Credit derivative houses are welcoming the possibility of wider credit spreads this year in Japan, on the announcement two weeks ago the central bank is ending its quantitative-easing regime. The Bank of Japan has changed its policy of flooding the market with cash and for the first time disclosed an inflation range, meaning that in the longer-term rates could move above zero. As a result market officials said this could trigger a move above the severely tight spread levels seen over the past few years, which have been responsible for slower levels of growth than other CDS markets.
"I expect to see some healthy spread widening this year," said Shun Cajot Yoshida, credit structurer at BNP Paribas in Tokyo. Yoshida noted that wider levels will attract more interest for domestic CDOs. The CDO market in Japan has tended to focus on overseas structures that offer much higher yields.
"We're already starting to see more punters in the market," said a credit head at a U.S. house in Tokyo, explaining that some participants, such as overseas hedge funds recently started buying protection on Japanese names in expectations of wider levels. He continued that spreads could widen out by 20-30% over the course of the year.
