Investors expect that a stable financial report will inject momentum into the rise of the Japanese stock market as Japanese banks will soon release quarterly results, which will fully reflect the impact of the end of negative interest rates for the first time.

As the Bank of Japan began raising interest rates this year, the market's expectations for banks' profitability have been increasing. According to Bloomberg Intelligence's calculations, banks holding a large amount of domestic assets and cash from the Bank of Japan are expected to be more sensitive to Japan's rate hikes.

Bloomberg Intelligence analyst Hideyasu Ban wrote in a report that as of the end of June, the price-to-book ratio of Japanese banks had risen from 0.66 at the end of last December to 0.85. If the Bank of Japan further raises interest rates, the stock return on more banks will exceed 8%.

David Chao, a global market strategist at Invesco, said: "When we consider the upward revision of profit expectations for the rest of the year, most of it will come from the financial industry." He expects the Bank of Japan to increase interest rates at next week's policy meeting. "Finance is the industry most likely to continue to outperform the broader market, as rising interest rates will definitely boost banks, securities firms, and insurance companies."

Major banks such as Mitsubishi UFJ Financial Group (MUFG.US), Sumitomo Mitsui Financial Group, and Mizuho Financial Group will announce their first-quarter financial results next week.

Although the benefits of the Bank of Japan's rate hike among major banks will be similar, individual banks' income may vary due to specific factors. For example, Mitsubishi UFJ Financial Group announced a share buyback plan in its full-year profit guidance that was below analysts' expectations, leading to a decline in its stock price in the previous quarter. At the same time, the stock price of Sumitomo Mitsui Financial Group rose after the company announced better-than-expected results and fiscal year guidance for the period ending March 2025.

Even after the rise, this sector still looks relatively cheap, with a price-to-earnings ratio of 15 times, compared with 17 times for the TOPIX index. Compiled data showed that analysts’ profit expectations for the banking industry for the next 12 months have been raised by 25% compared with the end of last year, while the increase in the TOPIX index was 13%.

Although the benefits of the Bank of Japan's rate hike among major banks will be similar, individual banks' income may vary due to specific factors. For example, Mitsubishi UFJ Financial Group announced a below-analyst-expectation buyback plan in its full-year profit guidance, leading to a decline in its stock price in the previous quarter. At the same time, the stock price of Sumitomo Mitsui Financial Group rose after the company announced better-than-expected results and fiscal year guidance for the period ending March 2025.

According to Bloomberg Intelligence's Ban, Mitsubishi UFJ Financial Group's net income may decline by more than 25% in this quarter, and market participants may have to wait until the second quarter to observe any additional share buybacks.

Banks are also expected to benefit from the unexpected release of value from the cross-shareholding relationships established over decades to consolidate business relationships, as they emulate the practices of property and accident insurance companies that have come under pressure from regulators to cut holdings. Banks' brokerage businesses will earn commissions from them, as other companies sell such stocks.

Sandeep Jadwani, head of investment advisory at UAE-based Habib investment Ltd., said: "This is a huge value release." He added that he believes that financial stocks are one of the most positive surprises in Japan this quarter.