Synopsis: Japanese banks are rapidly increasing their exposure to Indian lenders, driven not just by India’s growth story but by deep structural shifts within Japan itself. Regulatory pressure, excess capital, and limited domestic growth are pushing Japan’s megabanks overseas, with India emerging as one of their most attractive destinations.
Japan’s largest banks are stepping up their presence in India in a way not seen before. From acquiring stakes in major lenders to building control in investment banking firms, these moves have drawn the attention of investors and market watchers alike.
Mizuho Financial Group is set to take a controlling stake in Avendus Capital, an Indian investment bank. Mitsubishi UFJ Financial Group (MUFG) plans to invest approximately USD 4.4 billion for a 20 percent stake in Shriram Finance, one of India’s largest non-banking financial companies. Earlier in the year, Sumitomo Mitsui Financial Group (SMFG) became the largest shareholder of Yes Bank.
At first, it may seem like a straightforward story: Japanese banks are betting on India’s rapid growth and growing financial sector. India is, after all, the fastest-growing major economy in the world, with rising digital adoption in banking, a stable regulatory framework, and policies geared toward growth.
Yet, the full picture extends far beyond India’s economic interest. To truly understand why Japanese banks are suddenly deploying billions of dollars into the subcontinent, one must look back at changes taking place in Japan itself.
When Value Is Overlooked
For decades, Japanese companies suffered from what market analysts have dubbed the “Japan Discount.” Many firms traded at valuations far below the actual book value of their assets. To put it into perspective, in mid-2022, about 43 percent of companies on the Tokyo Stock Exchange’s top tier were valued at less than one times their book value. Essentially, investors believed that these companies were destroying the value of their own assets, retaining capital in the business rather than putting it to productive use.
Compare this to the United States, where only around 5 percent of S&P 500 companies traded below book value during the same period. For Japan, this persistent undervaluation wasn’t just a statistical issue; it was a structural problem that signaled inefficiencies across corporate Japan. Low returns on equity (ROE) and the tendency to hoard cash instead of reinvesting or distributing it meant that management was often penalized in the eyes of the market.
The result was suppressed stock prices and underutilized capital, creating a situation where tearing the company apart and selling assets piece by piece would, ironically, have yielded better returns than the ongoing business operations themselves.
Regulators Step In: Forcing Corporate Discipline
By 2023, Japanese regulators had enough. The Tokyo Stock Exchange and the Financial Services Agency began urging companies to address chronic undervaluation and capital inefficiency. Firms trading below book value were required to justify their strategies, demonstrate plans to enhance shareholder value, and report progress annually. Those failing to comply faced public scrutiny, labeled as “value destroyers” in one of the most direct forms of regulatory accountability in modern corporate history.
This move was emblematic of a broader shift: Japanese executives could no longer ignore the cost of equity, the returns expected by investors. The game had changed. Cash sitting idle on balance sheets was no longer acceptable, and management was under mounting pressure to either deploy capital wisely or return it to shareholders.
The End of Cross-Shareholdings
Another critical factor in Japan’s corporate transformation has been the gradual dismantling of cross-shareholdings, a hallmark of Japanese corporate culture for decades. Under this system, companies, including banks and industrial giants, held shares in each other not for investment returns but to cement long-term business ties, secure friendly shareholders, and prevent hostile takeovers. While this provided stability during periods of growth, it also trapped vast amounts of capital in assets that generated limited income.
The unwinding of these cross-shareholdings gained urgency following a major scandal in Japan’s insurance sector in 2024. Leading insurers, entangled in reciprocal holdings and found colluding in pricing, faced intense scrutiny from regulators. The result: they committed to divest all cross-shareholdings over the coming years. This shift freed up trillions of yen that could now be directed toward productive uses, including shareholder returns or strategic investment abroad.
For Japan’s megabanks, this represented a windfall. By selling off stakes in other firms and executing aggressive buybacks and dividend programs, banks now had substantial capital that exceeded regulatory requirements. With domestic loan demand stagnant, the question became: where could this capital generate meaningful growth?
From Hoarding Cash to Chasing Growth
Japanese companies, historically conservative with cash, have undergone a profound behavioral shift. Record buybacks and dividends illustrate this change. In November 2024 alone, share buyback announcements exceeded JPY 2 trillion, a monthly record. Dividend payouts hit around JPY 18 trillion for the financial year, demonstrating a new shareholder-friendly approach.
These measures reflect a broader recognition within corporate Japan: capital must be employed effectively. If domestic opportunities cannot generate adequate returns, companies must either return cash to shareholders or look abroad. For Japan’s three megabanks, MUFG, SMFG, and Mizuho, the decision was clear. Full with capital and facing limited growth opportunities at home, these banks turned their eyes overseas.
The surge in capital availability, coupled with the push for higher ROE and a shareholder-centric focus, has created conditions ripe for aggressive overseas expansion. Japan’s megabanks are no longer content with hoarding cash or investing in low-return domestic ventures. They are on the hunt for high-growth markets that can absorb their capital efficiently.
India As The New Frontier
India offers precisely the mix of opportunities that Japan’s megabanks are seeking. High loan growth, under-penetrated retail credit, infrastructure financing needs, and a relatively welcoming regulatory framework make India a fertile ground for deploying large amounts of capital.
MUFG has made India a central pillar of its Asia strategy, aiming to double its loan exposure to around USD 30 billion. The bank has engaged with major conglomerates like Reliance and Adani, acquired a USD 333 million stake in DMI Finance, and agreed to purchase roughly 20 percent of Shriram Finance. MUFG also acquired Link Group, the parent of Link Intime India Private Limited, in 2024. Following the acquisition, the Indian entity was renamed MUFG Intime India Private Limited, with the change taking effect from December 31, 2024.
SMFG has steadily built its retail banking presence, acquiring Fullerton India in phases and investing about USD 1.6 billion to take a 20 percent stake in Yes Bank, becoming its largest shareholder. Mizuho, meanwhile, is expanding across consumer finance and investment banking, purchasing a 15 percent stake in Kisetsu Saison Finance for approximately USD 145 million and taking control of KKR-backed Avendus Capital.
What makes India particularly attractive is the combination of growth potential and scale. These banks can deploy billions in a relatively short span, generate meaningful returns, and simultaneously establish deeper market footholds. Regulatory flexibility has also played a part, with ongoing discussions to make it easier for foreign banks to invest or obtain Indian banking licenses.
Strategic Diversification Beyond India
While India is currently in the spotlight, Japanese banks are not limiting their ambitions to South Asia. The United States represents another significant arena for growth. Japan is already one of the largest sources of foreign direct investment in the U.S., but here, the approach differs. Rather than taking stakes in retail banks or loan books, Japanese banks are focusing on investment banking services, targeting mergers and acquisitions and advisory work in a market with some of the highest fee pools.
This dual approach, retail credit and infrastructure lending in India, and investment banking in the U.S., reflects a careful global strategy. It allows banks to balance risk, diversify returns, and leverage their expertise in different market environments.
Risks and Challenges
Despite the appeal, expanding overseas is not without challenges. India’s banking sector is highly competitive, and foreign banks have historically had mixed success. There is a risk that Japanese banks could overpay for stakes in promising but potentially overpriced firms, undermining their goal of achieving higher ROE. For instance, Shriram Finance trades at around three times book value, and valuations for firms like Avendus reflect strategic but not bargain priced investments.
Other risks include currency fluctuations, interest rate differentials, and geopolitical uncertainties in both India and the U.S. Effective execution will require careful due diligence, local market understanding, and disciplined capital allocation.
The Human Angle
What makes this trend particularly interesting is the cultural transformation underpinning it. For decades, Japanese corporate culture emphasized stability, conservative growth, and maintaining long-term relationships through cross-shareholdings. Today, that mindset is shifting. The megabanks are increasingly embracing shareholder expectations, balancing caution with strategic risk-taking, and entering foreign markets with deliberate intent.
This is not merely a financial story; it is also a story of organizational behavior, regulatory influence, and evolving business culture. Japanese banks are learning to deploy capital like Western peers, chasing profitable opportunities abroad rather than hoarding cash at home. The ripple effects of this change extend well beyond Japan’s borders, influencing global capital flows and reshaping the competitive landscape in emerging markets like India.
Implications for India
The influx of Japanese capital could have transformative effects on India’s financial ecosystem. More investment can accelerate credit availability for consumers and businesses, support infrastructure projects, and enhance competition in retail banking. It also opens the door for knowledge transfer, best practices in risk management, and new product offerings.
From a broader perspective, these developments signal that India’s banking sector is gaining international credibility. If Japanese banks continue their aggressive expansion, they could help catalyze a phase of modernization and sophistication in Indian financial markets that benefits borrowers, investors, and regulators alike.
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