History of Securitisation in Japan

Securitisation — the financial practice of pooling assets (like loans, mortgages, receivables) and issuing securities backed by these assets — is often associated with large, developed markets such as the United States and Europe. But in Japan, the story is unique: driven by a convergence of economic pressures, regulatory reforms, and market culture that shaped its evolution into a distinct financial tool.

Why Japan Was Late to the Party

Unlike the U.S. or Europe, Japan did not have a thriving securitisation market in the post-war decades. There were strong economic and legal reasons behind this.

1. A Highly Conservatively Regulated Financial System

For decades, Japan’s financial system centered around large banks and close relationships with corporations. Credit was extended through traditional banking channels, and there was limited need — or appetite — for off-balance sheet instruments.

2. Legal and Procedural Barriers

Before the 1990s, there was no clear legal framework enabling the sale and transfer of loans and receivables in a cost-effective way. Under Japanese law, transferring debt required notarial certification of every individual loan, making the administrative burden high. Moreover, special purpose vehicles (SPVs) — essential to securitisation — had high capitalization requirements and operational hurdles.

The 1990s: Securitisation Takes Root

Securitisation in Japan officially began in the 1990s, amid broader systemic changes in global finance. Two key forces were at play:

1. The Global Financial Context

Worldwide, securitisation was gaining traction as an innovative way to manage credit risk and unlock new funding sources. Japan — facing economic stagnation after the asset-price bubble burst in 1991 — was under pressure to modernize its financial markets.

2. Domestic Legal Reforms

Crucial legislative steps between 1992 and 1998 laid the foundation for securitisation:

• 1992 Amendments to the Securities and Exchange Law — For the first time, asset-backed securities were recognized as legal “securities” in Japan.
• The Law for the Regulation of Business Relating to Specified Claims — Allowed transfer of lease receivables, auto loans, credit-card receivables, and other debts without individual consent.
• SPC Law Reforms — Reduced capitalization requirements for special purpose companies and enabled them to issue asset-backed securities with tax advantages.
• Act on the Securitisation of Assets (1998) — Created dedicated legal framework governing securitisation transactions (TMKs and trust vehicles).

These reforms removed many early obstacles and unlocked the possibility for structured deals involving a wider variety of assets.

The Early Growth Years (Mid-1990s to 2007)

Once the legal framework was in place, securitisation activity in Japan began to grow — albeit from a much smaller base than in the U.S.:

Rapid Expansion

• In 1994, total securitised assets were only about ¥30 billion.
• By 2006, that number had ballooned to approximately ¥11 trillion, making Japan one of Asia’s more significant securitisation markets.

New Asset Classes Emerge

Early deals focused on commercial and residential real estate. Over time, consumer loans, lease receivables, credit card debts, and even revenue streams from non-traditional assets (e.g., patents) were securitised.

Banks and Financial Institutions Join In

Japanese banks — historically conservative — began using securitisation for two main reasons:

1. Remove non-performing loans from balance sheets after the bubble era.
2. Access new funding sources and manage capital more efficiently.

The Global Financial Crisis and Its Impact

Despite its steady growth, Japan’s securitisation market was relatively small when the subprime crisis hit in 2007–2008.

A Smaller Market That Weathered the Storm

Unlike in the U.S.:

• Japan’s securitised deals were predominantly single-layer, not stacked into complex instruments (no CDO squares/cubes).
• Most issuances were rated AAA and were bought by conservative institutional investors (banks and insurers), reducing speculative risk.

This structural conservatism helped protect Japan’s financial system from the systemic failures seen overseas.

Even so, issuance volumes did fall sharply in the crisis years — showing how global risk aversion affected markets worldwide.

Regulatory and Institutional Responses

To shore up investor confidence and revitalize the market after the crisis:

Self-Regulation and Disclosure Rules

In 2009, the Japan Securities Dealers Association (JSDA) implemented disclosure procedures to improve transparency around securitised products — especially the risks tied to underlying assets.

Market Workshops

The Bank of Japan convened workshops and consultations to explore practical issues in securitisation, like origination, issuance, and secondary market development.

These actions reflected both regulator and market participant efforts to strengthen the market ecosystem.

The 2010s–2020s: Recovery and Modern Trends

After the Global Financial Crisis and the resilience shown during the Lehman shock, the Japanese securitisation market gradually recovered. Recent industry reports show:

Renewed Issuance and Recovery

• Residential mortgage-backed securities (RMBS) continued to be an active segment.
• Post-2011 (after events like the Great East Japan Earthquake), securitisation markets in Japan saw cautious but steady growth.

COVID-19 Disruption

Like many global markets, Japan’s securitisation activity was disrupted by pandemic economic uncertainty. But by 2025, issuance began strengthening again as investors sought diversified returns.

Why Securitisation Matters in Japan

The evolution of securitisation in Japan represents more than just financial engineering — it reflects broader economic and regulatory modernization in response to:

• A prolonged low-growth environment after the asset-price bubble.
• The need to diversify funding sources beyond traditional bank lending.
• The desire to internationalize and deepen financial markets.

Though Japan’s securitisation market remains smaller relative to Western markets, its careful, conservative development has given it resilience and relevance within Japan’s broader financial ecosystem.

Final Thoughts

Japan’s securitisation history is a case study in gradual adaptation — balancing innovation with prudence. From cumbersome legal barriers in the early 1990s to a post-crisis environment focused on transparency and risk management, the Japanese market reflects the country’s broader financial ethos: cautious, systematic, and highly regulated.

Future growth will likely hinge on how well Japan can integrate global standards with domestic needs, encouraging both domestic and international investor participation while managing systemic risks.