US President Donald Trump's aggressive tariff policy risks clouding the outlook for the Bank of Japan's monetary policy normalization and could drag on lenders' incomes.
Trump's first 100 days in office have ushered in a period of global economic uncertainty as the US raised tariffs on goods such as steel, aluminum and cars. Countermeasures from key trading partners such as China, Canada and Mexico could complicate global trade, potentially delaying corporate capital spending and fundraising plans, economists said.
"The uncertainty over global trade could make it difficult for companies to decide when, where, and how to ship or buy products, leading to weak capital needs," said Hiroshi Kubotani, a senior economist at NLI Research Institute who covers the US economy. "How can the Bank of Japan proceed with a rate hike when such [a] tariff effect could darken the global economic outlook?"
Megabanks' earnings
Japan's three megabanks — Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. — stand to benefit from the Bank of Japan's (BOJ's) accelerated monetary policy normalization after the central bank abandoned negative interest rates in 2024. The megabanks' businesses are more internationally aligned, and customers are better able to absorb higher interest rates.
The BOJ has raised rates thrice in the past year, taking its benchmark short-term rate to 0.5%. Naoki Tamura, a member of the BOJ's policy board, said on Feb. 6 that the central bank needs to raise its policy rate to "at least 1%" in the second half of the fiscal year that starts in April.
For now, the three megabanks are in good shape and analysts expect their earnings to grow as higher rates help push margins higher. MUFG's net interest margin is estimated to edge up to 0.63% in the fiscal year ending in March, up from 0.62% a year earlier. SMFG's margin is forecast to grow to 0.37% from 0.33% during the same period, and Mizuho's profitability is expected to remain at 0.4%, according to data from S&P Global Market Intelligence.
Loan demand for the megabanks has also increased. MUFG's outstanding loans in and outside Japan increased 6% to ¥125.6 trillion in December 2024 from a year earlier, while SMFG's global outstanding lending grew about 9.3% to ¥106.7 trillion. Mizuho increased its total loans by 6.5% to ¥97 trillion during the same period.
Drag from uncertainty
Still, BOJ officials acknowledge that global economic uncertainty could become a drag.
"As uncertainties still remain surrounding the US economy … I think that the [central] bank is expected to take a vigilant approach, such as by examining at each monetary policy meeting how policy interest rate hikes may affect developments in economic activity, prices and financial conditions," Hajime Takata, a member of the BOJ's policy board, said at a seminar on Feb. 19.
Economists note that Trump's tariff policy lacks predictability, fueling uncertainty. Some view it as a tactic or bluff to gain leverage in negotiations with trading partners and are skeptical that all the tariffs will actually be implemented.
Others, such as NLI's Kubotani and Yuta Asano, an economist at Mitsubishi Research Institute, expect Trump to impose some levies. Reducing the large US trade deficits and cutting corporate taxes would require alternative resources such as tariffs, the economists said.
Imposing a 25% auto tariff, if implemented, would deal a serious setback to Japan as auto exports account for about a third of Japan's total exports to the US. "If that is the case and Japanese stocks slump, then the BOJ would have to change the course of a rate hike," said Tsuyoshi Ueno, a senior economist at NLI Research who covers the Japanese economy.
Amid the uncertainty, stock prices have declined in both the US and Japan. The S&P 500 index has shed more than 5% so far this month, while Japan's Nikkei Average index was down more than 2%. The yen has strengthened by 1.6% against the dollar since the start of March, reducing the central bank's headroom to raise interest rates.
As of March 17, US$1 was equivalent to ¥148.57.
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