Japan’s top banks report record profits

The Bank of Japan’s gradual return to higher interest rates has produced record profits for the country’s largest banks, ending decades of near-zero margins that hindered growth.

Japan’s five biggest banking groups earned a combined net profit of JPY1.956 trillion ($12.3 billion) in the April-June quarter, a 42.3% increase from the same period last year. Four of the five posted record first-quarter earnings, according to results released August 3. Mitsubishi UFJ Financial Group (MUFG) led with a JPY809.4 billion profit, up 48.2%.

Rates rise, margins widen

The change started in March 2024, when the Bank of Japan ended its negative interest rate policy—the last in the world. The central bank has since raised its policy rate in quarter-point steps, reaching 1% in June, the highest since 1995. It maintained that level in July, citing inflation above its 2% target.

Each increase has expanded the difference between what banks pay depositors and what they charge borrowers. At Sumitomo Mitsui Financial Group, the average domestic loan yield climbed 32 basis points to 1.34% over the past year, while deposit costs remained nearly flat. Mizuho Financial Group saw its loan-and-deposit margin grow from 0.92% to 1.10%. Stronger equity markets also increased fee income from investment trusts and wealth management.

Annual results show even greater gains. The three megabanks—MUFG, Sumitomo Mitsui, and Mizuho—reported a combined JPY5.26 trillion in profit for the year ending March 2026, a 34% increase and a record for the second straight year. Mizuho surpassed JPY1 trillion for the first time.

S&P Global expects the trend to continue, predicting in June that profits for these major groups will keep rising through fiscal 2026. The shift reverses the era of ultra-low rates, when banks depended on cheap money to support struggling borrowers while earning minimal returns.

Global ambitions, lingering risks

Despite improvements, Japanese banks still trail global peers. Return on equity at the megabanks sits around 10-11%—MUFG’s reached 11.3%, Sumitomo Mitsui’s 10.4%—well below the 15% or more common among large U.S. lenders. Years of low rates left banks with low-yielding assets and a cautious approach to risk.

With Japan’s population shrinking and domestic loan demand weak, the megabanks have looked abroad for opportunities. Their expansion appears in major deals, such as a $40 billion bridge loan arranged with U.S. lenders for SoftBank’s investment in OpenAI. A decade ago, such a transaction by a Japanese syndicate would have been unlikely.

The same rising rates that boosted lending margins have also revealed weaknesses in bank bond portfolios. Norinchukin Bank, a JPY60 trillion cooperative serving farmers and fishermen, became the most visible example. After accumulating foreign government bonds during the zero-rate period, it faced close to JPY3 trillion in unrealized losses as U.S. and European yields rose. The bank sold about JPY10 trillion in foreign sovereign debt to limit losses and reported a JPY1.8 trillion net loss for the year ending March 2025. It has since swung back to a JPY58bn profit.

Regional banks face even tougher challenges. Operating in areas with shrinking populations, where young people leave and older residents spend savings, these lenders gain from higher rates but cannot escape demographic decline. Consolidation is speeding up as smaller banks seek scale. Larger players like SBI Shinsei Bank have created frameworks with regional lenders to share syndicated loans. Others, including Resona Holdings, have partnered with non-bank entities such as railway operator JR West to protect their business.

The move from negative to positive rates has given Japan’s banks a chance to recover. The megabanks are seeing gains, regional lenders are adjusting, and bond desks are still calculating the costs of a long era that has only recently closed. The industry’s ability to turn this temporary advantage into lasting, competitive returns will shape Japanese finance in the coming years.

Smaller institutions remain vulnerable to shifts in the banking sector.