Japan’s largest bank, Mitsubishi UFJ, has announced that its annual profits have plunged 28%, largely due to its exposure to the subprime market.

The bank said its annual subprime-related losses were more than 120 billion yen ($1.15 billion) and that it could lose another $480 million this year because of subprime exposure.

According to a report by Thomson Reuters, the bank’s president, Nobuo Kuroyanagi, said: “Subprime had a very broad effect on us. When you start talking about the related impact, the Japanese stock market has fallen a lot and that sparked losses on our stock portfolio.”

This from Thomson Reuters:

[Mitsubishi UFJ] has not been hurt as badly as Mizuho Financial on bets on risky U.S. subprime mortgages. Mizuho, Japan’s No.2 bank, lost 645 billion yen on subprime investments in the year to March, becoming one of Asia’s biggest subprime casualties.

But Mitsubishi UFJ has been dragged down by its consumer finance business after tighter government regulation squeezed profits, and is faced with sluggish lending growth and higher provisions against bad loans as Japan’s economy slows.

Future growth depends on MUFG’s ability to take advantage of opportunities overseas as Western banks, which have been hit much harder than Japanese banks by the credit crisis, become more cautious in extending loans, one investor said.

The loose bilateral trade association between China and Japan could be a major boost to the Japanese economy, which could become part of the world’s next superpower, says Martin Hutchinson in Money Morning.

“Free trade and free movement of labor between the two countries would enable them to deepen their economic relationship still further, making the Japan-China trade axis the most important in the world.

“Longer-term, an EU-style economic union could become the world’s leading economic power, surpassing even the United States and the EU itself. As a U.S. geo-strategist, one worries somewhat about this … As an investor, one rejoices in it and seeks to find sources of future profit from the two countries’ deepening relationship.

Read on here to find out how to profit from this geopolitical development.