Japanese banks posted their biggest weekly drop in at least four decades on Friday, as U.S. tariffs sparked fears that a slowdown in global growth could choke off the country's fragile economic recovery and snuff out a decades-long effort to return to normal interest rates.
The Tokyo index of banking stocks (.IBNKS.T) dropped 8% on the day, bringing losses for the week to 20%, the biggest such decline since at least 1983, LSEG data showed. Shares of Mitsubishi UFJ Financial Group (8306.T), the country's biggest financial firm, dropped 8.5%.
Japanese banks are some of the world's largest lenders by assets, and the sudden slump was a grim reminder of the global impact of U.S. President Donald Trump's protectionist policies and the precariousness of Japan's own exit from deflation.
After years of stop-start growth and frozen wages, the world's fourth-largest economy finally appeared to break through its long malaise last year, as prices - and wages - began to rise. In a hugely symbolic move, the central bank raised interest rates for the first time in almost two decades.
That shift has helped power a broader reassessment of Japanese stocks by global investors.
Whether that growth trajectory can continue depends to a large extent on what happens in the United States, analysts say. The world's largest economy is the main market for Japanese automakers, the country's economic engine, as well as other industries.
"I think there's the concern that the trade war has killed Japanese reflation - so in short, it's an expression of a slowdown in Japan's economy which is expected to come about because of tariffs," said Kyle Rodda, a senior financial market analyst at Capital.Com in Melbourne.
"Japanese yields have tumbled and the (bond) curve has flattened quite a bit, hurting the prospect for bank profits. Add the stronger currency in the air and you have a very negative mix for bank stocks."
Japan's slow move towards reflation - where prices rise rather than stagnate - has been helped, in part, by the strength of the dollar, which has driven up the cost of fuel, food and imports and ultimately heaped pressure on companies to raise wages.
Inflation has now exceeded the Bank of Japan's 2% target for almost three years thanks to that stronger dollar and corresponding weakness in the yen currency. That has been a vast change from the last two decades, when the BOJ kept rates near zero as it fought to end deflation.
While some analysts believe Trump is open to negotiations on tariffs, investors appear to be factoring in a worst-case scenario, at least for now.
With fears of a global recession looming, the BOJ is likely to cut its economic growth forecasts and hold off raising rates at its next meeting concluding on May 1, analysts say, predicting the higher duties could knock up to 0.8% off economic growth.
But there is less certainty about just how long the BOJ will be able to keep rates where they are given mounting inflationary pressure at home that has drawn warnings from hawkish members of the board.
"The world has changed, and few economies reverberate these changes as strongly as in Japan. A weaker dollar, and threats of a global trade recession, put a real dent into Japan’s reflation prospects," said Fred Neumann, Chief Asia Economist at HSBC Hong Kong.
BIG DROPS
Shares of second-ranked Sumitomo Mitsui Financial Group (8316.T) dropped 8% and No.3 Mizuho Financial Group (8411.T) slid 11.2%. The three "megabanks" are a fulcrum of corporate Japan, backing the largest companies at home and overseas.
Analysts said it was likely that the tariffs would hit banks by squeezing corporate activity and therefore dampening demand for loans.
"Reduced trade between the U.S. and Japan means reduced transaction activity, and reduced opportunity. Economic downturn is bad for banks. Banks profit from activity. Lower activity equals lower profit," said Travis Lundy, a veteran Japan analyst who publishes on the Smartkarma platform.
The sell-off also reflected concerns that bank shares had accelerated too quickly in the last few years as investors became enthusiastic about the potential for the economy to normalise. Last month, the banking index hit its highest level since 2007.
"It’s been a huge negative surprise for a lot of investors," said Amir Anvarzadeh, Japan equity strategist at Asymmetric Investors, who had recommended a bet against one of the megabanks prior to the tariff announcement.
"Banks were a very crowded trade and have been massively outperforming. There have been huge profits to be taken since 2022," he said.
