exposed

The market is just emerging, but domestic banks may already be exposed to global risk.

This article appears in the October issue of Global Finance Magazine.

Japan’s private credit market may still be small, but its exposure to private credit is not. 

That is an important distinction as the Bank of Japan warns that growing links between Japanese financial institutions and global private credit funds could have implications for financial stability. 

The BOJ’s concern is not that Japan has suddenly embraced the $2 trillion-plus private credit industry. It is that Japanese banks and institutional investors are becoming part of it, just as vulnerabilities in the asset class are attracting greater scrutiny. 

For now, regulators see no evidence of a systemic problem. According to reports, Japan’s Financial Services Agency has been examining financial institutions’ lending and investment exposure to private credit, while Finance Minister Satsuki Katayama has said Japan’s exposure is not substantial.

But Japanese banks have increased financing to global private credit funds in search of higher returns, while exploring domestic strategies in the same vein, creating potential channels through which overseas stress could spill into Japan. 

In 2020, for example, Sumitomo Mitsui Financial Group’s (SMFG) banking division took a 4.9% stake in U.S.-headquartered Ares Management Corp., making a strategic commitment to support the U.S. entity’s private credit business.

Earlier this spring, SMFG and Nippon Life Insurance were reported to be in talks to create a new private credit fund of at least 500 billion yen to finance leveraged buyouts, real estate and mezzanine transactions. 

“The market is only emerging,” said Yuuichiro Nakajima, managing director at Tokyo-based M&A advisory firm Crimson Phoenix. “It is certainly not replacing bank finance in any meaningful way.” 

Nakajima pointed out that Japan may well have less need for private credit than the U.S. or Europe because its banks remain deeply embedded in corporate finance and continue to provide relatively inexpensive funding. 

Filling the M&A Gap

Furthermore, Nakajima expects private credit to complement rather than displace traditional lenders, particularly as mergers & acquisitions in Japan become more complex and larger: Japanese M&A involving domestic companies reached a record 53 trillion yen in 2025, according to LSEG data cited by Reuters. 

Indeed, take-privates, succession deals, overseas acquisitions and infrastructure investment are generating financing requirements that can stretch conventional bank structures. 

In such an environment, private credit can fill gaps in leveraged buyouts, mezzanine finance and other transactions where flexibility, speed or longer maturities matter. 

“As the variety of M&A transactions becomes broader and more complex,” Nakajima said, “it wouldn’t be hard to imagine banks finding it difficult to keep up with the pace of financing needs.”

Global managers are betting on precisely that opportunity. According to reports, Apollo Global Management Inc., Blackstone Inc. and KKR & Co. are building private-credit capabilities in Tokyo, although industry executives expect adoption to take years rather than months.

But the domestic opportunity should not obscure the systemic risk concern: private credit globally has grown rapidly while remaining relatively opaque and illiquid. 

John Amari is a contributing writer based in Japan.