Bank of Japan will raise rates, a move that would also support net interest margin expansion across the banking sector.
This is the reason why I issued a note on the Bank of Nagoya in 4/24. I was a bit early, but over the last 12 months, it is up 61%, outperforming the bank index at +43% and Topx at +16%.
Why not city(money center) banks?
City banks are significantly larger than regional banks, with more diversified operations across geographies and product lines. As a result, the impact of Japanese rate hikes is proportionally less significant for city banks. That’s why I chose to focus on one of the regional banks for the current rate hiking cycle. A valuation comparison table among Kyoto Bank, Nagoya Bank, and MUFG is included in the report to my clients.
Why the Bank of Nagoya?
Bank of Nagoya is classified as a second-tier regional bank, originally founded as Kyowa Shokusan in 1949. Headquartered in Nagoya—home to Toyota’s global headquarters—the bank maintains a strong lending portfolio focused on small and medium-sized enterprises in the automotive sector.
The sector’s recovery in 2024, combined with the bank’s low valuation despite solid growth fundamentals, was a key reason I selected Nagoya among regional peers. If you like my initial note, I’d email it to you.
I continue to view Bank of Nagoya as a compelling name. Even after a 60% year-to-date appreciation, its price-to-book remains attractive at 0.59x. At this juncture, where markets are questioning the likelihood of continued rate hikes—and by extension, sustained improvement in net interest margins—I’m inclined to add another regional bank to your watch list.
Why Kyoto Financial Group (KFG)?
KFG is a top-tier regional bank:
4th in market capitalization among regional banks,
7th in deposits,
8th in loans
If Ms. Takaichi’s version of Abenomics takes hold, Japan could see renewed inflows of foreign capital.
Among regional banks, Kyoto Bank stands out as a strong candidate to benefit from this trend, for several reasons:
- High foreign ownership at 27% already positions it as a familiar name among global investors.
- Unrealized gains of ¥8,241 billion from its investment portfolio—the largest among regional banks—offer substantial balance sheet flexibility.
- A clear roadmap to improve ROE signals management’s commitment to shareholder value.
- Kyoto’s location continues to benefit from robust inbound tourism, reinforcing local economic activity and deposit growth.
KFG’a Midterm growth plan to improve PB from the current 0.72x to 1x
To Improve ROE from the current 3.28% (a big jump from 2.62% in FY3/23) to 5% in FY3/29 via:
1) ROE improvement
Aiming to increase net earnings to Y600 Bn from Y365 Bn in FY3/25. With this increase in earnings, ROE is expected to rise from 3.28% to 5%, marking a meaningful step toward capital efficiency
2). Earnings Expansion Strategy
2-a) The bank plans to invest ¥1,000 Bn in new business ventures, including startup financing and M&A advisory services focused on business succession. This initiative will be funded by a ¥1,000 Bn reduction in cross-shareholdings, primarily in Kyoto-based companies such as Nintendo and Kyocera. Notably, 23.6% of the divestment plan was already executed between October 2024 and March 2025.
2-b) Kyoto Bank is also expanding its corporate consulting capabilities, offering end-to-end advisory services across the client lifecycle—from business establishment to restructuring and M&A execution.
Possible Reasons for Kyoto’s higher valuation
- Despite Japan’s well-known population decline, Kyoto Financial Group (KFG) operates across a robust economic base spanning Kyoto, Osaka, Hyogo, Shiga, and Nara.
- The group has signaled a willingness to re-evaluate its large cross-shareholdings in Kyoto-based companies such as Kyocera and Nintendo.
- Proceeds from these divestments are being redeployed into growth initiatives, including startup investments and advisory services.
- Some of this strategic shift appears to be partially priced into the stock, but further upside remains if execution continues.
Conclusion:
Bank stocks are likely to underperform during periods when interest rates are expected to remain low. However, if the Bank of Japan acts prudently—as I believe it should—and resumes rate hikes, bank stocks should outperform the broader benchmark, supported by improving net interest margins.
If you’re interested in learning more about KFG and its growth potential, I’d like to invite you to experience my service—completely free of charge. I am confident that once you discover the value, convenience, and quality I offer, you’ll be glad you gave me a try.