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Economy May 15, 2026 02:40 AM

BOJ flags systemic vulnerabilities from growth of investment fund activity

Executive director cautions that foreign hedge funds and private equity can amplify market volatility and transmit external shocks to Japan

By Nina Shah

The Bank of Japan warned that investment funds, while important providers of risk capital, can create pressures for the wider financial system if their activity intensifies. In a speech posted on the BOJ website, executive director Kazushige Kamiyama noted the rising presence of foreign hedge funds and private equity firms in Japan and highlighted how greater exposure by domestic lenders to these funds could allow shocks to spread rapidly into local markets. He called for stronger international cooperation among central banks and supervisors as non-bank financial intermediaries expand globally.

BOJ flags systemic vulnerabilities from growth of investment fund activity

Key Points

  • Investment funds supply risk capital but can create risks for the whole financial system - impacts banking, capital markets, and corporate finance.
  • Foreign hedge funds and private equity have notably increased activity in Japan despite non-bank intermediaries comprising about 30% of the country's financial assets versus a global share near 50% - impacts asset managers and corporate dealmaking.
  • Greater lending by Japanese financial institutions to foreign investment funds raises the chance that external shocks could transmit rapidly into domestic bond and equity markets - impacts lenders, securities markets, and market liquidity.

Bank of Japan executive director Kazushige Kamiyama cautioned that investment funds are a double-edged sword for the domestic financial system, according to a speech the central bank published on its website on Friday.

Kamiyama acknowledged that investment funds fulfill an important economic role by supplying risk capital. At the same time, he warned that the activities of such funds can carry risks that affect the broader financial system.

Highlighting trends in Japan, Kamiyama said foreign hedge funds and private equity firms have been increasing their footprint in the country. He contrasted this with the relative size of non-bank financial intermediaries - which account for about 30% of Japan's total financial assets - noting that this share remains below the global average of roughly 50%.

In recent years, private equity has become a more visible force in corporate restructuring and merger and acquisition activity in Japan, Kamiyama said. While he emphasised the contribution of these non-bank entities to economic growth through the provision of risk capital, he also flagged the potential for such entities to pose "potential risks to the entire financial system."

Kamiyama warned that abrupt movements of capital by global hedge funds could magnify price swings in both bond and equity markets. He also pointed to a specific transmission channel of concern: as Japanese financial institutions increase lending to foreign investment funds, the possibility rises that external shocks could be relayed quickly into domestic markets.

Given the expanding cross-border reach of non-bank financial intermediaries, Kamiyama said enhanced cooperation among central banks and supervisory authorities across jurisdictions is becoming increasingly important. The remarks were delivered at a seminar on Thursday and released by the BOJ the following day.

Contextual note - The comments underline the BOJ's attention to the evolution of the non-bank sector and the implications for market stability and supervisory coordination as fund activity grows.

Risks

  • Sudden capital movements by global hedge funds could intensify volatility in bond and stock markets - affecting investors, bond issuers, and market-making activity.
  • Increased credit exposure from domestic financial institutions to foreign investment funds creates a pathway for external shocks to spread quickly into Japan's financial system - impacting banks and funding stability.
  • Expansion of non-bank financial intermediaries' global activities complicates oversight and raises the need for cross-border supervisory cooperation - posing regulatory coordination challenges for authorities.

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