Top Analyst Says BOJ's Negative Corporate Yield Adds Distortions

  • May put pressure on Japanese banks to cut lending rates: BNP
  • Coupon floor for company bonds may fall below 0.1%: SMBC Nikko

The Bank of Japan’s purchase of corporate debt at negative yields for the first time adds to distortions in Japan’s bond markets and raises risks for investors and banks, according to Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA.

The central bank bought corporate bonds in market operations at minus 0.03 percent on Wednesday, according to data from the central bank. While the BOJ has purchased company notes at zero interest in the past, it’s the first time for it to buy the debt at negative levels, according to data compiled by Bloomberg.

“The BOJ could end up becoming the final arbiter of everyone’s creditworthiness by deciding whether or not to buy a bond,” said Nakazora, ranked Japan’s No. 1 credit analyst in an Nikkei Veritas investor poll in 2015. “Investors will be saddled with risks if credit spreads aren’t reflective of a company’s creditworthiness.”

If the BOJ makes a regular practice of purchasing company notes at negative yields, it may also put pressure on banks to cut borrowing rates that are already at record lows, according to Nakazora. While negative yields on Japanese government bonds have become commonplace since the end of 2014, corporate borrowers have so far sought to offset declining benchmark rates by guaranteeing investors a minimum 0.1 percent coupon on bonds.

Market’s Floor

“The market had looked at the 0.1 percent level as the floor for corporate bonds but if investors can be confident that they can sell the debt to the BOJ at negative levels, that level may come down,” said Takayuki Atake, an analyst in Tokyo at SMBC Nikko Securities Inc., a unit of Sumitomo Mitsui Financial Group Inc. “It’s a landmark that we’ve reached negative yields for corporate bonds.”

As part of the BOJ’s stimulus efforts it buys corporate notes with maturities of one to three years in monthly market operations. The debt has to have ratings around BBB or higher, according to the central bank’s website.

The lowest yield for which the BOJ bought corporate bonds on Wednesday was minus 0.03 percent, down 8.3 basis points from a month earlier, while the average yield was 0.063 percent, according to BOJ data. Banks can earn 0.1 percent by keeping their excess reserves on account at the BOJ, prompting market expectations that companies will avoid offering notes with yields below that level.

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