BOJ staff flag looser lending terms and retail money in private credit
Victoria Shinder2 min readStaff in the Bank of Japan's Financial System and Bank Examination Department have published a review of private credit funds - vehicles that raise long-term capital, mostly from institutional investors, and lend directly to medium-sized and smaller companies with weaker credit. The paper, 2026-E-13, is an English translation of a Japanese original published in September, and it states that the views are the authors', not necessarily the Bank's.
Its main finding is that competition has changed the market. Money committed by investors but not yet lent - dry powder - has risen sharply and stayed high, lending spreads have narrowed, and the number of covenants in direct-lending deals has fallen, which the authors read as some easing of credit standards as lending capacity outran borrowing demand. Default rates at portfolio companies show no significant deterioration, though measures differ by data source. The authors single out the growing share of payment-in-kind loans where the PIK clause was added after the loan was made - so-called bad PIK - as a sign that some borrowers may be short of liquidity, and they note that funds have been lending more to software and AI infrastructure companies, sectors whose conditions change quickly.
The market is also changing shape. Asset-based finance funds, backed by pools such as auto loans, leases, receivables or royalties, are growing from a small base against a potential market the paper puts at around $5 trillion to $6 trillion. Semi-liquid funds aimed at affluent retail investors, including non-listed business development companies in the United States, interval funds and European long-term investment funds, allow periodic redemptions; the non-listed BDCs alone have grown faster than closed-end funds, according to the paper.
What it means
The paper matters in Japan because of who is on the other side. Japanese banks and institutional investors have been deepening their ties with private credit through investment, lending and fund financing, and the authors ask for closer monitoring of the funds' practices and credit. A deterioration in private credit would reach Japanese balance sheets through those links rather than through Japanese borrowers.
Two points are worth holding onto. The authors judge the liquidity risk of semi-liquid funds limited for now, because managers control redemption scale and receive regular loan repayments - but they add that retail investors may redeem more persistently than funds assume, and that stress could spread to a wider group of investors than in the past. And the workout skills needed when loans go bad vary across a growing number of managers, which matters more the longer rates stay high.