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Business trends

Negative rates put corporate Japan in a spending mood

Lower borrowing costs are supporting buyouts, but also threatening profits

Bank of Japan Gov. Haruhiko Kuroda speaks at a press conference on Jan. 31.

TOKYO -- The introduction of negative interest rates a year ago by the Bank of Japan is prompting listed companies here to funnel the money they save on borrowing costs toward takeovers and capital investment.

The average borrowing rate of 1,387 nonfinancial companies listed on the first section of the Tokyo Stock Exchange and which released their third-quarter results by December 2016 has shrunk to an estimated 1.06%, down 0.11 percentage point from a year earlier. Interest-bearing debt has increased nearly 1 trillion yen ($8.84 billion) to about 207 trillion yen, while interest payment costs have fallen 10% to about 1.63 trillion yen. Some 30% of the companies have increased their borrowings.

Telecommunications giant SoftBank Group is one of the companies that has benefited the most from negative interest rates. Chairman and CEO Masayoshi Son bought British chip designer ARM Holdings for about 24 billion pounds ($29.8 billion) at the current rate in 2016 and has announced other bold global plans.

SoftBank's interest-bearing debt has jumped 16%, or about 1.9 trillion yen, to a little more than 14 trillion yen over the past year. However, its average borrowing rate -- obtained by dividing interest payment costs by average interest-bearing debt -- was 3.53%, down 0.18 percentage point.

Negative interest rates have also lowered borrowing costs for corporate bonds. Borrowing costs for SoftBank seven-year bonds issued in April 2016 were 1.94% per annum, 0.19 percentage point lower than the cost for the seven-year bonds it issued six months earlier.

Medical equipment maker Terumo has taken advantage of the bargain to borrow money to buy U.S. intravascular treatment equipment companies. Although doing so has pushed up Terumo's debt by more than 100 billion yen, the interest rate on its five-year bonds issued last spring was 0.08%, one-sixth the rate of its five-year bonds scheduled to be redeemed this March.

Growth capital

A growing number of companies are boosting investment in future growth. Central Japan Railway (JR Tokai), which is funneling money into the ambitious Linear Chuo Shinkansen magnetic-levitation train project, has seen its debt expand by about 300 billion yen, but its interest payment costs have declined due to falling borrowing costs for its 20-year bonds.

Some companies whose profits are driven by domestic demand are stepping up their borrowing to cope with a labor shortage. Parcel delivery company Yamato Holdings has seen its debt jump 12% due to rising personnel and outsourcing costs to secure adequate manpower for its operations.

While negative interest rates have reduced borrowing costs and made it easier for companies to redirect their money toward investment, negative interest rates could make profits harder to come by, said an employee at a Japanese asset management company. Corporate pensions, for example, are seeing their investment performances deteriorate.

Growing uncertainty about the domestic and international economies has many Japanese companies choosing to play it safe by amassing ample cash reserves.

Satoshi Osanai, senior economist at the Daiwa Institute of Research, said a key focus will be whether Japanese companies can boost domestic capital spending in a way that creates a virtuous cycle for the economy.

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