BOJ Shockwave Leveling Rates Sends Banks to Dollar: Japan CreditMonami Yui and Emi Urabe
Shizuoka Bank Ltd. joined Japanese national lenders in expanding U.S. dollar finance activity, anticipating monetary easing will crush margins on yen loans.
The nation’s second-biggest regional bank by market value raised $500 million in zero-coupon notes due 2018, the first public sale of dollar-denominated convertible bonds by a Japanese company since 2002. The average interest rate on long-term yen loans from the country’s lenders fell to 0.942 percent in February, compared with 3.348 percent companies worldwide pay on dollar facilities, according to data compiled by Bloomberg.
Mitsubishi UFJ Financial Group Inc. plans to increase energy and utility financing in the U.S., as the Bank of Japan’s focus on cutting long-term borrowing costs undercuts earnings from yen loans, President Nobuyuki Hirano said. Sumitomo Mitsui Financial Group Inc. aims to sell a record amount of dollar bonds this year for overseas business, even as the BOJ policy seeks to spur domestic lending to revive the economy.
“You know it’s a big deal when a conservative lender like Shizuoka Bank does this, a sure sign that yen debt is just not cutting it anymore,” said Nozomi Kokubun, a Tokyo-based analyst at SMBC Nikko Securities Inc. “Dollar-denominated loans are attractive for banks because they offer a spread you simply won’t find in Japan.”
Prime Minister Shinzo Abe’s call to boost fiscal and monetary stimulus hasn’t been enough to spark corporate demand for loans, leaving Japan’s banks with a record amount of excess cash. Customer deposits held by Japanese lenders exceeded loans by 176.3 trillion yen ($1.8 trillion) in March, central bank data show.
The BOJ decided on April 4 to double monthly bond buying to 7.5 trillion yen and lengthened the average maturity of the purchases by twofold to about seven years. The central bank’s previous program under Governor Masaaki Shirakawa focused on notes maturing in one to three years.
The announcement sent Japan’s benchmark 10-year bond yield to a record low of 0.315 percent the following day. The rate surged to almost double that level in the same session and traded 6 1/2 basis points lower at 0.575 percent as of 2:20 p.m. in Tokyo today.
“This round of monetary easing is without precedent and we must prepare for the interest rates to fall even further,” Mitsubishi UFJ’s Hirano said in an interview on April 8. “The decline in yen-denominated interest rates is weighing heavily on earnings from capital.”
The average interest rate on long-term loans from Japan’s six so-called city banks, which include Mitsubishi UFJ, Sumitomo Mitsui and Mizuho Financial Group Inc., dropped below 1 percent for the first time in January and was 1.01 percent in February, according to data compiled by Bloomberg. The rate for regional banks was 1.097 percent, after matching a record low of 1.075 percent in December, the data show.
Elsewhere in Japan’s credit markets, Nissan Motor Co. plans to price about 60 billion yen of five- and seven-year bonds later this week, according to a person familiar with the matter. The automaker is marketing 50 billion yen of the shorter-term notes at 16 to 21 basis points more than government debt and the remainder at an 18 to 24 basis point spread, the person said, asking not to be name because the terms aren’t set. A basis point is 0.01 percentage point.
Seven & I Holdings Co. plans to raise 60 billion yen split between three-, six- and 10-year bonds, marketing all tranches at a yield spread of 10 to 14 basis points, a separate person familiar with the matter said yesterday. The operator of 7-Eleven convenience stores last sold debt in June 2010, offering 80 billion yen of seven- and 10-year debt, according to data compiled by Bloomberg.
A Ministry of Finance sale of about 2.5 trillion yen of five-year notes today attracted bids valued at 3.09 times the amount available, showing the weakest demand since December 2011, according to ministry data. The gap between the average and low prices at the auction was 0.05, the widest since June 2008, another sign of low demand.
Shizuoka Bank’s offering is the first sale of convertible notes by a Japanese company in the U.S. currency since Orix Corp.’s May 2002 offering, according to Hiromitsu Umehara, a Tokyo-based general manager in its banking department. The lender, headquartered in Shizuoka Prefecture west of Tokyo, home to Suzuki Motor Corp. and Yamaha Corp., will use the proceeds to fund dollar offerings to its mostly Japanese clients seeking to expand overseas, Umehara said.
“Domestic loan demand should gradually improve, but at this moment company spending remains at a low level,” said Shigeki Makita, deputy general manager at Shizuoka Bank’s corporate planning department. Higher interest rates on dollar loans make overseas facilities more profitable than domestic lending, he said.
Japan’s corporate bonds have handed investors a 0.56 percent return this year, compared with a 1.43 percent gain for the nation’s sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has climbed 1.54 percent.
The yen traded at 97.41 per dollar at 2:30 p.m. in Tokyo today, after falling to a four-year low of 99.95 last week. The currency has plunged 10 percent this year, the worst performance among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes.
The cost to insure Japan’s sovereign notes for five years against nonpayment was at 71 basis points yesterday, after reaching 78 earlier this month, the highest since Jan. 23, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A drop in the credit-default swaps signals improving perceptions of creditworthiness.
“Japanese regional lenders and megabanks alike are very keen on opportunities for dollar financing,” SMBC Nikko’s Kokubun said. “They don’t even have to use the proceeds for lending and may just accumulate overseas securities.”
Sumitomo Mitsui’s lending unit targets two issuances that could total as much as $4.5 billion, matching last year’s amount as the most in the company’s 11-year history, President Koichi Miyata said in a Dec. 19 interview. The two sales would range from $1 billion to $3 billion each, he said.
The bank raised 2.15 trillion yen from dollar bond sales this year, making it the third-largest Japanese borrower in the currency after Mitsubishi UFJ with 2.25 trillion yen, according to data compiled by Bloomberg. Toyota Motor Corp. led the rankings with 3.193 trillion yen, the data show.
Mitsubishi UFJ is looking to buy a regional bank on the west coast of the U.S., President Hirano said. The Tokyo-based lender acquired San Francisco-based UnionBanCal Corp. in 2008 and Santa Barbara, California-based Pacific Capital Bancorp last year as persistent deflation inhibits loan demand at home.
The balance of outstanding loans at Japanese banks rose 0.6 percent to 404.8 trillion yen in March, the highest level since April 2009, according to data compiled by Bloomberg. Lending by city banks climbed to 199.1 trillion yen in the period, 3.7 percent short of the level three years ago, the data show.
“There’s been great demand for dollar funding among Japanese banks as they increase lending overseas,” said Chikako Horiuchi, a Hong Kong-based analyst at Fitch Ratings Ltd. “The trend is likely to continue.”