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Credit Turmoil Is Closing In on Japan’s $650 Billion Market

Rie Morita
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Fallout From Turmoil in Global Credit Markets Is Spreading

(Bloomberg) --

Japan’s corporate bond market had been an oasis of calm in recent weeks, with deals staying steady even as the coronavirus pandemic caused the worst sell-offs elsewhere since the global financial crisis. That’s now changing.

The cost to insure company debt against default in Japan has surged 77 basis points so far in March, the sharpest monthly increase since 2009, according to CMA data. As investors realized that Japan’s mostly high-grade corporate notes aren’t immune to the credit crisis abroad, yield premiums rose last week to the highest in five months, a Nomura BPI index shows. Debt issuers will need to offer wider spreads as the market volatility saps investor demand, according to one underwriter.

As Japanese companies brace for damage to sales and profits from the virus outbreak, their bond sales have decreased this month and will likely fall in the fiscal year starting April after record issuance this business year. The slide in fundraising may mean even less investments by firms, which would hurt the world’s No. 3 economy that’s already expected to contract for a second straight quarter.

“We need to watch out for what happens in May-June because the real economic impact of what happened since February will appear around that time,” said Mana Nakazora, chief credit analyst at BNP Paribas SA. “There’s a possibility of defaults as companies’ falling sales and profits hurt their balance sheets.”

It’s a stunning shift in sentiment that’s occurred suddenly in credit markets across the world. Japanese companies have sold 15.9 trillion yen ($149 billion) of bonds in the year ending March 31, by far the most on record, according to Bloomberg-compiled data.

Until the end of February, Japan’s corporate note market, with about 70 trillion yen of debt outstanding, appeared resilient in the face of coronavirus-related turbulence abroad. It helped that almost all of Japanese corporate issues are investment grade, and sovereign yields below zero added to the allure of company notes.

That’s all changed.

“There’s an increasing number of issuers who can’t decide what to do now as uncertainties remain too strong,” said Haruhiro Ikezaki, head of debt capital markets at Mitsubishi UFJ Morgan Stanley Securities Co.

Last-minute fundraising by Japanese firms at the end of the fiscal year may have masked increasing concern in the nation’s debt market recently, according to Nakazora at BNP Paribas.

“That made it look as if things were as normal in Japan,” she said.

(Updates with link to story about corporate rush for cash)

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