The FSA's Working Group on the Provision of Funds to Growing Companies

Japan’s overarching macroeconomic strategy is shifting from a legacy, bank-centric indirect financing ecosystem toward a dynamic capital market supplied with diversified risk capital. The Financial Services Agency (FSA) Working Group on the Provision of Funds to Growing Companies (2nd Meeting, held October 9, 2026) marks an essential mechanism in this legal and operational realignment.

Accelerating the transition beyond standard, collateral-backed bank loans into diversified growth capital—comprising Private Equity (PE), mezzanine credit, and venture debt—is vital for executing large-scale corporate carve-outs, facilitating smooth business succession, strengthening international industrial competitiveness, and fostering regional economic revitalization.

Data presented by the Japan Private Equity Association (JPEA) illustrates the maturation of Japan's PE sector into an established, resilient asset class over its 30-year history:

• Sustained Growth Trajectory: Since entering a steep growth curve in 2016, the Japanese PE market has matured into an active asset class consistently generating over ¥3 trillion in annual transaction value.
• Peak Deal Volumes: Following an all-time high of ¥5.8 trillion in 2023, deal volume stood at ¥3.7 trillion in 2024 and expanded to ¥4.8 trillion across 149 major transactions in 2025 (excluding real estate acquisitions and small transactions under $10 million / ¥1.5 billion).
• Broad Market Depth: When incorporating small-scale transactions under ¥1.5 billion ($10 million), Japan's private equity deployment reaches approximately 300 completed transactions annually.

The structural backing of this asset class establishes a direct connection to public wealth creation. Domestic PE funds in Japan are primarily anchored by institutional capital—including trust banks, life and non-life insurance companies, public and private pension funds, and mutual aid associations (kyōsai).

Consequently, the operational efficiency, risk-adjusted returns, and governance of Japanese PE funds directly affect the long-term wealth, retirement security, and financial stability of the general public.

In response to this evolution, the FSA's regulatory philosophy is moving away from a uniform, retail-centric regime originally constructed around consumer protection, debt-reduction, and curbing over-indebtedness (takyū-saimu), toward a "flexible regulatory architecture" (jūkōzōka). This tiered oversight model tailors statutory burdens according to the sophistication of market participants, removing operational drag for institutional transactions while preserving essential safeguards for retail borrowers.

With the macroeconomic foundation for private equity firmly established, evaluating the operational dynamics of Leveraged Buyouts (LBOs) and mezzanine credit reveals how structured finance acts as the operational engine for value creation across Japanese enterprise.

1. Private Equity, Structured Finance, and Operational Realities

Leveraged Buyout (LBO) financing, mezzanine debt, and revolving credit facilities (RCFs) serve as critical financial infrastructure for corporate restructuring, cross-border M&A, business succession, and post-acquisition scaling in Japan. As equity commitments for complex buyouts grow, combining senior bank credit with mezzanine instruments—such as subordinated loans and preferred equity—has become essential for bridging capital gaps, optimizing capital costs, avoiding equity dilution, and facilitating corporate growth.

Beyond supplying liquidity, private equity ownership produces measurable improvements in corporate productivity and human capital development. According to a 2025 survey conducted by JPEA and KPMG FAS across 433 PE-backed target companies:

• Employment Expansion: Total employment grew by 17% post-investment, expanding from 241,681 to 281,625 employees.
• Diversity & Leadership: The proportion of female managers increased from 14% to 18%.
• Wage Appreciation: Per-capita compensation increased by 9% across target companies.

A primary benchmark of PE-backed value creation is the development of BayCurrent Consulting:

1. Sponsor Investment & Transition: In June 2014, Sunrise Capital acquired a majority stake (>50%), with the founder reinvesting ~40%. Operations were transferred to professional management, with the founder retiring after a structured one-year transition.
2. Strategic Scale-Up: Backed by senior bank debt and mezzanine facilities, BayCurrent expanded its consultant workforce from ~880 employees at investment to 6,788.
3. Public Capital Execution: BayCurrent listed on the TSE Mothers market in September 2016. Revenue expanded from ~¥12.0 billion in FY2013 to ¥148.332 billion by FY2025.

Reflecting market demand, LBO loan balances across major domestic banks grew from ¥2.6 trillion in March 2019 to ¥6.6 trillion in September 2023. Over the same period, major bank mezzanine debt balances expanded from ¥8 billion to ¥380 billion. Non-bank lenders also form a key part of the structured finance market; as of March 2025, non-bank business loan balances reached ¥7.8 trillion (excluding inter-company loans). Among the top 15 non-bank business lenders (representing ¥4.2 trillion in total loans), leasing companies account for approximately 63% of overall balances and 75% of structured finance balances (¥2.9 trillion across 10 top lenders).

Crucially, as highlighted by JPEA Chairman Kiyozuka during the FSA deliberations, a structural imbalance persists: while mezzanine balances expanded to ¥380 billion, this figure remains modest compared to the ¥6.6 trillion senior LBO loan balance. This disparity underlines an unmet demand for private credit and junior capital in Japan.

This supply bottleneck is intensified by regulatory friction under the Money Lending Business Act (Kashikingyō-hō). The statutory friction stems from its original legislative intent: the Money Lending Business Act was designed around consumer protection and curbing over-indebtedness (takyū-saimu). Applying consumer-centric operational mandates to institutional corporate transactions introduces severe administrative drag:

• Net Asset & Personnel Mandates: Special Purpose Vehicle General Partners (SPC GPs) face a mandatory ¥50 million net asset requirement and must appoint a full-time Chief Operational Officer of Moneylending (Kashikin Gyōmu Tokiatsukai Shuninsha), despite managing limited institutional transactions.
• Lifecycle Mismatches: Moneylending registrations require renewal every three years, creating administrative complexity for mezzanine funds operating on 10-year investment lifecycles.
• Post-Capital Call Delays: Funds organized as Investment Limited Partnerships (LPS) cannot apply for moneylending registration until drawing down capital to fulfill the ¥50 million net asset threshold. Obtaining approval requires an additional 2 to 3 months post-drawdown, during which no loans can be extended—forcing funds to miss time-sensitive investment opportunities.
• Operational Friction: Applying retail disclosure rules—such as rigid pre- and post-contract physical paper delivery (shomen kōfu), debt assignment notifications, and strict collection limitations—creates unnecessary complexity for negotiated corporate transactions overseen by legal counsel.

Addressing this severe structural misalignment requires formalizing a modern legal boundary that isolates institutional transactions from consumer protection mandates through a dedicated "pro-lending" framework.

2. Defining the Flexible Regulatory Architecture for "Pro-Lending"

To resolve these operational hurdles, the FSA Secretariat proposes establishing a distinct regulatory boundary separating retail and SME lending from sophisticated corporate transactions ("pro-lending").

Rather than creating new regulatory definitions, the FSA proposes adopting the objective corporate criteria set out in the Act on Special Measures Concerning Commitment Line Contracts.

In his submission to the Working Group, Attorney Satoshi Inoue (Nagashima Ohno & Tsunematsu) supported using the Commitment Line Act criteria as a baseline, while proposing necessary modifications for fund structures:

• Fund Entities & Operating Managers: Investment funds/LPS and their GPs (including SPCs, LLCs, or foreign partnerships with a Japanese presence) should qualify as pro-borrowers if the GP or operating manager is organized as a joint-stock company (Kabushiki Kaisha), limited liability company (Gōdō Kaisha), or registered foreign corporation.
• LP Investor Status Clarification: Limited liability investors (LPs) in partnership funds should not independently need to satisfy pro-borrower criteria, as their liability is strictly limited to their committed capital.

For lenders engaging exclusively in pro-lending, the FSA proposes targeted regulatory relief:

1. Entry Thresholds: Eliminating minimum capital requirements, removing mandatory Chief Operational Officer placements (Kashikin Gyōmu Tokiatsukai Shuninsha), and replacing the 3-year registration renewal cycle with continuous supervision under national authority oversight.
2. Conduct Rules: Exempting transactions from physical paper delivery mandates (shomen kōfu) and removing collection or debt assignment restrictions when debt is transferred to regulated institutional entities (e.g., banks or insurers).
3. Commitment Fee Treatment: Exempting commitment line fees from "deemed interest" (minashi risoku) calculations under the Interest Rate Restriction Act and Money Lending Business Act. Under current interpretations, if an LBO drawdown does not occur, non-bank commitment fees can theoretically be interpreted as infinite interest rate violations. Carving out these fees aligns non-bank lenders with commercial banks, eliminating administrative risk for M&A liquidity facilities.

Expanding this flexible regulatory philosophy beyond established buyouts to early-stage corporate innovation demands a parallel modernization of venture debt mechanisms and the non-bank bond framework.

3. Venture Debt Expansion and Modernization of the Non-Bank Bond Act

Venture debt has emerged as a crucial financing instrument for Japan's startup ecosystem, particularly for scaling university-backed deeptech ventures and regional industrial technology clusters. By blending debt instruments with equity warrants, venture debt allows startups to secure growth capital between low-interest bank loans (~3%) and higher-cost venture equity (20%+), extending cash runways without forcing excessive equity dilution.

Market data compiled by the Fintech Association of Japan (based on Speeda research) highlights key startup financing trends:

• Startup Capital Environment: While equity startup funding experienced a downward trend in 2025, total debt financing remained steady, with total debt reaching 28.9% of equity funding volume.
• Venture Debt Volume: Venture debt issuances (including warrant-linked loans and convertible debt) reached ¥29.2 billion, representing 13.2% of total startup debt financing.
• Deal Expansion: Average deal size expanded from ~¥280 million to ~¥390 million per target company.

To meet this demand, bank-fintech alliances have established multi-bank venture debt funds:

• RFC Venture Debt Fund No. 1 (Nov 2025): Established by Resona Bank and Fivot, utilizing Fivot’s AI-driven cash flow analysis and real-time accounting data underwriting models.
• Funds Venture Debt Fund No. 2 (June 2026): Established by Funds Startups in partnership with Mitsubishi UFJ Bank and four regional banks (Ikeda Senshu Bank, Joyo Bank, Chugoku Bank, and Fukuoka Bank), targeting deeptech enterprises across all growth stages.

However, non-bank venture debt providers encounter statutory bottlenecks under the Non-Bank Bond Act (Act on Issuance of Bonds by Financial Institutions for Loan Business, enacted May 1999 following the deletion of Deposit Act Article 2, Paragraph 3). Prior to May 1999, Article 2, Paragraph 3 of the Deposit Act (Shukkin-hō) prohibited non-bank moneylenders from issuing bonds to raise lending capital, treating such issuances as illegal deposit-taking (minashi azukarikin). The 1999 Non-Bank Bond Act created an exception framework, but established strict entry requirements:

• Capital Threshold: Minimum capital requirement of ¥1 billion.
• Personnel Requirements: Requirement to maintain at least two full-time personnel with 3+ years of loan underwriting experience.

Non-bank venture debt providers—often growth-stage entities themselves—find satisfying a ¥1 billion capital requirement exceptionally difficult. This restriction limits their ability to raise debt capital via corporate bond issuances (shibobo), restricting the flow of non-dilutive risk capital to deeptech and regional startups.

Developments over the past quarter-century have altered the regulatory environment:

1. Reduction in Unregistered Lenders: Following the 2006 Money Lending Business Act reforms, registered moneylenders decreased from 14,236 in FY2005 to 1,473 in FY2024, while annual enforcement actions dropped from 1,596 to 3–4 cases.
2. Modern Investor Protection Frameworks: Comprehensive statutory protections now exist under the Financial Instruments and Exchange Act (FIEA), including mandatory EDINET electronic reporting (2004), civil monetary penalties for misstatements (2005), heightened criminal penalties (2006), and social lending conduct rules (2023).

To expand debt funding sources, industry bodies and legal experts advocate for targeted statutory updates: lowering the minimum capital requirement from ¥1 billion to ¥100 million, removing the dedicated registration regime while preserving statutory loan portfolio disclosures, and fully exempting private placement bonds (shibobo) from Non-Bank Bond Act constraints.

While rationalizing debt-issuance rules unlocks non-bank capital, ensuring long-term financial stability requires robust cross-stakeholder risk management and cross-border regulatory harmonization.

4. Legal Integrity, Systemic Risk Management, and Future Outlook

While easing regulatory restrictions aims to unlock growth capital, regulators must balance market expansion with systemic oversight and investor protection. During Working Group deliberations, committee members highlighted key policy considerations regarding foreign cross-border entities participating in syndicated loans:

• Local Legal Representation: Requiring foreign institutions without domestic branches to designate a licensed local representative (such as a Japanese law firm or attorney corporation) in Japan.
• Cross-Border Information Sharing: Establishing regulatory information exchange frameworks between domestic authorities and foreign regulators to monitor non-resident loan participants.
• Restructuring Protocols (Shiteki Seiri): Addressing potential complications in out-of-court restructurings (shiteki seiri), which typically require unanimous creditor consent. The FSA recommends clarifying the role of facility agents and requiring foreign syndicates or debt assignees to retain licensed domestic attorneys or debt servicers to manage loan enforcement.
• Regulatory Parity: Preventing regulatory arbitrage between domestic foreign bank branches governed by the Banking Act and non-resident syndicates participating under moneylending frameworks.

To support broader market participation, Attorney Satoshi Inoue proposed a "Two-Stage Flexible Architecture" (Nidankai no Jūkōzōka):

• Stage 1: Granting direct regulatory relief to lenders based on objective pro-borrower criteria (e.g., Commitment Line Act standards).
• Stage 2: Further relaxing operational requirements on end-lenders if licensed financial intermediaries, registered servicers, or legal professionals handle loan origination, enforcement, servicing, and covenant negotiations on their behalf.

Modernizing Japan's growth capital regulations offers a clear path toward expanding institutional liquidity. Aligning moneylending regulations, commitment fee rules, and non-bank bond frameworks with modern market realities will help channel institutional capital into productive growth companies—strengthening corporate value creation, expanding venture debt capacity, and supporting long-term economic expansion across Japan.

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Japan FinTech ObserverNorbert Gehrke