S&P Global — 12 February 2025
Daily Update: February 12, 2025
A Changing Rate Environment Buoys Japan’s Major Banks
By Nathan Hunt
Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy
As central banks around the world look to lower interest rates, the Bank of Japan is moving in the opposite direction. In January, the Japanese central bank raised its short-term policy rate to 0.50% from 0.25% — its third rate hike since March 2024, and its highest interest rate since 2008. Economists estimate that the Bank of Japan will raise rates to between 0.75% and 1.00% in 2026. These higher interest rates have normalized the Japanese business environment, driven increased demand for loans, led to a stable deposit base and improved net interest income for major banks in Japan’s metropolitan areas.
In “Japan Banking Outlook 2025: Tailwinds And Test of Resilience,” analysts at S&P Global Ratings suggested that the changing rate environment and strength of the Japanese economy will not help all banks equally. Japan’s major banks — Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group (SMFG) and Mizuho Financial Group — possess the economies of scale necessary to deal with increasingly sophisticated risks, such as cyber threats and money laundering. Corporate demand for borrowing remains healthy and should ease lending rate competition between the Japanese megabanks. Higher rates improve net interest income, and the balance of deposits looks likely to remain firm. The slow rise of Japanese interest rates and the relatively cheap cost of capital should offset any negative economic impact from increased rates.
According to S&P Global Market Intelligence, Japan’s megabanks posted efficiency gains in 2024. MUFG, Japan's largest bank by assets, reduced its cost-to-income ratio by 5.5 percentage points to 49.89% in the 12 months to Sept. 30, 2024. MUFG also posted a net profit of ¥1.258 trillion in the six months to Sept. 30, 2024, a 35.7% year-over-year increase. SMFG and Mizuho posted similar efficiency gains. Meanwhile, global financial services group Nomura posted robust earnings on gains from its wealth and wholesale businesses.
S&P Global Market Intelligence expects the three major Japanese banks to beat earnings estimates. The banks have either exceeded or almost met their earnings goals in the first nine months of their fiscal year ending March 31. Robust loan growth and higher net interest income appear to be driving this earnings outperformance.
The key risks to Japanese banks are economic uncertainty driven by an unpredictable global macroeconomic environment and increased geopolitical risks. In addition, Japanese banks’ increased appetite for alternative investments, including private credit and private equity, could negatively affect their creditworthiness. Like US and European banks, Japanese banks have looked to project financing, mezzanine loans and equity investments to maximize shareholder value, although they are riskier than mainstream lending.
Today is Wednesday, February 12, 2025, and here is today’s essential intelligence.
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