Japan's rate hike is getting people talking in this quiet holiday period. Finally, after months of delaying, Bank of Japan (BoJ) governor Masaru Hayami announced the end of its zero-interest-rate policy. And though it came as no surprise to the market, dealers are waiting to gauge the effect of the 0.25% increase. But Hayami has not convinced everyone that a second hike is out of the question. This is a serious threat that is worrying many MTNers. Chieko Takenaka, MTN desk at Daiwa SBCM Europe, explains how the market was braced for the announcement. She says: "Towards the end of last week market sentiment was getting ready for the rate hike, taking into consideration Hayami's hawkish comments during the week. But it's the holiday season and the market is generally thin so the impact of the rate hike has been discounted." On the whole, dealers have taken the rate hike in their stride. The decision had been well telegraphed in the months leading up to Friday's announcement, so there was no real shock value in the decision itself. But the market is definitely in temporary limbo and yen trading has dropped slightly. Ninety-one yen trades have been issued since the hike announcement, totalling $1,272.21 billion, according to MTNWare. This represents a significant dip in issuance, compared to the same period the previous week, when 143 yen trades were announced, totalling $1,755.84 billion. But the hike has benefited the market by relieving investor tension. Marc Falconer, director, Euro-MTN trading at Salomon Smith Barney, is confident. He says: "It shouldn't really affect the level of business we do. Generally speaking in the run up to the hike we saw customers accumulate cash. Now the hike is out of the way we can help customers put this to work. A quarter of a basis point rise really isn't going to impact us that much." Michael Robertson, head of new issues at IBJ, agrees that the rate increase released tension. He says: "It's good news for any short-end investors holding out for slightly higher rates, although practically it has made little difference. The shape of the curve beyond six months has not changed much - if anything the longer end has sold off slightly, with the market beginning to focus on the prospect of more ten-year supply following the September supplementary budget." Many dealers suspect that there will be a shift from fixed-rate notes to floating-rate notes, while some hopeful issuers expect an increase in issuance of yen trades. Sean Murphy, director, head of funding at Citibank Credit Structures, says that this has not yet happened. He says: "We had hoped that Japanese investors would be more aggressive buyers following the rate hike, but if this were going to happen we would have expected to see it by now." Many dealers have reported an increase in yen enquiry and a steady flow of trades. However, Michael Bransford, assistant vice-president, Euro-MTNs, at Merrill Lynch, warns that there is also a downside. He says: "The Japanese economy remains in a delicate condition, underlined by Sogo's bankruptcy. But the bold rate hike helps restore some credibility to the BoJ." Although issuers are confident, some realise that they are, as always, at the mercy of the investors who control the market at this sensitive time. Murphy says: "It won't change our approach immediately. We'll continue to issue as before, but if it changes investor behaviour, then we'll meet the demand." And Scottish & Newcastle is confident that the hike will not affect its funding too much. It has issued 15 yen trades off its £
August 25, 2000
