The Japanese government will on Wednesday unveil plans to securitise about Y400bn ($3.74bn) a year in loans to special public institutions over the next few years as part of a scheme to shrink government assets by Y140,000bn.
In the first securitisation of national assets, the Japanese government will next month launch an initial Y100bn in 10-year bonds backed by loans to national hospitals, universities, financial institutions and other entities that do not receive private sector equity financing.
The deal comes at a time when securitisation markets elsewhere have suffered after the US subprime mortgage crisis. In contrast to the west, Japan’s securitisation market has not been significantly affected by the subprime impact, says Tomohiro Miyasaka, a securitised product analyst at Credit Suisse.
Japan has an unusually high ratio of assets to gross domestic product – at 75 per cent, twice that of the US. Under former prime minister Junichiro Koizumi, the government committed in 2005 to halving this ratio, which entails reducing assets by Y140,000bn by the end of fiscal 2015. The Ministry of Finance expects to make most of the cuts by reducing annual lending. It expects up to about Y10,000bn to be taken off the balance sheet through securitisation.
The main advantage of securitisation is that it allows the government to reduce the risk of a higher future interest rate, according to the MoF. The government raises funds by issuing JGBs and provides long-term loans to special public institutions at fixed rates. If interest rates rise, as they are likely to eventually, the government could face paying more for its borrowing than it receives on its loans.
The finance ministry’s decision to securitise assets represents an unusual move by a national government to tap this market, particularly as Japan has been relatively late to develop its securitisation market.
“Given the scarcity of [bonds with attractive spreads] in Japan, I think it would be well-received,” said John Richards, head of research at Royal Bank of Scotland in Tokyo. Investors in Japan who have been willing to buy products at extremely tight spreads “need yield wherever they can get it”.
The government will use the funds raised through the securitisation issues to buy back JGBs.
Daiwa Securities SMBC is arranging the issue, with Nikko Citigroup and Mitsubishi UFJ Securities as joint underwriters.
Additional reporting by Lindsay Whipp in Tokyo