Japan’s Credit Market on Pace for First Annual Loss in a Decade

Ayai Tomisawa, Bloomberg News

BC-Japan’s-Credit-Market-on-Pace-for-First-Annual-Loss-in-a-Decade , Ayai Tomisawa

(Bloomberg) -- The global bond rout hasn’t escaped Japan’s staid credit market, which is poised for its first annual loss since 2011 amid the yen’s plunge versus the dollar.

Yen-denominated corporate bonds have lost 1% so far this year, according to a Bloomberg index. The market’s annual moves have been slight the past decade, with no yearly gain topping 1.4%. This year’s weakness has resulted in the spreads on the notes widening 16 basis points, set for the largest annual increase since 2008.

Bonds globally are in a rare bear market as central banks around the world sharply increase their policy rates in efforts to curb inflation from the highest levels in decades. While price pressures remain tame by comparison in Japan, they did hit a 31-year high in August. Even that wasn’t enough for Bank of Japan Governor Haruhiko Kuroda to budge from keeping interest rates at rock-bottom levels until wage gains make inflation more sustainable.

“Uncertainty over the BOJ’s policy may sap investor appetite for longer notes, and a recovery in demand may be delayed,” said Kentaro Harada, chief credit analyst at SMBC Nikko Securities Inc.

The widening gap between US and Japan yields and monetary policy fueled the yen falling to a 24-year low versus the dollar before Japan’s first intervention to support its currency since then. As the Federal Reserve last week enacted a third-straight 75 basis-point rate hike, the BOJ affirmed its ultralow rate policy.

Yield premiums on Japanese corporate bonds have climbed to 54 basis points, the most since December 2020. Further widening may prompt “investors like us” to increase their holdings of government debt and cut credit exposure, said Shunsuke Oshida, head of credit research at Manulife Investment Management Japan.

“When there is uncertainty over rate risks, investors are likely to move toward sovereign bonds from corporate notes,” said Kazuma Ogino, senior credit analyst at Nomura Securities Co. The BOJ’s policy of keeping 10-year JGB yields below 0.25% is making 10-year bonds less attractive, he said.