Japan seeks to resurrect junk bond market

Japan is making its biggest push in years to jolt its moribund junk bond market into life in an effort to cut corporate dependence on bank lending ahead of an anticipated wave of domestic dealmaking.

Government officials and regulators are canvassing bank chiefs, M&A advisers and private equity executives on how to boost appetite for higher-yielding debt, according to multiple people familiar with the matter.

The effort comes as international investors show renewed interest in Asia’s biggest advanced economy, after years of caution over the country’s slow growth and lacklustre attention to shareholders. Global business leaders and fund heads including BlackRock’s Larry Fink are in Tokyo this week to meet officials and Japanese company chiefs who are making the case for more investment.

“Japan’s lack of financial skills has been holding it back badly. The penny seems to have finally dropped with government that if it is serious about growth this financial backwardness needs to change”, said Nicholas Smith, an analyst at CLSA.

Global private equity groups in particular are hunting for opportunities in Japan’s corporate sector, as regulators and investors push undervalued companies to improve their capital efficiency. A deeper high-yield market in Japan would make it easier for those firms to use debt to support leveraged buyouts and offer some cash-rich lenders an opportunity to make higher returns.

Japan has had barely any junk bond issuance for two decades, mainly because corporate borrowers have relied heavily on funding from a handful of big banks such as Mizuho, MUFG and SMFG.

“The problem you have in Japan is that its debt capital system is basically three banks, and when they’ve had enough [of lending more] that’s it. It’s not hard to see why there would be demand for diversification, especially now,” said the senior executive of a financial firm involved in the confidential talks.

Only 3.5 per cent of all funding in Japan for non-financial companies comes from corporate bonds, while bank loans still make up 25 per cent. In the US, almost 10 per cent comes from corporate bonds while 6.4 per cent is from banks, according to statistics compiled by the Japanese government.

E-commerce group Rakuten and SoftBank Group are two of the rare Japanese companies to have raised dollar-denominated junk bonds, but in 2022 not a single high-yield bond was issued in Japan, according to government statistics. That compares with more than $100bn of such issuance in the US.

Not until 2019 did a Japanese company publicly offer yen-denominated junk bonds. The notes from Aiful, a consumer loan company, offered investors a yield of just 0.99 per cent.

Bankers whose expertise have been solicited by the government include Yoshitaka Kitao, the founder of SBI Holdings, which controls Japan’s largest online trading platform. Senior figures at the Government Pension Investment Fund, which manages more than ¥200tn ($1.3tn) of assets, are also involved, according to people close to the situation.

Japan has already made some efforts to kick start the market. In 2018, the GPIF — the largest fund of its type in the world — adjusted its investment policy to allow it to buy yen-denominated bonds rated below BB, and therefore “junk” status.

The consultation, which one person said started before the summer, is also looking for advice on how to inject vitality and liquidity into the secondary market, the lack of which means that banks cannot easily offload risk.

“There is still a chicken and egg problem in the high-yield market . . . there is no issuance in the primary market and that means that there is no secondary market,” said one senior government official familiar with the matter.

Japan’s financial regulator declined to comment but people familiar with its thinking said FSA officials were working to improve disclosure requirements by corporates and dialogue between investors and companies, as well as how banks analyse risk.

SBI declined to comment. The GPIF did not respond to a request for comment.