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Nascent Junk Bond Market Gets Nod From Japan Financial Regulator

Takashi Nakamichi and Issei Hazama
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Nascent Junk Bond Market Gets Nod From Japan Financial Regulator

(Bloomberg) -- Japan’s financial regulator is warming to a junk bond market.Debate has been heating up in the country about junk bonds after the first such publicly offered note in the nation priced last month by Aiful Corp., a consumer lender that teetered on the verge of bankruptcy a decade ago. With negative rates persisting into a fourth year and showing no sign of abating, investors are increasingly under pressure to take on more risk to secure returns.The volume of deals in Japan’s corporate bond market overall is small compared with the scale of the economy and it’s hard to say that the market is sufficiently fulfilling its function, according to a Financial Services Agency official, who asked not to be identified in line with agency policy. The development of high-yield issuance would be beneficial to the economy, the person said.Japan’s First Junk Bond Would Break Barriers in Wary MarketFor some investors and market makers, that means abandoning conventions that have limited the public corporate bond market to investment-grade issuance. Buyers need to be aware that high-yield securities are more likely to default than higher-rated debt when corporate results worsen or the economy enters recession, according to the official.In Japan, weaker companies haven’t felt compelled to sell speculative-grade notes as they’ve traditionally found it easy to obtain bank loans. But some recent changes have at least raised the possibility that the country could eventually develop such a market. State-run Government Pension Investment Fund, which manages the world’s largest such pool of assets, revised guidelines last year to allow it to buy yen bonds with ratings of BB or lower.Sales of yen corporate bonds topped 4 trillion yen in the fiscal first quarter for the first time in a decade, as some of Japan’s largest companies including Takeda Pharmaceutical Co. and SoftBank Group Corp. sold record-sized offerings. The growth in corporate bond deals is a positive sign, the FSA official said.\--With assistance from Finbarr Flynn.To contact the reporters on this story: Takashi Nakamichi in Tokyo at tnakamichi1@bloomberg.net;Issei Hazama in Tokyo at ihazama@bloomberg.netTo contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, ;Marcus Wright at mwright115@bloomberg.net, Beth Thomas, Russell WardFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

(Bloomberg) -- Japan’s financial regulator is warming to a junk bond market.

Debate has been heating up in the country about junk bonds after the first such publicly offered note in the nation priced last month by Aiful Corp., a consumer lender that teetered on the verge of bankruptcy a decade ago. With negative rates persisting into a fourth year and showing no sign of abating, investors are increasingly under pressure to take on more risk to secure returns.

The volume of deals in Japan’s corporate bond market overall is small compared with the scale of the economy and it’s hard to say that the market is sufficiently fulfilling its function, according to a Financial Services Agency official, who asked not to be identified in line with agency policy. The development of high-yield issuance would be beneficial to the economy, the person said.

Japan’s First Junk Bond Would Break Barriers in Wary Market

For some investors and market makers, that means abandoning conventions that have limited the public corporate bond market to investment-grade issuance. Buyers need to be aware that high-yield securities are more likely to default than higher-rated debt when corporate results worsen or the economy enters recession, according to the official.

In Japan, weaker companies haven’t felt compelled to sell speculative-grade notes as they’ve traditionally found it easy to obtain bank loans. But some recent changes have at least raised the possibility that the country could eventually develop such a market. State-run Government Pension Investment Fund, which manages the world’s largest such pool of assets, revised guidelines last year to allow it to buy yen bonds with ratings of BB or lower.

Sales of yen corporate bonds topped 4 trillion yen in the fiscal first quarter for the first time in a decade, as some of Japan’s largest companies including Takeda Pharmaceutical Co. and SoftBank Group Corp. sold record-sized offerings. The growth in corporate bond deals is a positive sign, the FSA official said.

--With assistance from Finbarr Flynn.

To contact the reporters on this story: Takashi Nakamichi in Tokyo at tnakamichi1@bloomberg.net;Issei Hazama in Tokyo at ihazama@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, ;Marcus Wright at mwright115@bloomberg.net, Beth Thomas, Russell Ward

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.