Japan’s Banks Enter a New Era of Opportunity

Mia Nagasaka (0:00)

Welcome to Thoughts on the Market. I'm Mia Nagasaka, head of Japan Financials Research at Morgan Stanley MUFG Securities. Today, a once-in-30-year investment cycle is changing. How investors think about Japanese banks. It's Tuesday, October 6th at 10 a.m. in Tokyo.

For decades, Japanese companies had more cash than investment opportunities. But now, it's changing. This marks a new chapter for Japanese banks. The first stage of recovery was largely about interest rates. As Japan moved away from negative rates, higher lending yields helped bank margins and earnings. This next stage is about growth in the banking business itself, driven by companies investing more and needing more external capital.

In fact, we think Japan is entering its first meaningful capping cycle in nearly three decades. Investment needs are broadening, from labor-saving technology to the replacement of aging equipment. Companies are also becoming more active in reallocating capital toward business where they see stronger returns. For banks, the most direct opportunity is lending. We expect Japan's domestic loan market to grow from about 588 trillion yen or roughly 3.7 trillion US dollars in the fiscal year ending March 2026 to roughly 712 trillion yen or about 4.5 trillion dollars by March 2031 Loan growth could run at around 5% annually early in the investment cycle. Then settle at about 3% to 4%.

And the financing opportunity extends beyond loans. Take Japan's debt capital markets, where companies raise money by issuing bonds. We expect them to grow from about 52 trillion yen or roughly 331 billion dollars to 63 trillion yen or about 401 billion dollars by March 2031

We also forecast the M&A market to rise from 23 trillion yen or roughly 146 billion dollars to 32 trillion yen or about 204 billion dollars over the same period. Large projects often need several forms of financing, so lending can open the door to underwriting and advisory fees as well.

This gives banks more ways to generate earnings. In the early phase, banks can benefit mainly from lending and project finance. As projects mature, fee-based businesses such as capital markets and M&A can contribute more. This makes the opportunity look less like a short-lived lending boom and more like a multi-stage financing cycle. The key measure to watch is return on equity, which shows how effectively a bank turns shareholder capital into profit. Japan's megabanks are currently generating RUs of roughly 10 to 11 percent. We see a path toward around 15 percent over the medium term. Structural growth and corporate financing demand alone could add about 1 to 1.5 percentage point. So the bigger story is not simply that rates has risen. Japan may be moving from an economy defined by excess savings and under investment toward one where companies need capital to grow. If that transition continues, banks could have substantially more productive opportunities to deploy their balance sheets.

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