The Bank of Japan’s recent decision to increase flexibility on its yield curve control (YCC) is good news for its banking sector — and some stocks are set to benefit, according to Goldman Sachs. The BOJ embarked on a bond-buying program back in 2016 with a hard limit of 1% on the 10-year Japanese government bond (JGB) yields. Last week, however, the central bank took a big step toward unwinding the policy with its announcement that the 1% cap would now be understood merely “as a reference.” One benefit is that the 10-year yield can now rise slightly above the 1% cap, Goldman Sachs analyst Makoto Kuroda told CNBC’s ” Squawk Box Asia ” on Monday. She noted that a flexible YCC “may be conducive to a more controlled yield rise since there’s no more line in the sand to go against.” She also added that the rise in yields may happen in a “more controlled manner,” which is important for the natural buyers of JGBs, like the banks, as it makes it easier for them to buy the bonds. While banks will potentially see higher earnings, thanks to higher JGB yields, the market can only reflect that once the banks begin to buy JGBs, Kuroda and fellow analyst Yuka Azami wrote in a Nov. 1 note to investors. Elsewhere, Kuroda wrote in notes to CNBC that Japanese banks “remain in focus as a beneficiary” of BOJ’s interest rate normalization. The analyst expects the BOJ’s forward guidance revision and exit from negative interest policy to come in 2024 rather than 2025, as was expected, assuming “shunto wages confirm a virtuous cycle between wages and inflation.” Shunto — or “spring wage offensive” — refers to the annual wage negotiations between labor unions and Japanese employers which typically take place in spring between February and March. A more flexible interest rate on BOJ operations may allow for a controlled rise in long-term yields, Kuroda said in notes to CNBC. “This might make it easier for banks to buy or reinvest JGB portfolio at higher yields.” Japanese bank stock picks Goldman Sachs continues to name conviction list stock Mitsubishi UFJ Financial Group (MUFG) and Mizuho as its top picks from the Japanese banking sector. It expects megabank MUFG to benefit from potential tailwinds in steady growth in domestic and corporate lending as well as a recovery in capital and bond markets following Asia’s economic reopening. Goldman is positive on Mizuho thanks to improving earnings on the back of steady growth in lending to domestic and overseas corporations. Catalysts for growth include the BOJ’s YCC adjustment, the Tokyo Stock Exchange’s corporate governance reform, and a stock market rally or a weak yen, the analysts wrote in their note to investors. Goldman has buy calls on both stocks and has a target of 1,500 yen ($10.03) for MUFG — giving it around 18% potential upside from its Nov. 6 close — and 3,050 yen for Mizuho, implying around 20% upside. — CNBC’s Naman Tandon and Lim Hui Jie contributed to this report.