Since regulatory changes in 1996, Japanese companies have increasingly securitised mortgages and assets such as auto loans and credit card receivables, eager to raise funds more cheaply.
Industry sources estimate issuance topped 3.4 trillion yen in the last fiscal year to March, up 38 per cent from the year before. The figure is expected to jump to 5.4 trillion yen this year. But the amount is still a fraction of the US markets $200 billion issuance a year, and analysts said the market here faced grave obstacles to growth.
That could be troublesome for Japans economy because analysts say nurturing the securitisation market is key, noting that in South Korea, a securitisation boom had helped weak firms secure cash and banks get rid of non-performing loans after the Asian financial crisis in 1997-98.
Securitisation could play a big role in cleaning up corporate balance sheets and allowing companies that have no way of raising money otherwise to use their assets to procure funds, said Ms Miwa Suzuki, vice president of bond portfolio analysis at Nikko Salomon Smith Barney. Any asset is open for securitisation, she said. One of the problems in Japan is that nearly 80 per cent of the securitisation is done through private placement due to cozy ties between issuers, brokers and investors.
That has allowed companies to conceal information from outside investors, stifling secondary market trade and discouraging new participants from entering the market, analysts said.
There are many cases where even the basic terms of the deal remain hidden, like what types of assets are being pooled to back the securities and how the issues are performing over time, said Ms Chinatsu Hani, vice president of structured credit research at Merrill Lynch.
To develop the market, potential investors need the decision-making tools that will allow them to choose certain deals over others, she said.
For now, a flurry of new issues has found interest from financial institutions such as insurers and regional banks looking for better returns than those on government debt and high-rated corporate bonds.
Asset-backed and mortgage-backed securities are usually structured to carry high credit ratings, which are backed by future cash flow. But premiums are also attached to cater to market illiquidity and the complexity of deals.
Analysts said transparency was vital to maintain the current level of demand, especially as more companies struggle to borrow from banks, which are wary of adding to their huge bad-debt load. The market also lacks the big money from pension funds needed to add weight to trade. Analysts said such funds were turned off by the markets closed nature and the lack of a benchmark.
It may be difficult for pension funds to pile into asset-backed and mortgage-backed securities, considering theyre not included in benchmark indices, said Ms Suzuki at Nikko Salomon Smith Barney.
With retail mortgage-backed securities (RMBS) issued by the Government Housing Loan Corp expected to reach as much as one trillion yen in 2004, Ms Suzuki said inclusion in indices could be a near possibility. The government could also help add breadth to the market by encouraging other state agencies to securitise assets to pare debt. Analysts said a recent securitisation of a toll road by a private hotel developer offered hints for the countrys roads-and-bridges corporations to shed a dependence on public funds.