Japan considers private credit as a pillar of its policy despite foreign market turbulence.

Japanese financial regulator considers private credit as potential pillar of new strategy By Makiko Yamazaki and Takahiko Wada

The Japanese financial regulator sees private credit as a potential cornerstone of its new strategy to meet the increasing demand for corporate financing, driven by the rise in merger and acquisition activities, a high-ranking official told Reuters, despite turbulence in foreign private credit markets.

This decision reflects a shift in behavior among Japanese companies, with rising inflation prompting them to invest the liquidity they have held onto for a long time, a trend that analysts believe will accelerate as Prime Minister Sanae Takaichi prioritizes investment-driven growth.

In contrast to foreign private credit markets experiencing heavy losses, the Japanese market “remains underdeveloped and needs to be cultivated,” said Michinori Haba, deputy director general at the Financial Services Agency overseeing financial markets, in an interview.

Haba noted that the demand for financing has strengthened further as the Takaichi administration promotes investment alongside the increase in merger and acquisition activities, accelerating the government’s debate on the need to diversify sources of capital.

“As part of the government’s new financial strategy, domestic private credit could be one of the main pillars,” he said, emphasizing that the policy is based on close monitoring of governance and developments abroad.

The government plans to formulate a new financial strategy in a few months to reorganize the financial ecosystem to boost growth in the world’s fourth-largest economy.

The Japanese private credit market remains small as companies have long relied on easily accessible traditional bank loans, but the demand for higher-risk financing is expected to increase due to the growing number and size of merger and acquisition deals.

Last year, mergers and acquisitions involving Japanese companies more than doubled compared to the previous year, reaching a record ¥51 trillion ($345 billion), fueled by multi-billion dollar private company buyouts, according to the LSEG.

“Private credit can provide a source of funding for leveraged buyouts,” said Haba, noting that mezzanine financing – a hybrid capital between senior debt and equity – has been particularly low in Japan.

Japanese financial giants are beginning to take an interest in the emerging domestic market.

Sumitomo Mitsui Financial Group (8316.T), which owns 6% of American alternative asset manager Ares Management (ARES.N), is in talks with Nippon Life Insurance to set up a private credit fund to provide loans for leveraged buyouts, according to sources familiar with the matter.

Such initiatives are seen as “a positive development,” according to Haba.

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