By Makiko Yamazaki and Anton Bridge

TOKYO (Reuters) -Two of Japan's megabanks reported solid quarterly profits on Monday amid hopes the Bank of Japan's (BOJ) nudge towards policy normalisation will herald a sea change in their business after years of being squeezed by rock-bottom interest rates.

The central bank's relaxation of its cap on bond yields on Friday boosted the prospect of higher government bond yields creating a windfall for lenders, sending Japan's benchmark index of banking stocks to an eight-year high.

Higher government bond yields will in the long run lift returns on bond holdings at major lenders, which have had limited options for where to park huge deposits and so flocked to higher-yielding assets overseas such as U.S. Treasuries.

The tailwind comes as top banks revamp their businesses to withstand ultra-low rates at home by slimming domestic retail operations, beefing up their presence in Asia through acquisitions and ramping up U.S. investment banking.

Sumitomo Mitsui Financial Group (SMFG) and Mizuho Financial Group, Japan's second- and third-largest lenders by assets respectively, on Monday stuck to their full-year net profit forecasts, which point to their highest earnings since the mid 2010s.

Both forecasts have not factored in the impact of the latest policy shift.

"It might take a while till the BOJ ends its negative interest rate policy," IwaiCosmo Securities analyst Tomoaki Kawasaki said. "But the business environment for the Japanese lenders is improving."

For April-June, SMFG reported a net profit of 248 billion yen ($1.75 billion), down 1.8% from the same period a year earlier but accounting for 30% of its annual profit forecast of 820 billion yen.

Mizuho's net profit for the quarter jumped 53.9% to 245.19 billion yen, representing 40% of its annual profit forecast.

Japan's biggest lender, Mitsubishi UFJ Financial Group (MUFG), will report quarterly earnings on Tuesday.

Years of ultra-low interest rates in Japan have meant lenders have little margin for earnings from lending, which has typically translated into a discount for Japanese banking stocks.

SMFG is trading at a price to book value of 0.7, meaning its shares are trading at a discount to the value of its assets. In comparison, U.S. bank JP Morgan is trading at almost twice the value of its assets, according to Refinitiv data.

The Japanese banks, however, say a full earnings impact will only be felt after the BOJ ends its negative interest rate policy, where it imposes a 0.1% interest rate on a portion of excess reserves banks park with the central bank.

SMFG said it expects a policy rate increase to 0% would boost its annual net interest income by 30 billion yen.

While the latest policy change does not necessarily hasten the end of negative interest rates, "normalisation of the policy will come into sight if stable inflation is confirmed," IwaiCosmo's Kawasaki said.

($1 = 141.7000 yen)

(Reporting by Makiko Yamazaki, Anton Bridge and David Dolan; Editing by Christopher Cushing and Mark Potter)