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More than ten years after the bubble burst in Japan's property and equity markets, the erosion of wealth and of confidence continues. Government finances are weakening as one fiscal stimulus after another fails to kickstart the economy. The banking system remains largely dysfunctional, seemingly unwilling to tackle bad loans. Yet, ironically, this creates a wealth of opportunity for investment banks as prime minister Koizumi's new administration tries to recapture Japan's economic miracle. Mark B Johnson reports.

The more government debt that Japan issues, the greater the weighting of the yen in the global bond and currency indices becomes. To counter the danger of exposure both to the currency and to the government directly, international investors continue to diversify out of JGBs and into non-Japanese credits including lower rated names. Mark B Johnson reports.

JFM

Kreditanstalt für Wiederaufbau

Mark B Johnson interviewed some of the most prominent investment bankers working in Japan to get their views on the state of the markets, namely:

Originators are embracing securitisation as never before in Japan and investor demand at home seems almost limitless. The prospects for a vibrant RMBS market to finally develop are good. But competition for agency mandates is intense and new structures rapidly become commoditised. Only the smartest and most patient houses can stay ahead of the pack and make a solid return on their investment in the market. Mark B Johnson reports.

Investors in yen fixed income believe that the supply and demand equation is badly out of balance. Too much money, chasing too little paper. Mark B Johnson and Richard Morrow canvassed a range of investors to find out their strategies and how much risk they are prepared to take on board to gain some yield pick-up.

Trading in the European credit derivatives and equity options market ground to a halt Monday afternoon following the crash of a Dominican Republic-bound plane in the New York City borough of Queens. One credit derivatives trader in London said his firm had ceased making markets in all names "for at least an hour, maybe more, depending on what happens," adding that the team was awaiting word on whether the crash was terrorist-related. He added the airline sector is expected to be slammed when the default swap market reopens, as confidence will have taken a further battering followed the latest plane crash. Prior to the crash, five-year protection was quoted at 220-225 basis points for Lufthansa, 150-200bps for Air France and 600-700bps for British Airways. "The sector will be a lot wider" when the market reopens, he added.

Aanders Haagen, formerly v.p. of structured credit products at Bank of America in Hong Kong, is joining ABN AMRO in Singapore, according to a market official familiar with the move. He is expected to start in two weeks. Haagen did not return calls.

Trading on credit-default swaps referenced to Enron and Dynegy dried up last Thursday as Dynegy appeared to be moving closer to acquiring a stake in its struggling rival, according to traders. Trading volumes on Enron, which just a few weeks ago was trading every day, was non-existent as the acquisition talks intensified, said traders in New York. "There's no flow at all. The only thing we're seeing is firms' unwinding previous trades," said one trader. Most of this business came from hedge funds that had previously bought protection. Another trader said "it's hard to offer protection on risk that's just hanging out there." Trading flows on Dynegy, which were already thin--averaging about one trade every three months--followed the same path as Enron.

BT Funds Management, a Sydney-based investment manager with over AUD34 billion (USD17 billion) under management, plans to start trading credit derivatives for its AUD1 billion (USD514 million) fixed-income portfolio within three months. Robert da Silva, head of corporate credit, said the fund manager is in the process of setting up the capabilities and preparing documentation for the effort. It is preparing the move now because of increased liquidity in credit-default swaps.