The Sun also rises: Japanese investment banking comes back into fashion
Rupak Ghose
Is the reemergence of Japanese financial markets and risk appetite a secular shift or just a mirage in a wide desert? That is what international banks have been wondering for a while but recent moves will give full confidence that they need to invest in Japan or risk being too late to the party.
The Nikkei 225 Index of Japan’s largest stocks jumped almost 5% on Monday on the hope of new fiscal stimulus under the likely new prime minister, Sanae Takaichi. That brought gains for the index over the last month to around 10%.
By contrast, the bond market was spooked, especially at the long end of the curve where the yield on 30-year JGBs hit a record high. Borrowing costs for short durations are similarly at multi-decade highs but still exceptionally low in absolute terms.
According to LSEG data, Japanese investment banking revenues are tracking up 12% year on year in 2025 versus 10% for the US and –2% for moribund Europe. This is also in line with the 2024 growth rate, albeit that had lagged the US and Europe.
M&A boom
M&A has been where this shift in the revenue pie is most obvious. There have been clear themes driving this, such as investor and regulatory pressure to reduce crossholdings, improve corporate governance, drive more efficiency and better returns on equity.
There is a plethora of industries with low operating margins relative to international peers and a generational handover of family-owned businesses going on. With around 4,000 publicly listed companies (much more than other countries adjusted for size), there is huge scope for consolidation.
Japanese M&A volume shrunk a little in 2024 and marginally lagged the rest of the world. This year Japanese M&A volume is up a staggering 200%, partly owing to three large transactions between linked companies with crossholdings in the giant Toyota Group and telecoms operator NTT. That said, even excluding these, Japanese M&A volume is up 80% year on year, well ahead of the 25% growth in the busy US market.
Getting bigger
Crucial to this turnaround in M&A has been private equity. There has been a steady increase in the number of private equity deals in Japan over the last decade but what has emerged in 2025 is an increase in deal size.
Around half the top 10 M&A deals in Japan this year have been private equity taking companies private. Huge international private equity groups such as KKR, Blackstone, EQT and Bain Capital have deployed billions of dollars in one or more deals and have been expanding their footprint in the country in recent years. Local private equity is also increasingly awash with cash.
As well as improved local opportunities, international groups are seeing fewer opportunities in the highly valued US market. Despite the rise in interest rates, funding costs for leveraged deals in Japan are still extremely cheap on an absolute basis with Japanese banks being willing lenders.
The biggest challenge for investment bankers is that – despite Japanese stock markets tracking global markets upwards in the past five years – ECM volume has been lacklustre with a 19% decline this year and only a 9% increase last year, according to LSEG data. In particular, the level of follow-ons is pacing down on prior years, with the IPO environment mixed and very few listings of any size.
Debt issuance has been better than equity issuance in Japan this year. Volume has grown quicker than in most G7 countries, albeit these relative growth rates are largely a function of the fact that US and European debt markets were so busy last year.
No skew
Unlike in European investment banking, there is no clear skew towards local players, with Japanese mega banks boasting strong franchises across M&A, ECM and DCM.
Bloomberg recently reported that, looking at the Japanese subsidiaries of international investment banks – which are driven more by trading than capital market activity – the big three US banks, JP Morgan, Morgan Stanley and Goldman Sachs, reported revenues in the last financial year to December 2024 or March 2025 that were at least twice the size of their peers.
The next group of international banks – BNP Paribas, Barclays, Citigroup, Bank of America and UBS – all generated similar levels of revenue as each other but were way behind the big three.
Looking at LSEG league tables for dealflow alone, no European bank makes the top 10 this year in Japanese M&A, ECM or DCM. By contrast, the big three US banks are often joined by Bank of America and Citigroup in top 10 tables, especially in DCM.
As Japanese business gets its mojo back and a wave of domestic catalysts combine with international private equity giants’ deep pockets, we are likely to see the investment banking wallet continue to recover. This will disproportionately benefit Goldman Sachs, Morgan Stanley and JP Morgan. Morgan Stanley, in particular, benefits from its local joint venture structure – one very welcome legacy of its near-death experience in 2008.
Rupak Ghose is a former financials research analyst