By Makiko Yamazaki and Takahiko Wada
TOKYO, April 16 (Reuters) - Japan's financial regulator sees private credit as a potential key pillar of its new strategy to meet rising corporate funding demand driven by a surge in M&A activity, a senior official told Reuters, despite turbulence in overseas private credit markets.
The move reflects a shift in Japanese corporate behaviour, with rising inflation prompting firms to invest cash piles they have been sitting on for long, a trend analysts say could accelerate
as Prime Minister Sanae Takaichi prioritises investment-led growth.
In contrast with overseas private credit markets that are taking heavy redemption hits, Japan's market "remains underdeveloped and needs cultivation," Michinori Haba, the Financial Services Agency's deputy director-general in charge of financial markets, said in an interview.
Haba said funding demand has strengthened further as the Takaichi administration promotes investment alongside rising M&A activity, accelerating government debate over the need to diversify providers of capital.
"Under the government's new financial strategy, domestic private credit could form one of the key pillars," he said, adding that the policy is premised on close monitoring of governance and developments overseas.
The government plans to compile a new financial strategy in a few months with the aim of revamping the financial ecosystem to spur growth in the world's fourth-largest economy.
Japan's private credit market remains tiny as companies have long relied on readily available traditional bank lending, but demand for higher-risk financing is expected to rise in the wake of an increase in both the number and size of M&A deals.
M&A activity involving Japanese companies last year more than doubled from the previous year to a record 51 trillion yen($345 billion), fuelled by multi-billion dollar take-private deals, according to LSEG.
"Private credit can serve as a source of funding for leveraged buyout loans," Haba said, adding that mezzanine financing - hybrid capital that sits between senior debt and equity - has been particularly thin in Japan.
There are emerging signs of Japanese financial giants stepping into fledging domestic market.
Sumitomo Mitsui Financial Group, which owns 6% of U.S. alternative asset manager Ares Management, is in talks with Nippon Life Insurance to set up a private credit fund to provide loans for leveraged buyouts, sources familiar with the matter said.
Such moves are "one positive development," Haba said.
($1 = 158.8800 yen)
(Reporting by Makiko Yamazaki and Takahiko Wada; Additional reporting by Kentaro OkasakaEditing by Shri Navaratnam)
