Currency gains for Japan's three megabanks are expected to diminish as the yen's recent appreciation against the dollar is likely to accelerate due to diverging monetary policies in the US and Japan.
Mitsubishi UFJ Financial Group Inc. (MUFG), Sumitomo Mitsui Financial Group Inc. (SMFG) and Mizuho Financial Group Inc. benefited earlier in 2024 from the yen's decline, which boosted the value of their overseas earnings when converted to yen. This effect contributed to strong net income growth in the fiscal first quarter ended June 30. But with the yen recovering about 8% from a four-decade low of ¥161.90 per US dollar July 3, these gains are expected to diminish.
"As [the megabanks] have much exposure to overseas markets, the dollar-yen rate would have a sizeable impact on their profits," said Hideo Oshima, a senior economist at Japan Research Institute. Any weakness in the US economy could prompt the Federal Reserve to cut interest rates, leading to a stronger yen and reduced margins for Japanese banks, Oshima said.
Policies diverge
The Fed is widely expected to cut rates at its Sept. 18 policy meeting after a series of subdued economic reports raised concerns about a slowdown in the world's largest economy. The move would contrast with the Bank of Japan's (BOJ) second rate hike of the year in late July, with more increases anticipated as the Japanese central bank normalizes its monetary policy.
Japan's megabanks have expanded into overseas markets, primarily in the US and Asia, to strengthen their investment banking and financing businesses. The strategy was driven by the BOJ's eight-year negative interest rate policy, which pressured domestic margins. While the banks do not disclose regional profit breakdowns, about 40% of their outstanding loans were from outside Japan in the fiscal first quarter that began April 1.
MUFG's overseas lending rose to about ¥49.100 trillion in the April-to-June period, up from about ¥46.800 trillion in the previous quarter, largely due to the yen's weakness. Excluding currency effects, loans outside Japan would have decreased by ¥400 billion to about ¥46.400 trillion, according to MUFG's first-quarter earnings statement.
In the same quarter, SMFG's overseas loans increased by ¥400 billion from a year earlier to ¥38.9 trillion, excluding foreign exchange impacts. But due to the yen's depreciation, the bank reported a significant gain of about ¥3.700 trillion in its overseas loan portfolio. Mizuho did not disclose the foreign exchange impact on its overseas lending.
Hawkish BOJ
The BOJ's hawkish stance may drive the yen higher, contrasting sharply with the US, where the first rate cuts since the early pandemic are anticipated. With inflation nearing the 2% target and the labor market softening, the Fed is likely to ease rates.
"The correction of the yen's weakness won't be temporary," said Takahide Kiuchi, executive economist at Nomura Research Institute, highlighting the disparity between US and Japanese monetary policies.
MUFG posted a ¥25 billion net income boost from the yen's weakness in the April-June quarter, while SMFG gained ¥16 billion in operating net income from the exchange rate during the same period, according to their fiscal first-quarter earnings. Both megabanks based their earnings on a rate of about ¥161 per dollar, up from ¥145 per dollar a year earlier.
For the fiscal year ending March 2025, MUFG and SMFG project a rate of ¥140 per dollar, while Mizuho forecasts ¥135 per dollar. Despite this, all three banks aim for record-high earnings over the 12-month period.
"We see little currency risk unless the yen strengthens beyond the ¥140 level," said Takayuki Hara, head of MUFG's corporate planning division, during an Aug. 1 online briefing following the bank's first-quarter earnings release.
In an Aug. 5 report, UBS projected the yen would appreciate to ¥140 per dollar by mid-2025, down from ¥147 per dollar in September. The Swiss bank's forecast is based on expectations that the Fed would cut rates by 100 basis points by the end of 2024, revising its previous prediction of a 50-bps cut.
As of Aug. 23, US$1 was equivalent to ¥144.74.