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Japan's first zero-rate corporate bond on the way from Toyota unit

Move may usher in a new normal of negative-yielding private-sector debt

The Toyota logo on a steering wheel. The finance unit of the automaker is taking advantage of the ultralow interest rate environment to issue bonds that effectively have no interest rate. (Photo by Hiroshi Kotani)

TOKYO -- A Toyota Motor group finance unit will issue Japan's first zero-rate corporate bond Oct. 25 as subzero yields spill over from government bonds to private-sector debt, which carries the risk of default.

Toyota Finance will issue 20 billion yen ($184 million) in three-year bonds with a face value of 100 yen and a coupon rate of 0.001%. These will be sold for 100.003 yen, canceling out any interest rate burden for the company.

The bonds "can be used to shore up revenue in the long term," a Toyota Finance official said.

Until now, the lowest private-sector yield was around 0.0003% on bonds from companies including Toyota Finance.

Even with the bonds tying up capital for three years and effectively offering no interest income, "banks and asset management companies have placed around 40 billion yen in orders, oversubscribing to the issue by a factor of two," according to a lead underwriter.

The reason is that investors can still profit off the bonds. The Bank of Japan regularly buys corporate bonds as part of its monthly operations. An investor can make money by selling the BOJ a bond for a higher price than the investor bought it for.

The bonds are also a good place for banks to park extra cash, because the BOJ charges a negative 0.1% interest rate on reserves beyond the legally required limit.

Subzero yields have become the new normal for Japanese public-sector bonds. This summer, a nonguaranteed bond issued by the Japan Student Services Organization public body had a negative interest rate. Commercial paper, a short-term instrument that lets companies raise daily funding, has also carried negative rates of late.

The same trend can also be found abroad, with U.K.-based pharmaceutical giant GlaxoSmithKline selling a two-year negative-yielding euro-denominated bond via a group company.

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