The Bank of Japan's latest interest rate hike could boost net interest margins at the nation's lenders.

In a widely anticipated move, the Bank of Japan (BOJ) on Jan. 24 raised its short-term policy rate to 0.50% from 0.25%, the third hike since it abandoned its experiment with negative interest rates in March 2024. The central bank's benchmark interest rate is now at its highest level since 2008.

The move "is a tailwind for banks, further increasing corporate lending and expanding net interest margins for them," said Toyoki Sameshima, a senior analyst at SBI Securities Co.

While the higher rates will help all lenders, Japan's biggest banks are set to gain the most as their size and reach mean they can pass the associated costs on to their customers, while clients of smaller and regional lenders find it more difficult to absorb higher costs.

Mitsubishi UFJ Financial Group Inc. in November set a new net income target of ￥1.75 trillion for the fiscal year ending March 31, up from the previously estimated ￥1.5 trillion. Sumitomo Mitsui Financial Group Inc. expects ￥1.16 trillion in net income for the same fiscal year, rising from its earlier projections of ￥1.06 trillion, and Mizuho Financial Group Inc. is aiming for ￥820 billion in earnings, up from its previous goal of ￥750 billion.

SMFG said in its earnings report in November 2024 that the rate hike to 0.50% means the bank could earn an additional ￥100 billion in net interest income per year — in addition to an increase of ￥100 billion as a direct result of the first two rate hikes to 0.25%, it said.

Policy normalization

The BOJ holding firm to its policy normalization path is also a vote of confidence in the Japanese economy in the face of global uncertainties such as falling interest rates in several major economies and possible trade tariffs in the US under President Donald Trump.

"The international financial market has stabilized" following Trump's inauguration, BOJ Governor Kazuo Ueda said at a press conference after the Jan. 24 policy meeting. "Once the [US] tariff policy is detailed, we will put it into consideration for our policy," Ueda said.

Some economists believe higher tariffs in the US could benefit Japanese banks by creating inflationary pressures in the world's biggest economy. The resulting pressure on the US dollar would slow potential US Federal Reserve rate cuts and allow the BOJ to stay on its path to policy normalization. Most economists expect the BOJ to aim for a benchmark rate of 1.0% by 2026.

"The Fed's slowing rate cuts will put downward pressure on the yen and support the BOJ's rate hikes," Tsuyoshi Ueno, senior economist at NLI Research Institute, told Market Intelligence.

"Basically, the US tariffs imposition could raise inflation in the country, increasing the dollar against other currencies and making it harder for the Fed to cut rates," Ueno added. "The yen's depreciation would make it easier for the BOJ to raise rates."