Japan's banks are expected to boost their margins and grow earnings after the Bank of Japan raised its benchmark rate on Sept. 18, as global monetary trends point to a faster pace of rate hikes.
The Japanese central bank raised its benchmark interest rate by 25 basis points to 1.25%, its highest level since 1995, in an effort to contain inflation. The latest move marks the shortest interval between hikes in the tightening cycle that began in March 2024; the Bank of Japan (BOJ) previously raised rates in June. Analysts expect additional rate hikes at a faster pace as the central bank seeks to normalize interest rates following increases by other major global central banks, including the US Federal Reserve, which hiked rates earlier this week.
"The global rate hikes are definitely a tailwind for banks," said Hideo Oshima, a senior economist at the Japan Research Institute. "Chances are high that two of the three [mega]banks will revise their earnings targets higher."
Japan's three megabanks — Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. — reported about 30% of their projected net income for the current fiscal year ending March 31, 2027, in the first quarter ended June 30. Mizuho upgraded its full-year earnings outlook after the first quarter, while the other two maintained their annual forecasts, which were based on an assumed policy rate of 0.75% to 1.0%, according to the lenders.
Analysts expect the lenders to adjust their forecasts to reflect the benchmark rate rising to 1.25%, the highest in more than three decades.
"Even Mizuho may make another revision to its earnings outlook," said Toyoki Sameshima, a senior analyst at SBI Securities Co.
Rate hikes have become a global trend as central banks move to ease inflationary pressures. The US-Israel war with Iran escalated recently, pushing oil prices above $100 per barrel and making inflation a key factor in central bank decisions worldwide.
The Fed raised interest rates by 25 bps to a range of 3.75% to 4.00% on Sept. 16, signaling further increases in borrowing costs in the coming months. The European Central Bank hiked its benchmark rate to 2.5% from 2.25% on Sept. 10.
Japan's three megabanks have a significant overseas business presence, making them more sensitive to global interest rate movements. Overseas lending accounted for 42% of Mitsubishi UFJ's total outstanding loans at the end of the fiscal first quarter ended June 30, 40% of Mizuho's total loans and 35% of Sumitomo Mitsui's total as of June 30, according to the lenders' income statements.
Loan demand is rising domestically, which is expected to support the banks' lending incomes as higher interest rates boost margins. Outstanding domestic loans at Mitsubishi UFJ grew 1.2% year on year to ¥76.7 trillion as of the end of June, while Sumitomo Mitsui increased its domestic lending by 6.7% to ¥73.3 trillion over the same period and Mizuho’s domestic loans climbed 10% to ¥62.9 trillion.
As of Sept. 17, US$1 was equivalent to ¥157.03.
