Japan corporate cleanup fuels appetite for record debt sales

CORPORATE governance reforms that have underpinned a nearly US$2 trillion rally in Japanese stocks are increasing the draw for investors in credit.

Japanese corporate US dollar bonds have been outperforming US peers, and borrowers have piled into the market with record issuance in recent months. Improved governance scores are helping to burnish the country’s credit at a time when the economy has finally shaken off decades of deflation, allowing the Bank of Japan to move away from rock-bottom interest rates.

“We are seeing a change in the economic conditions and the corporate culture in Japan,” said Angus Hui, head of fixed income at Fullerton Fund Management in Singapore. While those developments initially focused on shareholders, they are becoming a “pull factor” for credit investors too, he said.

The number of companies publishing plans to improve capital efficiency has been steadily increasing since the Tokyo Stock Exchange launched a ‘name and shame’ list at the start of the year, as part of a drive to improve corporate value that’s reignited interest among overseas buyers for Japanese assets. The emphasis on lifting earnings is prompting more Japanese companies to boost investments abroad, with the deep US dollar bond market a favoured funding option.

The strengthening of corporate reforms has helped Japanese corporate bonds outperform amid a deluge of such debt sales globally, spurred by historically tight credit spreads. Yield premiums on better-rated US-currency notes from Japan tightened 10 basis points in 2024, about double US peers, a Bloomberg index shows.

The country’s issuers sold almost US$31 billion of bonds since Apr 1, up 50 per cent from a year earlier and the most ever for that period, according to data compiled by Bloomberg. That compares with a 26 per cent increase in debt offerings in the US high-grade market for the same period, the data show.

“The improvement seen in Japan’s corporate governance has raised investor willingness to invest in Japanese corporate debt,” said Murray Collis, a fixed-income chief investment officer at Manulife Investment Management. “We have further broadened our investment scope and fundamental coverage for Japanese corporate bonds and are appropriately resourced to increase our participation.”

While environmental, social and governance factors have become an increasing focus for investors globally in the past decade, there’s also a growing emphasis on the rights of non-equity stakeholders such as creditors.

Of course, the interests of creditors and shareholders do not always align. While stock investors may welcome larger payouts and risk-taking in the form of mergers and acquisitions, corporate bondholders can frown on such activities if they hurt the creditworthiness of the firm. In Japan, though, most US dollar bond issuers are investment grade and sitting on piles of cash.

The country’s companies have multiple reasons for selling US dollar bonds including overseas investment needs and relatively competitive borrowing costs compared to yen when US-currency funds are swapped. Panasonic Holdings, which sold a US$500 million note this month, plans to use the proceeds in yen, a spokesperson said.

With Japanese companies facing elevated maturities next year and into 2026, the flow of deals is unlikely to reverse.

The bond issuance trend in foreign currencies by Japanese corporates should continue longer term given their investment needs overseas, said Akiko Tsubouchi, a managing director of Japan debt capital markets at BofA Securities in Tokyo.

“Their businesses and balance sheets are strong,” she said. “We see strong demand from global investors.” BLOOMBERG