TOKYO -- Eroding faith in corporate creditworthiness sparked by worries over Europe is compounding the Japanese stock market's slide, with investors prioritizing stability when choosing where to park funds.
The Nikkei Stock Average sank 372 points Wednesday to close at 15,713, a low not seen in more than a year. "Market sentiment has deteriorated to the point where bargain hunting on dips has disappeared," explained Ryoma Sugihara, head of equity sales at Societe Generale Securities.
The market for credit default swaps reflects how badly investors' mindset has chilled when it comes to corporate creditworthiness. Since these insurance-like instruments are essentially bets on whether a company will go bankrupt, their rates provide a barometer of perceived credit risk.
The iTraxx Japan index, which tracks credit default swaps for Japanese blue chips, shows that CDS rates climbed to 1.03% on Tuesday -- above the 1% threshold for the first time in nearly two and a half years. This is based on calculations by the Markit group, the company behind the index. Rates had hovered around 0.6% to 0.8% in 2015.
Marine transporters, trading houses and other resource-related companies were among the first to see CDS rates jump. Mitsui O.S.K. Lines expects a group net loss this fiscal year, and its rate spiked more than 1 percentage point from the start of the year to just above 3% as of Wednesday.
Rates are also climbing for commercial banks in the wake of the Bank of Japan's announced negative-rate policy. Electronic makers are feeling the impact as well in the face of the strong yen and concerns over a slowing global economy.
CDS rates for Western enterprises are climbing, too. An index tracking major companies has risen more than 0.3 point since the start of the year to 1.2%. Financial institutions and energy companies are increasingly viewed as credit risks. Now that the haze of uncertainty has spread to developed nations, "the threat has entered into a new stage," said Mamoru Shimode of Resona Bank.
This view is also behind the movements of Japanese stocks. Among components of the Topix 100 index of large-caps, resource and China-related companies were the worst performers between the start of the year and Jan. 21. But from that date up to Wednesday, banks and electrical machinery giants ranked among the biggest losers.
Risk-averse investors now seek resilient stocks, one category being companies awash in funds. Equipment manufacturers Shimadzu and SMC bucked the downtrend Wednesday, both companies boasting positive net cash. "They have large margins for investor rewards, so they will attract attention," said Ken Kamoshita of DIAM Assent Management.
Investment money is also flowing into areas reliant on domestic demand, such as rail, real estate and general contractors. Their CDS rates have remained low as well.
Now that long-term bond yields are nosediving, real estate investment trusts, which promise higher returns, are fast becoming hot commodities. But if bank earnings suffer under the weight of negative interest rates, the blowback may hit REITs and those industries, pruning investors' choices for safe havens.