Japan
11 November 2025
Japan has recently faced an unprecedented political shift that has hugely benefited the securities lending market. Hansa Tote explores the Bank of Japan鈥檚 termination of ETF lending, barriers to entry, and current trends
Image: stock.adobe.com/umer
The home of cherry blossoms, sushi, sumo wrestling, and a Paddington Bear-loving ambassador, Japan has been making waves in the world of securities finance of late. The region's securities finance market is showing signs of growth with a steady escalation in revenue that is only increasing year-on-year (YoY).
Japan boasts the third-largest economy in APAC, and has seen a surge in investor confidence following the victory of Prime Minister Sanae Takaichi. This is due to her pro-growth economic stance, reminiscent of former Prime Minister Shinzo Abe鈥檚 鈥楢benomics鈥�, but with revised structural reform elements that have stimulated market activity.
What makes Japan鈥檚 market different?
Based in Tokyo, Ted Allen, product manager for collateral at FIS鈥檚 网爆吃瓜 Finance and Collateral division, describes the market as 鈥渓arge and stable鈥�, having not seen the vibrancy and concentration of other markets located in the APAC region.
Japan differs from other global markets in more ways than one, due to its highly structured status, and that it is concentrated into a relatively small and tightly integrated community of industrial lenders, large retail brokers, trust banks operating as custodians, as well as agent lenders and broker-dealers, Allen explains.
Kohei Takeda, 网爆吃瓜 Finance Group, senior vice president of Japan 网爆吃瓜 Finance (JSF), says the Japanese securities market is distinguished by its substantial scale, high liquidity, transparency, and trustworthiness. He believes that the 鈥渉igh degree of freedom鈥� in Japan鈥檚 foreign exchange market and relaxed capital movement regulations makes it an attractive investment destination for foreign investors.
鈥淭hese characteristics are directly reflected in Japan鈥檚 securities lending market, where transparency, regulatory reliability, and a mature market infrastructure have ensured liquidity and efficiency in lending transactions. As a result, Japan鈥檚 securities lending market has established itself as a globally competitive and advantageous marketplace,鈥� Takeda concludes.
Current trends
Allen highlights that as the economy moves into the positive interest rate and higher inflation environment there may be a positive impact on securities lending revenues, noting: 鈥淚nterest rate volatility will drive both short selling and cash reinvestment requirements while the lender community will develop greater sophistication as they react to these market opportunities.鈥�
Following the appointment of Prime Minister Takaichi, Takeda states that the Nikkei 225 index reached a historic high of 52,000 in October.
He continues: 鈥淭his surge in the Japanese equity market has led to a significant increase in funding demand, particularly by strong demand for Japanese stocks from overseas investors.
鈥淎s the equity market continues to thrive, the demand for fail coverage is also expected to grow, which is expected to further boost activity in Japan鈥檚 equity securities borrowing and lending market in the near term.鈥�
In recent years, JSF has had a focus on providing high-quality liquid assets (HQLA) through repo and collateral swap transactions. With the Bank of Japan (BoJ) having raised interest rates to 0.5 per cent earlier this year 鈥� the highest seen in 17 years 鈥� the role of Japan government bonds (JGBs) as HQLA has been increasing, further strengthening its position as an alternative to cash in fulfilling HQLA requirements, Takeda notes.
Facts and figures
As the final quarter of 2025 approaches, the Japanese securities lending market shows a 鈥渃ompelling narrative of growth鈥� during political transformation, according to Matt Chessum, executive director, equity analytic products at S&P Global Market Intelligence.
This is evident through a 17.3 per cent increase in revenues towards the end of Q3 to US$629.4 million, as revealed by S&P Global Market Intelligence data. The market has demonstrated remarkable resilience and momentum, notes Chessum, particularly in the third quarter which saw a 28.9 per cent rise compared to the same period last year.
鈥淭his performance aligns with the broader Japanese equity market's positive trajectory following Sanae Takaichi's ascension to leadership and the implementation of significant market reforms,鈥� Chessum notes.
Looking at revenue and balance, S&P Global Market Intelligence data highlights multiple trends, including 鈥渋mpressive鈥� summer growth, with July seeing the highest YoY revenue increase at 36.3 per cent. This was closely followed by June at 33.6 per cent, reflecting heightened market activity during the period of political transition.
Average balances also continue to grow, reaching a peak of US$196.5 billion during September 鈥� a figure higher than at any point during 2024. This showed a month-on-month increase of nine per cent, denoting increased securities lending activity and market liquidity.
The average fee rate has also increased by seven per cent year-to-date, 0.58 per cent versus 0.54 per cent, a trend that suggests a greater demand for borrowed securities, particularly in specialised segments.
According to the data, consumer services have benefited the most from Japan鈥檚 economic revolution, with Metaplanet generating over US$55.3 million, with an average fee rate of 1791 basis points 鈥� reflecting the sector鈥檚 growth amid greater domestic consumption due to rising wages.
The termination of ETF lending
The BoJ has terminated its exchange traded fund (ETF) lending facility, having released a statement indicating that the facility, which has been open since 2018, will halt operations by the end of 2025.
Alongside the termination of ETF lending, the BoJ has also begun to sell its 楼37-55 trillion ETF holdings.
Chessum believes that this release marks a turning point in Japan鈥檚 securities lending market, commenting: 鈥淲hile these sales release assets into circulation, they also reduce the supply of lendable shares previously facilitated by ETF managers, tightening short-selling capacity, and raising borrowing costs.
鈥淭he BoJ鈥檚 role as a passive, price-insensitive buyer has long supported market liquidity and stability; its exit removes a key buffer against volatility. As a result, hedge fund strategies may be constrained, and liquidity, especially in less traded stocks, could deteriorate.鈥�
A BoJ white paper reveals the terms of the sales, and details that the Bank will sell ETFs to the market at a pace of 楼330 billion per year, based on the prices formed in the exchange market. However, the pace of sales may be modified as time goes on based on experience from prior sales.
Takeda says the termination of BoJ's ETF lending and subsequent selling of those funds, may have short-term negative impacts on the supply-demand dynamics of the Japanese equity market.
He notes, however, that it is important to recognise that the BoJ鈥檚 large-scale holdings have often been criticised for distorting the market.
鈥淢oreover, given the relatively small amount of ETFs expected to be sold by the BoJ, the overall impact is likely to be limited. In the coming years, the selling of ETFs by the BoJ could serve as a tailwind for the Japanese equity market, which continues to gain attractiveness due to ongoing corporate governance reforms,鈥� he explains.
Barriers to market
As with other markets, Japan faces barriers to entry. FIS鈥檚 Allen highlights the most significant of them.
鈥淟evels of automation in pre-trade, matching, and post-trade service in Japan remain low when compared to other markets,鈥� Allen begins. This often creates significant challenges for participants such as higher operational costs and risks, delays in processing, and trouble integrating with other market infrastructures.
Allen continues: 鈥淭he Japanese market is also somewhat concentrated in direct lending and a single matching platform, with high costs and a lack of local focus along with tighter spreads that have translated into great demand for an alternative venue.
鈥淲e expect this will drive a shift in liquidity to reduce costs and increase market resilience.鈥�
The high operational costs are often offset by the high salaries within Japan, however they act as a barrier into the market from an international perspective.
Looking ahead
The strong momentum in balances (up 12 per cent in Q3) and fees (up 15 per cent in Q3) suggests the market remains dynamic, says Chessum, as Japan continues its economic transformation under new leadership.
According to Chessum, the market's performance through Q3 2025 demonstrates Japan's broader economic narrative: a market in transition, welcoming structural reforms, all while maintaining the strength of its traditional industrial base, all against the backdrop of cautious monetary normalisation and renewed investor confidence in Japan's long-term growth prospects.
Discussing the future of securities lending in Japan, Allen agrees that, as local firms evolve their offerings, further investment will be driven among the Japanese securities lending community to obtain the tools and processes needed to respond to the increased revenue opportunities.
Japan鈥檚 securities lending market is well integrated with global liquidity pools with the major local and larger international broker-dealers offering two-way access. Due to this, Allen believes the market may further expand as the Government Pension Investment Fund (GPIF) grows its renewed securities lending model.
Over the next three to five years, JSF aims to enhance domestic market liquidity while strengthening its role as a bridge between these markets. By utilising its extensive network of relationships with overseas financial institutions and investors, JSF says it is well-positioned to globally expand the liquidity of the Japanese market, further reinforcing its competitive advantage.
Takeda states that with the normalisation of monetary policy by the BoJ, and increased activity in the Japanese equity market following the establishment of the Takaichi administration, Japan鈥檚 financial markets are at a critical turning point.
鈥淭hese changes present opportunities to address emerging trends and evolving trading needs, particularly in the JGB and securities lending markets.鈥�
A rise in Japanese yen funding presents a key opportunity for the market according to Takeda, who says it creates a chance to expand transactions by broadening the range of eligible securities and offering flexible solutions to meet client needs.
Japan boasts the third-largest economy in APAC, and has seen a surge in investor confidence following the victory of Prime Minister Sanae Takaichi. This is due to her pro-growth economic stance, reminiscent of former Prime Minister Shinzo Abe鈥檚 鈥楢benomics鈥�, but with revised structural reform elements that have stimulated market activity.
What makes Japan鈥檚 market different?
Based in Tokyo, Ted Allen, product manager for collateral at FIS鈥檚 网爆吃瓜 Finance and Collateral division, describes the market as 鈥渓arge and stable鈥�, having not seen the vibrancy and concentration of other markets located in the APAC region.
Japan differs from other global markets in more ways than one, due to its highly structured status, and that it is concentrated into a relatively small and tightly integrated community of industrial lenders, large retail brokers, trust banks operating as custodians, as well as agent lenders and broker-dealers, Allen explains.
Kohei Takeda, 网爆吃瓜 Finance Group, senior vice president of Japan 网爆吃瓜 Finance (JSF), says the Japanese securities market is distinguished by its substantial scale, high liquidity, transparency, and trustworthiness. He believes that the 鈥渉igh degree of freedom鈥� in Japan鈥檚 foreign exchange market and relaxed capital movement regulations makes it an attractive investment destination for foreign investors.
鈥淭hese characteristics are directly reflected in Japan鈥檚 securities lending market, where transparency, regulatory reliability, and a mature market infrastructure have ensured liquidity and efficiency in lending transactions. As a result, Japan鈥檚 securities lending market has established itself as a globally competitive and advantageous marketplace,鈥� Takeda concludes.
Current trends
Allen highlights that as the economy moves into the positive interest rate and higher inflation environment there may be a positive impact on securities lending revenues, noting: 鈥淚nterest rate volatility will drive both short selling and cash reinvestment requirements while the lender community will develop greater sophistication as they react to these market opportunities.鈥�
Following the appointment of Prime Minister Takaichi, Takeda states that the Nikkei 225 index reached a historic high of 52,000 in October.
He continues: 鈥淭his surge in the Japanese equity market has led to a significant increase in funding demand, particularly by strong demand for Japanese stocks from overseas investors.
鈥淎s the equity market continues to thrive, the demand for fail coverage is also expected to grow, which is expected to further boost activity in Japan鈥檚 equity securities borrowing and lending market in the near term.鈥�
In recent years, JSF has had a focus on providing high-quality liquid assets (HQLA) through repo and collateral swap transactions. With the Bank of Japan (BoJ) having raised interest rates to 0.5 per cent earlier this year 鈥� the highest seen in 17 years 鈥� the role of Japan government bonds (JGBs) as HQLA has been increasing, further strengthening its position as an alternative to cash in fulfilling HQLA requirements, Takeda notes.
Facts and figures
As the final quarter of 2025 approaches, the Japanese securities lending market shows a 鈥渃ompelling narrative of growth鈥� during political transformation, according to Matt Chessum, executive director, equity analytic products at S&P Global Market Intelligence.
This is evident through a 17.3 per cent increase in revenues towards the end of Q3 to US$629.4 million, as revealed by S&P Global Market Intelligence data. The market has demonstrated remarkable resilience and momentum, notes Chessum, particularly in the third quarter which saw a 28.9 per cent rise compared to the same period last year.
鈥淭his performance aligns with the broader Japanese equity market's positive trajectory following Sanae Takaichi's ascension to leadership and the implementation of significant market reforms,鈥� Chessum notes.
Looking at revenue and balance, S&P Global Market Intelligence data highlights multiple trends, including 鈥渋mpressive鈥� summer growth, with July seeing the highest YoY revenue increase at 36.3 per cent. This was closely followed by June at 33.6 per cent, reflecting heightened market activity during the period of political transition.
Average balances also continue to grow, reaching a peak of US$196.5 billion during September 鈥� a figure higher than at any point during 2024. This showed a month-on-month increase of nine per cent, denoting increased securities lending activity and market liquidity.
The average fee rate has also increased by seven per cent year-to-date, 0.58 per cent versus 0.54 per cent, a trend that suggests a greater demand for borrowed securities, particularly in specialised segments.
According to the data, consumer services have benefited the most from Japan鈥檚 economic revolution, with Metaplanet generating over US$55.3 million, with an average fee rate of 1791 basis points 鈥� reflecting the sector鈥檚 growth amid greater domestic consumption due to rising wages.
The termination of ETF lending
The BoJ has terminated its exchange traded fund (ETF) lending facility, having released a statement indicating that the facility, which has been open since 2018, will halt operations by the end of 2025.
Alongside the termination of ETF lending, the BoJ has also begun to sell its 楼37-55 trillion ETF holdings.
Chessum believes that this release marks a turning point in Japan鈥檚 securities lending market, commenting: 鈥淲hile these sales release assets into circulation, they also reduce the supply of lendable shares previously facilitated by ETF managers, tightening short-selling capacity, and raising borrowing costs.
鈥淭he BoJ鈥檚 role as a passive, price-insensitive buyer has long supported market liquidity and stability; its exit removes a key buffer against volatility. As a result, hedge fund strategies may be constrained, and liquidity, especially in less traded stocks, could deteriorate.鈥�
A BoJ white paper reveals the terms of the sales, and details that the Bank will sell ETFs to the market at a pace of 楼330 billion per year, based on the prices formed in the exchange market. However, the pace of sales may be modified as time goes on based on experience from prior sales.
Takeda says the termination of BoJ's ETF lending and subsequent selling of those funds, may have short-term negative impacts on the supply-demand dynamics of the Japanese equity market.
He notes, however, that it is important to recognise that the BoJ鈥檚 large-scale holdings have often been criticised for distorting the market.
鈥淢oreover, given the relatively small amount of ETFs expected to be sold by the BoJ, the overall impact is likely to be limited. In the coming years, the selling of ETFs by the BoJ could serve as a tailwind for the Japanese equity market, which continues to gain attractiveness due to ongoing corporate governance reforms,鈥� he explains.
Barriers to market
As with other markets, Japan faces barriers to entry. FIS鈥檚 Allen highlights the most significant of them.
鈥淟evels of automation in pre-trade, matching, and post-trade service in Japan remain low when compared to other markets,鈥� Allen begins. This often creates significant challenges for participants such as higher operational costs and risks, delays in processing, and trouble integrating with other market infrastructures.
Allen continues: 鈥淭he Japanese market is also somewhat concentrated in direct lending and a single matching platform, with high costs and a lack of local focus along with tighter spreads that have translated into great demand for an alternative venue.
鈥淲e expect this will drive a shift in liquidity to reduce costs and increase market resilience.鈥�
The high operational costs are often offset by the high salaries within Japan, however they act as a barrier into the market from an international perspective.
Looking ahead
The strong momentum in balances (up 12 per cent in Q3) and fees (up 15 per cent in Q3) suggests the market remains dynamic, says Chessum, as Japan continues its economic transformation under new leadership.
According to Chessum, the market's performance through Q3 2025 demonstrates Japan's broader economic narrative: a market in transition, welcoming structural reforms, all while maintaining the strength of its traditional industrial base, all against the backdrop of cautious monetary normalisation and renewed investor confidence in Japan's long-term growth prospects.
Discussing the future of securities lending in Japan, Allen agrees that, as local firms evolve their offerings, further investment will be driven among the Japanese securities lending community to obtain the tools and processes needed to respond to the increased revenue opportunities.
Japan鈥檚 securities lending market is well integrated with global liquidity pools with the major local and larger international broker-dealers offering two-way access. Due to this, Allen believes the market may further expand as the Government Pension Investment Fund (GPIF) grows its renewed securities lending model.
Over the next three to five years, JSF aims to enhance domestic market liquidity while strengthening its role as a bridge between these markets. By utilising its extensive network of relationships with overseas financial institutions and investors, JSF says it is well-positioned to globally expand the liquidity of the Japanese market, further reinforcing its competitive advantage.
Takeda states that with the normalisation of monetary policy by the BoJ, and increased activity in the Japanese equity market following the establishment of the Takaichi administration, Japan鈥檚 financial markets are at a critical turning point.
鈥淭hese changes present opportunities to address emerging trends and evolving trading needs, particularly in the JGB and securities lending markets.鈥�
A rise in Japanese yen funding presents a key opportunity for the market according to Takeda, who says it creates a chance to expand transactions by broadening the range of eligible securities and offering flexible solutions to meet client needs.
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