Goldman Sachs Group Inc. said it recommends buying Japanese banks and shorting the nation's steelmakers, citing valuations.

Japanese bank stocks are relatively cheap as they trade at about 70 percent of their average price-to-book ratio, compared with up to 120 percent for banks across Asia, Kathy Matsui, the Tokyo-based chief strategist at the brokerage, said in a report dated Thursday. The country's steel shares are at or above their midpoint price-to-book levels, the report said.

"Japanese banks should enjoy an outsized earnings impact from lower credit costs as the economy stabilizes," Matsui wrote. "The recovery in stock prices should also help alleviate capital concerns."

While many investors have bought into steel stocks that are sensitive to global economic trends, most are still "extremely underweight" in domestic cyclical shares like banks, Matsui said in the report.

The brokerage boosted Mitsubishi UFJ Financial Group Inc. to "buy" from "sell" and Mizuho Financial Group Inc. to "neutral" from "sell," the report showed.