The end of deflation has been a boon for Japan's banks, which endured razor-thin margins over seven years of negative interest rates.

Between April and December last year, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group hit 99.9%, 97.9% and 104% of their annual profit forecasts respectively.

None of the banking groups raised its full-year guidance, in each case citing the prospective need to use surplus funds to secure its future financial position.

MUFG's third-quarter profit jumped 32% to 490.74 billion yen ($3.16 billion) from 370.64 billion yen a year earlier. SMFG and Mizuho booked leaps over the same period of 54% and 28% respectively.

Three rate hikes since March 2024 have widened domestic loan spreads, while the return of inflation has encouraged large Japanese corporations, which make up the bulk of each bank's corporate clients, to take on loans for investments.

Alongside, growing calls for better capital allocation from Japanese authorities and investors have encouraged companies to offload their cross-shareholdings and non-core or under-utilised assets, generating fees for banks.

The banks' sale of their own equity holdings has proven another tailwind. MUFG sold 225 billion yen of holdings between April and December, with a further 248 billion yen agreed to be sold before the end of March 2027.

It is aiming to dispose of an additional 264 billion yen over that period.

The years of deflation also pushed Japan's financial groups to look abroad for growth, which has helped push profits to record levels now the domestic market is more profitable.

Overseas loans make up nearly 40% of MUFG's total loan balance, while its ownership of around 23.5% of Wall Street bank Morgan Stanley (MS.N) generated more than 20% of its profits in the April-December period.

($1 = 155.2400 yen)