Bloomberg News

Abe Rocket-Start Lowers Sony Risk With Market Fuel: Japan Credit

January 15, 2013

Japanese Prime Minister Shinzo Abe

Japanese Prime Minister Shinzo Abe plans to spend 10.3 trillion yen ($116 billion) for what he calls a “rocket start” to the world’s third-largest economy. Photographer: Haruyoshi Yamaguchi/Bloomberg

Bond risk for Japan’s biggest companies from Toyota Motor Corp. (7203) to Sony Corp. (6758) plunged to a 10- month low as Prime Minister Shinzo Abe’s $116 billion stimulus plan added fuel to the longest stock-market rally since 1989.

The Markit iTraxx Japan index has dropped 32.6 basis points in the past month to 138.3 last week, the lowest since March 19, according to data provider CMA. That is more than five-fold the 6.6 basis point decline for North American gauge. Credit-default swaps on Sony fell to a six-month low, while Toyota’s retreated to the least since September 2008, the data show.

Abe plans to spend 10.3 trillion yen ($116 billion) for what he calls a “rocket start” to the world’s third-largest economy. Stimulus will be aided by Bank of Japan monetary easing and a recovery in the global economy that helped drive the yen to the lowest since June 2010 and spurred a nine-week rally in the Topix stock index.

“The weaker yen, rising shares, additional spending by the new administration and expectations for new economic revival measures are acting in concert to lift corporate creditworthiness,” said Taketoshi Tsuchiya, Tokyo-based director of credit trading at Barclays Plc. “The effect will probably last at least until July’s parliamentary elections” for control of the upper house, he said.

Sony Swaps

The cost to insure the debt of Sony against non-payment dropped 135.1 basis points in the past month to 250.9 on Jan. 11, making it the fourth-best performer, while Toyota’s contracts fell 8.3 to 44, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Sharp Corp. led the declines in the period, followed by Tokyo Electric Power Co. and NEC Corp., the data show. A decrease in the contracts signal improving perceptions of creditworthiness, while an increase suggests the opposite. A basis point is 0.01 percentage point.

Abe’s first major policy initiative to end deflation and boost growth comprises around 3.8 trillion yen for disaster prevention and reconstruction, with 3.1 trillion yen directed to stimulating private investment and other measures, according to a Jan. 11 Cabinet Office statement. The package aims to increase gross domestic product by about 2 percentage points and create about 600,000 jobs.

Borrowing Costs

The cost of raising funds through bond sales for companies in Japan, at 0.65 percent yesterday, has changed little since Abe’s victory on Dec. 16, according to Bank of America Merrill Lynch data. The extra yield investors demand to hold the nation’s corporate debt rather than sovereign notes fell one basis point to 45 basis points in the period, the data show.

“Fiscally expansive policies should boost economic growth in 2013 and provide spread-tightening pressure in domestic credit markets over the near term,” BNP Paribas SA analysts led by Mana Nakazora wrote in a Jan. 10 note. “If the net result is simply a further rise in Japan’s fiscal burden, the emerging risk will be that of another sovereign rating downgrade.”

Elsewhere in the Japanese credit markets, Odakyu Electric Railway Co. set 15 billion yen of three-year bonds at a yield of 0.22 percent, while Sumitomo Mitsui Banking Corp. priced 100 billion yen of 0.87 percent 10-year subordinated notes, the companies said in statements to the Finance Ministry last week.

Yield Decline

The benchmark 10-year bond yield fell three basis points to 0.78 percent as of 2:19 p.m. today in Tokyo, the lowest level this year. The securities yielded 103 basis points less than similar maturity U.S Treasuries, compared with 92 basis points a year earlier.

Japan’s current account swung to a 222.4 billion yen deficit in November from a 376.9 billion yen surplus the previous month, Finance Ministry data showed last week. The median estimate of economists in a Bloomberg News survey was for a 17.1 billion yen shortfall. The figure is the sum of the trade balance, earnings on investments and cash transfers.

Panasonic Corp.’s Chairman Fumio Ohtsubo said on Jan. 7 a weaker yen may help the maker of flat-screen televisions and appliances meet its earnings forecast next fiscal year. The company, which expects a 765 billion yen loss in the 12 months to March 31, prefers the yen weaker than 90, Ohtsubo said.

Amari Warning

The yen rose to 89.02 per dollar as of 2:06 p.m. today in Tokyo, after touching 89.67 yesterday, the weakest since June 2010. Japan’s currency rebounded after the nation’s economy minister, Akira Amari, said an excessive depreciation would cause import prices to rise and hurt consumers.

In the past month the yen has lost 7.1 percent, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

“This administration’s mission is above else to return the economy to strength,” Abe said in a Jan. 11 televised speech. The government will focus on bold monetary measures, flexible fiscal policies and promoting corporate investment, he said.

Economic output shrank an annualized 3.5 percent in the third quarter of 2012 after contracting in the three months through June, meeting the textbook definition of a recession. The median estimate of economists surveyed by Bloomberg News is for a 0.5 percent contraction in the final quarter of last year, with growth in the three months to March seen at 1.6 percent.

The Bank of Japan may increase its fiscal 2014 inflation forecast at this month’s policy meeting on stimulus measures and a weaker yen, people familiar with officials’ discussions said last week. The BOJ may raise an October projection for an 0.8 percent increase in consumer prices excluding fresh food, the people said, without specifying a new number.

“These government policies make shorting the electronics sector by overseas investors, who drove up the CDS in the past, less attractive,” Yusuke Ueda, a Tokyo-based credit analyst at Bank of America’s Merrill Lynch unit, said in a telephone interview Jan. 11. “Domestic investors in search of return are also turning to products linked to credit-default swaps” as yields on sovereign bonds drop.

To contact the reporters on this story: Yusuke Miyazawa in Tokyo at ymiyazawa3@bloomberg.net; Amina Mobley in Tokyo at amobley1@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net


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