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Japanese corporates test the waters

Economic recovery in Japan is not expected to be accompanied by a rush of corporates to the bond markets. Many companies are still paying down debt and those that are borrowing can do so relatively cheaply through bank lending. Nevertheless, there are signs of growing activity from Japanese credits both domestically and in international markets.

AFTER ALMOST FIFTEEN years, Japan is finally showing sustained signs of shaking off its economic malaise. GDP growth figures have risen for four consecutive quarters, hitting a 13-year high of 7% in the first quarter this year. Standard & Poor's raised seven ratings on Japanese corporations and financial institutions between January and March this year, continuing the trend from 2003, the first year in which upgrades exceeded downgrades since 1990.

A recent survey conducted by the Nikkei newspaper using the results of some 1,780 companies, indicated that capital expenditure in the manufacturing sector was expected to rise by 10% this fiscal year, compared to a 6% rise in FY2003. For all other industries, including electric and utility sectors, capital expenditure is expected to rise by 5.5%, up from 2.2% last year.

The signs of economic improvement are all there but levels of issuance in the international debt capital markets by Japanese corporates still remain relatively low. It is still cheaper for Japanese companies to borrow in the domestic market. Historically, the most frequent users of the bond markets have been government-guaranteed borrowers that issue with the backing of the Japanese finance ministry.

One fixed-income analyst at Nomura argues that "while the volume of government agencies' issuance is on the rise, corporate issuance is not, mainly because they have just completed balance sheet restructuring.

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