The Bank of Japan raising interest rates pushes up profits. Banking giants are making a fortune.

Driven by still strong demand for loans in Japan and the increase in profit margins following the Bank of Japan's rate hike in July, Japan's three largest commercial banks on Thursday raised their profit expectations for the fiscal year to historic highs. These banks all released their latest financial reports on Thursday, benefiting from higher borrowing costs after seven years of minimal loan profitability due to the negative policy interest rates. Mitsubishi UFJ Financial Group, the largest asset size commercial bank in Japan, stated that its second-quarter profits surged by about 90% due to rising interest rates and increased stock sales related to cross-shareholdings. The bank raised its net profit forecast for the fiscal year from 1.5 trillion yen to 1.75 trillion yen (approximately $11.2 billion). Measures taken by the Japanese government to improve corporate governance rules have led to an increase in the pace of cross-shareholdings sales between companies, with some companies choosing to buy back their own shares from strategic partners. Japanese banking giants still hold billions of dollars worth of corporate client shares, and divesting these holdings will generate additional profits, especially as the Japanese stock market nears historic highs. Benefiting from rising benchmark interest rates and significantly improved loan spreads, the bank's domestic retail and corporate lending businesses have generated higher interest income from loans and deposits. With the backdrop of Japanese banks expanding overseas for many years, the weakening yen has boosted the value of overseas business revenue and provided another important driver of performance growth for Japan's banking giants. Due to the thriving Japanese stock market and the expansion of cross-border investments, Mitsubishi UFJ Financial Group's asset and wealth management businesses have also achieved steady growth, but the net profit of the global investment banking business has declined due to sustained high global credit costs. Mitsubishi UFJ Financial Group stated that its current fiscal year's target for return on equity is around 9%, with hopes of achieving it earlier than previously expected. Mizuho Financial Group, Japan's third largest bank, reported a more than 60% year-on-year increase in net profit for the second quarter of the fiscal year 2024, and raised its full-year profit forecast to a record 820 billion yen. In order to emphasize these lucrative performance expectations, Mizuho announced a share buyback program of up to 100 billion yen, marking Mizuho's first share buyback in 16 years, and also raised its dividend expectation for the current fiscal year by 15 yen to 130 yen. "We have entered a new phase of growth investment and enhancing shareholder returns," said Mizuho CEO Kihara Masahiro at a media briefing. Following the Bank of Japan's ending of years of extremely loose negative interest rate policy in March, and the start of a rate hike cycle in July that has raised the policy rate to 0.25%, large Japanese banks like Mitsubishi UFJ Financial Group and Mizuho have seen significant increases in the spread between lending and deposits in their domestic loan businesses for two consecutive quarters. Mizuho Financial Group expects a positive impact of 85 billion yen from the two rate hikes by the Bank of Japan in the current fiscal year. In the period from July to September, Mizuho reported a group net profit of approximately 277 billion yen, significantly higher than the 170 billion yen in the same period last year. Ranked second in terms of overall asset size, Sumitomo Mitsui Financial Group saw a 27% surge in profits in the second quarter and raised its outlook for net profit for the fiscal year to a record 1.16 trillion yen. Sumitomo Mitsui Financial Group expects the rate hikes announced by the Bank of Japan to have a total positive impact of 100 billion yen on its net interest income, with approximately 70 billion yen of the positive impact set to be realized before the end of March 2025.