Dec. 5 (Bloomberg) -- The cost of protecting investors from defaults on Japanese corporate bonds matched a record high on concern the central bank's efforts to unlock lending fall short of what credit markets need.

Banks and investors in the world's second-largest economy have shrugged off Bank of Japan Governor Masaaki Shirakawa`s attempts to revive loans to businesses, as a year-end funding crunch drove rates on commercial paper to a record high. Policy makers will accept BBB or higher-rated corporate debt as collateral from commercial banks from Dec. 9, the board said this week after an emergency meeting.

``The BOJ support program will not affect the actual market as it targets from AA to A companies,'' said Yasunobu Katsuki, chief credit analyst at Mizuho Securities Co. in Tokyo. ``The actual problem is that the market risk appetite for credit products and the risk taking capacity is very low.''

The Markit iTraxx Japan index rose as much as 13 basis points to trade at 380 as of 10:30 a.m. in Tokyo, according to prices from Credit Suisse Group AG. The benchmark of 50 investment-grade Japanese companies, including All Nippon Airways Co. and Japan Tobacco Inc., climbs as investors' perceptions of credit quality deteriorate.

Yields on one-month commercial paper with the second- strongest credit rating rose today to 1.825 percent, more than double the interbank rate. The commercial paper index covers companies such as Nippon Oil Corp., Japan's largest refiner, and Resona Holdings Inc., its fourth-biggest bank by market value, which have an A-1 score from Japan Rating & Investment Information.

Lending `Dry'

One of the ways Japan's central bank can support the market ``is to buy commercial paper from corporations, like the U.S. and European central banks are doing,'' Mizuho's Katsuki said. ``Otherwise the CP market will stay dry. This very difficult situation will continue.''

Corporate bond sales in Japan plunged 45 percent last month compared to the same period last year as the economy fell into its first recession since 2001, data compiled by Bloomberg show. NTT DoCoMo Inc., ranked the third-highest AA rating by Standard & Poor's, and Nippon Steel Corp. paid higher yield premiums last week when they sold the first bonds outside the public works sector since Oct. 15.

Morimoto Co., the Japanese condominium developer that brought the number of bankruptcies in Japan to a record last week, filed for protection from creditors on 162 billion yen ($1.75 billion) of debt.

Australia, Asia Indexes

The cost of protecting investors in Australian and Asian bonds from default also rose amid signs the global recession is deepening.

The Markit iTraxx Australia index was quoted 10 basis points higher at 400, Citigroup Inc. data show. The benchmark is linked to the debt of 25 companies, including Qantas Airways Ltd. and BHP Billiton Ltd.

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan, including the Thai government and Hong Kong's Hutchison Whampoa Ltd., rose 20 basis points to 440 in Hong Kong, BNP Paribas SA data show. Swaps on the region's index of 20 high- risk, high-yield borrowers advanced 25 basis points to 1,300.

Yesterday the Bank of England lowered its main rate by 1 percentage point to 2 percent, the lowest level since 1951, while the European Central Bank cut its benchmark rate by 75 basis points to 2.5 percent.

Five-year credit-default swaps on the debt of the South Korean government climbed 10 basis points to 420, or $420,000 to cover $10 million of debt, the BNP prices show. Contracts on Thailand rose 10 basis points to 360 and those for Malaysia advanced the same amount to 320.

The default-swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on changes in credit quality. Credit-default swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements.

A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt.

To contact the reporters on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Oliver Biggadike in Tokyo at obiggadike@bloomberg.net.

Last Updated: December 4, 2008 22:29 EST