Japanese financial institutions will continue to favor higher-yielding assets abroad, including US private credit, Fitch Ratings said in a recent release.

The preference for higher-yielding overseas assets will remain despite improved yields on Japanese assets, the rating agency said.

Recent stress in the private credit market should have a limited impact on Japan's major financial institutions, although risk could manifest through indirect channels across financial groups, Fitch said.

Regulators have examined private credit exposure but have not designated it as a domestic financial risk, which aligns with Fitch's view of the assets' limited scope in Japan.

The country's megabanks and life insurers also have narrow direct private credit exposure if assessed within their sizable overall portfolios, Fitch said.

Risks will come from indirect channels such as fund finance, warehouse lending, leveraged finance, and collateralized loan obligations, the rating agency said.

Given the difficulty in managing private credit risks, financial institutions will lean on long-standing risk-management frameworks, monitoring, and stress testing, among other measures, to contain them, Fitch said.