Analysts said the results for the first half of the fiscal year also reflected cost-cutting prompted by the restructuring sweeping Japan's financial sector. All eight major banks that reported on Friday are involved in merger plans and the figures had been keenly anticipated for evidence of how aggressive they will be in writing off problem loans, cutting costs and boosting margins on corporate lending. With one exception, the banks all said they would return to profit for the year ending in March after wallowing for years in a sea of red ink. But some analysts gave only a muted cheer.

"There were some improvements in terms of cost-cutting and profit margins. Otherwise the earnings would have been disappointing," said Katsuhito Sasajima, senior industry analyst at Warburg Dillon Read. Margins in the sector have gradually improved as a result of the Bank of Japan's decision to keep short-term money market rates close to zero to help the economy out of its deepest recession since World War Two.

These economic woes have saddled banks with more than 10 trillion yen ($95 billion) in problem loans, and, despite a tentative rebound in growth, Sasajima said there was a lingering risk that the problem would get worse.

Reflecting this risk, the banks sharply increased their charges to cover bad loans. Dai-Ichi Kangyo Bank, for example, posted loan charges of 115.8 billion yen and raised its estimate of full-year charges to 170 billion yen from 120 billion yen. Fortunately this year's surge in Tokyo shares rode to the banks' rescue, enabling them to draw on latent gains in their hefty equity portfolios and to record chunky one-off profits from the sale of some of their cross-shareholdings. These are being unwound as rapid economic change loosens the "keiretsu" links binding groups of Japanese firms to their bankers.

"The rally in stocks gave a big boost to the banks and was more than enough to offset the hits they had to take," Sasajima said. The benchmark Nikkei average, which has ridden a wave of investor optimism about corporate restructuring, climbed on Friday to its highest level since August 1997 and is now up 36 percent since the start of the year. The banking sector rose 1.43 per cent on Friday, outsripping the 0.21 per cent rise in the Nikkei.