Lone Star Funds, which this week picked up part of Merrill Lynch’s CDO portfolio, is once again going where angels fear to tread. The US private equity firm is reportedly moving into real estate financing in Japan – a market that has ground to a virtual standstill with the retreat of domestic and international banks.

Financing for Japanese real estate was never as deep as in other developed markets. But the pool is becoming shallower still. Issuance of commercial mortgage-backed securities in the first quarter was half the level of a year ago, at just $1bn or so. Residential mortgage-backed security issuance fell by a third to $7bn. International investment banks began laying off securitisation teams at the end of last year. Domestic banks cut back new lending to real estate some months later, encouraged by the regulator. Japan’s Financial Services Authority, panicked by tumbling prices for properties outside plum areas – down 10-20 per cent in the past six months, according to CLSA – encouraged banks to prune their exposure to the sector. The knock-on effect was almost immediate. Earlier this month, Japan chalked up its biggest failure in nearly five years when Zephyr, a property developer, filed for bankruptcy.