Three lost decades of near-zero interest rates hollowed out Japan's banks. The Bank of Japan's slow climb back to 1% is finally handing its lenders fat margins again — and the biggest of them record profits.

Japan's five largest banking groups earned a combined net profit of JPY1.956 trillion ($12.3bn) in the April-June quarter, up 42.3% y/y, with four of the five posting record first-quarter earnings, on results released on August 3. Mitsubishi UFJ Financial Group alone made JPY809.4bn, up 48.2%.

The ratings agency S&P Global expects the run to continue, forecasting in June that “profit will continue increasing for Japan's three major banking groups through fiscal 2026”.

For a generation, Japanese banking was a byword for the walking dead: zombie borrowers kept alive by free money, margins squeezed to nothing and returns among the lowest in the developed world. The central bank's retreat from negative interest rates has quietly rewired the economics of an entire industry.

The end of cheap money

The turn began in March 2024, when the Bank of Japan scrapped the last negative interest rate policy in the world. Quarter-point steps followed — to 0.25% that July, 0.5% in January 2025 and 0.75% last December — and on June 16 the board raised its policy rate to 1%, the highest level since 1995. It held there on July 31, warning that core inflation could stay above its 2% target.

For banks that live on the gap between what they pay depositors and what they charge borrowers, each step is money in the till. At Sumitomo Mitsui the average domestic loan yield climbed 32 basis points to 1.34% over the past year while deposit costs barely moved; Mizuho's loan-and-deposit margin widened from 0.92% to 1.10%. Buoyant equity markets have added a second engine, lifting fee income from investment-trust sales and wealth management.

The full-year figures are just as striking. The three megabanks — MUFG, Sumitomo Mitsui and Mizuho — booked a combined JPY5.26 trillion in the year to March 2026, up 34% and a record for the second year running. Mizuho cleared JPY1 trillion for the first time.

Still cheap, still going global

Profitable is not the same as world-beating. Even after the jump, return on equity at the megabanks sits at about 10-11% — MUFG's rose to 11.3%, Sumitomo Mitsui's to 10.4% — well short of the 15%-plus that big US lenders routinely deliver. Decades of low rates left Japanese banks stuffed with low-yielding assets and shy of risk.

A shrinking, ageing home market gives them little choice but to look abroad. Domestic loan demand is thin, the population is falling and the depositor base is greying, so the megabanks have pushed hard into Southeast Asia and the United States in search of growth.

Their reach shows in the deals they bankroll. In March the three megabanks lined up alongside US lenders to arrange a $40bn bridge loan for SoftBank's investment in OpenAI, a size of ticket that would have been unthinkable for a Japanese lending syndicate a decade ago.

The pull of scale runs the other way too. Japan Post Bank, one of the world's largest deposit-takers, sits on a savings mountain it struggles to lend out at home and has steered ever more of it into securities and overseas assets — the very trade that later scorched Norinchukin.

Norinchukin and the bond-market hangover

The same rising rates that fatten lending margins have torn holes in bank bond portfolios, and no institution has felt it more sharply than Norinchukin Bank, the JPY60 trillion cooperative that manages the savings of Japan's farmers and fishermen.

Having ploughed its members' deposits into foreign government bonds during the years of domestic zero rates, Norinchukin was left nursing close to JPY3 trillion in unrealised losses as US and European yields climbed. It dumped roughly JPY10 trillion of foreign sovereign debt to stem the bleeding and reported a net loss of JPY1.8 trillion for the year to March 2025, Reuters reported.

The bank has since steadied — it swung back to a JPY58bn profit in the April-June quarter — but still carried JPY1.22 trillion of unrealised losses at the end of June.

Norinchukin is an extreme case, but the exposure is national. Japan holds around $1.2 trillion of US Treasuries, more than any other country, and its banks and insurers have long chased higher-yielding assets abroad to escape rock-bottom domestic returns. As the Bank of Japan lets its own bond yields rise, the mark-to-market pain on those hoards — foreign and, increasingly, Japanese government paper — is a running risk for the sector.

Too many banks, too few people

At the other end of the industry sit the regional banks, scores of them, serving depopulating prefectures where the young leave and the old draw down their savings. Higher rates help their margins too, but they cannot outrun the demographics.

A wave of consolidation is under way as smaller lenders chase scale, and the bigger players are extending a hand. SBI Shinsei Bank is building a framework with more than 20 regional lenders to share large syndicated loans, while groups such as Resona have struck alliances with non-bank partners like the railway operator JR West to defend their franchises.

None of this undoes the central shift. After two decades in which cheap money was both crutch and curse, Japan's banks have been handed something they had almost forgotten how to use: a positive interest rate. The megabanks are richer for it, the regionals are scrambling to consolidate before it is too late, and the bond desks are still counting the cost of the era that has just ended. Whether the industry can turn a cyclical windfall into the sort of returns its global rivals take for granted is the question that will define Japanese finance for the rest of the decade.