Japan's new trade deal with the US could allow the Bank of Japan (BOJ) to resume monetary policy normalization and support commercial lenders' margins.
Banking stocks in Japan jumped to a four-month high after the trade deal with the US was announced. Reciprocal US tariffs on imports from Japan and a proposed levy on cars will be capped at 15%, lower than the previous proposal of 25%, in the trade deal announced by US President Donald Trump on July 22.
"The tariff cut will make it easier for the BOJ to continue raising interest rates," said Toyoki Sameshima, a senior analyst at SBI Securities Co. The relatively lower tariff burden on Japanese industries "also would not dampen cash demand as earlier feared," Sameshima added.
The central bank last raised its policy rate by a quarter percentage point to 0.5% in January, following the abandonment of its negative rate policy in March 2024. Economists viewed the potential economic drag from higher tariffs as an obstacle to further rate hikes.
"The hurdle for the BOJ to raise rates is certainly lower now," said Tsuyoshi Ueno, a senior economist at NLI Research Institute. "It's possible to raise rates in October."
Many economists had predicted the BOJ to stay on hold at least until December if Trump had imposed higher reciprocal tariffs on goods from Japan. The US has announced trade deals with a clutch of Asian nations such as Vietnam, the Philippines and Indonesia in recent days ahead of its Aug. 1 deadline.
Bank shares jump
Shares of Mitsubishi UFJ Financial Group Inc. traded 4.9% higher at ￥2,098 on afternoon trading on July 23. Sumitomo Mitsui Financial Group Inc. shares were up 5.66% to ￥3,843, while Mizuho Financial Group Inc. shares climbed 5.4% to ￥4,410.
The drag on the Japanese economy due to US tariffs is expected to decrease to 55 basis points after the trade deal, Takahide Kiuchi, executive economist at Nomura Research Institute, estimated in a July 23 report. Kiuchi now expects Japan's economy to contract by approximately 0.1% in the fiscal year ending March 2026, compared with 0.8% growth in the previous fiscal year. Without the trade deal, the drag would have been as high as 85 basis points, Kiuchi said.
Japanese Prime Minister Shigeru Ishiba confirmed the US-Japan trade deal in a televised press briefing on July 23. "Since February, we have been negotiating with our national interests at stake. Both sides have engaged in all-out, close-to-the-edge negotiations over automobiles and other products. I believe this outcome reflects those efforts," Ishiba said.
MUFG projected in February that the BOJ's January rate hike would contribute an additional ¥20 billion in net interest income for the fiscal year ended March 2025, and ¥100 billion annually starting from the fiscal year beginning April 1.
SMFG said the January rate increase would contribute about ¥100 billion to its net interest income per year, complementing the ¥100 billion already added in the fiscal year that ended March 31 from prior rate hikes in July and March 2024. The lender indicated that a 25-basis-point rate increase will generate an additional ¥100 billion in annual net interest income.
