By Samantha Barnes, International Banker
For the financial year ended March 2026, Japan’s three largest banking groups—Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group (SMFG) and Mizuho Financial Group—earned a combined net income of approximately ¥5.26 trillion (US$32 billion), around 34 percent more than a year earlier. The three megabanks also reported record profits. With the Bank of Japan (BOJ) having raised its policy rate from 0.75 percent to 1 percent on June 16 as it seeks to further normalise its monetary-policy regime, the country’s banking sector is set to continue receiving a significant earnings tailwind for the current financial year.
The BOJ ended its negative interest-rate policy in March 2024, before raising its benchmark rate to 0.25 percent in July 2024, 0.5 percent in January 2025 and then 0.75 percent in December 2025. For banks that spent years trying to generate acceptable returns from ultra-low-yielding loans and securities, positive rates have restored several sources of recurring domestic income. “Profit will continue increasing for Japan’s three major banking groups through fiscal 2026,” S&P Global stated in a June 8 report. “Robust funding demand from large domestic corporations is likely to persist. Moderate interest rate hikes in Japan are a further benefit for the banks.”
Indeed, the normalisation of interest rates represents a major improvement for Japanese banking performance. MUFG’s net income rose by 30 percent to ¥2.43 trillion in Fiscal Year (FY) 2025 (April 1, 2025, to March 31, 2026), while its return on equity (ROE) increased from 9.3 percent to 11.3 percent. SMFG’s net income grew by approximately 34 percent to ¥1.58 trillion, with its return on equity rising from 8 percent to 10.4 percent. And Mizuho’s net income advanced by 41 percent to ¥1.25 trillion, exceeding ¥1 trillion for the first time.
The most direct benefit has transpired in net interest income—that is, the difference between the interest received from loans, securities and reserves and the interest paid on deposits and other funding. When policy and market rates rise, floating-rate loans and newly originated credit reprice relatively quickly. Most ordinary deposits have repriced more slowly thus far, however. The resulting divergence between asset yields and funding costs improves the loan-to-deposit spread and, more broadly, the net-interest margin earned across a bank’s interest-bearing assets.
Sumitomo Mitsui’s domestic results demonstrate this mechanism in action. The bank’s average yield on loans and discounted bills increased by 32 basis points to 1.34 percent during FY2025, while the interest paid on deposits rose by 14 basis points to 0.20 percent. Its loan-to-deposit spread consequently widened by 18 basis points to 1.14 percent, thereby generating additional income before any future contribution from fixed-rate loans that have not yet matured or been refinanced was taken into consideration.
“The positive impact in the first year is expected to be JPY 110 billion,” Toru Nakashima, SMFG’s president and group chief executive, stated. “Further upside is also expected from loan growth.” The estimate applies to each additional 25-basis-point increase and reaches approximately ¥150 billion by the fifth year as fixed-rate loans gradually reprice.
The BOJ’s remuneration of bank reserves, by comparison, changes immediately. The central bank now pays 1 percent on eligible current-account balances held by financial institutions. Its interest expense on excess reserves reached ¥2.71 trillion in FY2025, indicating the scale of payments moving into the banking system. Fukuoka Financial Group (FFG), for example, earned ¥42 billion on its BOJ current-account deposits, ¥19.3 billion more than in the previous year. With rising rates also raising some banks’ wholesale funding costs and payments under interest-rate swaps, however, the additional interest received from the BOJ does not translate into an equivalent increase in profit.
Banks can also earn more as low-yielding bonds mature, and the proceeds are invested at higher prevailing yields. FFG increased the yield on its domestic bond portfolio from 0.54 percent in December 2025 to 0.78 percent in March 2026, having sold low-yielding holdings and shortened the portfolio’s duration. The same rise in yields reduces the market value of older fixed-rate bonds, so improving future interest income requires careful management of valuation losses and the pace of reinvestment.
“Net interest income is projected to improve from FY2026 onward due to rebalancing the portfolio in FY2025,” Hisashi Goto, FFG’s president, observed. “We expect interest rates to continue rising.” FFG’s net income had already increased from ¥72.1 billion to ¥85.4 billion in FY2025, while domestic net-interest income rose by ¥34.9 billion. Under a 1-percent policy-rate scenario, the group has estimated an additional pre-tax benefit of ¥4.5 billion in FY2026 and ¥13 billion in FY2027.
The improved operating environment is also reaching regional lenders, not just the globally diversified megabanks. Indeed, the BOJ reported in April that pre-provision net revenue—a measure of core earnings before credit losses—had continued to rise among major, regional and shinkin banks (cooperative regional financial institutions designed to support small and medium-sized enterprises and local residents). “Banks’ net income has continued to increase,” the BOJ noted. “Losses such as credit costs have been limited.”
While rate normalisation has certainly helped the megabanks achieve sizeable gains, it only explains part of the uptick.
While rate normalisation has certainly helped the megabanks achieve sizeable gains, it only explains part of the uptick. Expanding corporate loan books, stronger investment banking and wealth-management fees, capital-markets activity and overseas operations additionally contributed. MUFG also benefitted substantially from Morgan Stanley’s performance, while gains from strategic equity holdings remained material across the sector. Revenue growth was thus spread across lending, fee-generating businesses and investments developed partly in response to Japan’s prolonged period of ultra-low interest rates.
Mizuho presents a similar picture. Its domestic loan balance expanded by 1.6 percent to ¥57.8 trillion during FY2025, while its loan-and-deposit margin increased from 0.92 percent to 1.10 percent. The group spent the negative-rate years expanding fee-generating businesses in areas such as corporate banking, investment banking, wealth management and asset management, giving the bank sources of income that do not depend directly on domestic interest rates.
The value of a strong deposit franchise will now become more visible. Mizuho held ¥124 trillion in yen deposits against ¥61 trillion in loans in March 2026, leaving it with abundant, relatively inexpensive funding. Its ordinary deposit rate was 0.30 percent when the policy rate stood at 0.75 percent. That 45-basis-point gap supported earnings, but depositors are likely to demand better returns as positive rates become established and rival banks compete for their savings.
Given that much depends on how much banks raise lending rates relative to the additional interest they pay depositors, estimates of the profits generated by higher interest rates are not always guaranteed. “We may need to pay slightly higher costs for time deposits and other products,” Masahiro Kihara, Mizuho’s president and group chief executive, acknowledged, in reference to the annual effect of an additional 25-basis-point rate increase. “I suspect the actual impact might be slightly below JPY 120 billion.”
“As long as the Bank of Japan raises interest rates, the banks’ net interest margins will continue to rise,” Toyoki Sameshima, senior analyst at SBI Securities, said. “Their NIMs overseas may shrink.” Indeed, Federal Reserve rate cuts could reduce returns on Japanese banks’ overseas lending, although Sameshima expected domestic improvement to prevail because their Japanese loan books are relatively larger.
Further rate increases also carry credit and market risks. Borrowers eventually face higher refinancing costs, potentially increasing loan losses among financially weaker companies. Existing bond portfolios could incur valuation losses, while Japan’s shrinking population and declining number of companies continue to limit long-term domestic loan demand. Competition may also prevent lenders from passing every policy-rate increase through to customers.
Japan’s rate cycle has nevertheless produced a genuine improvement in banks’ underlying earning power. Loan yields are rising faster than deposit costs; reserves now provide substantial income; and maturing securities can be reinvested more profitably. And with fixed-rate assets typically repricing over several years, part of the BOJ’s June rate hike will accrue benefits throughout Japan’s banking sector well beyond FY2026. The banks retaining the largest share of that benefit will likely be those with abundant low-cost deposits, disciplined lending policies and bond portfolios positioned to capture higher yields without crystallising excessive losses.
“We expect the three groups’ revenue to keep rising in fiscal 2026 (ends March 31, 2027),” S&P Global added, in reference to the megabanks. “This is based on our view that the groups’ shift to more profitable business portfolios and the domestic business environment will continue to have positive effects. Interest rates are rising moderately, and demand for funds among large Japanese corporations is robust.”