Japanese businesses are ramping up borrowing to cover cash shortfalls fueled by record merger activity, booming capital investments and mounting investor pressure for shareholder returns, putting their credit ratings at risk.
Debt held by companies in the Nikkei 225 that reported results for the fiscal year through March totaled ¥678 trillion ($4.2 trillion), up 4.6% from a year earlier, data shows. The increase coincided with a rise in downgrades by all three major rating agencies in 2025.
In the past, corporate Japan was known for hoarding cash and keeping borrowing low. Now, against the backdrop of tighter governance and the return of inflation, investors are pressing companies to deploy capital more aggressively. How they manage that transition will shape their credit profiles and broader stability in uncertain times, according to Hiroki Shibata, managing director at S&P Global Ratings.
“This trend could lead to higher debt leverage and increased reliance on bond capital markets to fund these activities,” Shibata said. “While this shift aims to enhance shareholder value and improve capital efficiency, we view it as increasing financial risk because of decreasing financial buffers.”
All told, S&P Global issued 19 downgrades of major Japanese businesses in 2025, versus seven in the prior year, while Moody’s made 19 reductions versus five. Fitch lowered its ratings seven times, up from just one downgrade the year prior.
Rising interest rates hit weaker or heavily indebted companies first, given that they’re less able to cope with rising refinancing costs, and the impact is being felt most acutely among industrial companies.
S&P Global downgraded Nissan in November to reflect the rising strain on its finances and said the burden of investments aimed at enhancing competitiveness would keep free operating cash flows for the automotive division negative for the next one to two years.
Greater appetite among Japanese companies for acquisitions, at home and abroad, also underscores their need to expand earnings in an economy where the population is shrinking. That adds execution risk because foreign deals can be harder to integrate than domestic ones, according to S&P Global.
Nippon Steel’s cash position shrank by about a third in the latest fiscal year, while borrowing doubled as it sought financing for its $14 billion acquisition of United States Steel, prompting S&P Global Ratings to downgrade the Japanese company’s debt.
Trading house Sumitomo saw its outlook cut to negative from stable by S&P Global, which sees its financial capacity likely to diminish over the next one to two years by its acquisition in March of listed unit SCSK.
“What makes this story increasingly nuanced is the financing behind the deals,” said Tanuj Khosla, portfolio manager at InCred Global Asset Management, pointing out that leverage multiples on…