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Japan stock investors learn to love corporate debt

Hulic recently bought a big Tokyo hotel using debt finance.

TOKYO -- A shift is taking place in the Japanese stock market. Companies that take risks rather than playing it safe and transform themselves to seize growth opportunities are the new darlings among investors.

In the wake of the 2008 financial crisis, managers shunned debt. But the Bank of Japan's "a new phase of monetary easing," which began in the spring of 2013 was a game-changer. The BOJ's ultraeasy monetary policy has sharply lowered borrowing costs. Among Japanese companies that have taken on more debt since the central bank's new policy, 70% have seen their market capitalization rise.

Thus, from both a corporate and an investor perspective, debt is not necessarily a bad thing.

The positives of negative

Earlier this year, the BOJ introduced negative interest rates for the first time to try and restore the moribund economy to health. The BOJ set an interest rate of minus 0.1% for some current account deposits held by commercial financial institutions at the central bank. Under normal conditions, borrowers must pay interest rates to their creditors. Under negative interest rates, lenders, in effect, pay borrowers to take their money.

Corporate Japan is adjusting to the reality of negative interest rates. The BOJ's below-zero rates have pushed corporate bond yields sharply lower as well. A financial subsidiary of Toyota Motor recently issued three-year bonds paying an annual interest rate of 0.001%. This translates to yearly interest of just 1,000 yen ($9.43) per 100 million yen borrowed. Many market participants believe it is only a matter of time before yields on corporate bonds slip into negative territory, just as those on government bonds have.

Hulic, a real estate company, is taking advantage of the new environment. Backed by a 250 billion yen line of credit from 10 financial institutions, Hulic bought Grand Pacific Le Daiba, a big hotel in Tokyo's Odaiba district, from railway operator Keikyu for just over 60 billion yen in May.

Hulic concluded the deal after only three months of negotiations with Keikyu. The purchase price set a record for the Japanese hotel industry.

"Without [this] funding capacity, our company would not have the ability to procure properties, and would not be able to maintain its growth potential," said Hulic President Manabu Yoshidome, a former banker.

SoftBank Group also placed a big bet recently, agreeing to buy ARM Holdings, a U.K.-based chip designer, for 3.3 trillion yen. SoftBank's move came just a month after it raised about 2 trillion yen, including through the sale of part of its stake in Chinese e-commerce giant Alibaba Group Holdings. The technology company's "leverage management," means using debt effectively to grow.

While stressing the importance of fiscal discipline, Yoshimitsu Goto, SoftBank's general manager for finance, said the company does not fear a temporary downgrade in its credit rating. The biggest risk, Goto said, was for the company to shy away from borrowing, thereby missing a promising investment opportunity.

Fujitsu General was saddled with debts totaling 84 billion yen in the early 2000s. After years of strenuous effort, the company managed to clear all its debts by the end of the last fiscal year. But in an era of negative interest rates, that achievement is less valuable. Hiroshi Niwayama, Fujitsu General's senior executive vice president, said he now thinks simply paying off debt will not ensure the company's growth.

Fujitsu General set up a task force under the direct control of the president in April to explore investment opportunities, with a particular eye on acquisition opportunities in the U.S. Borrowing to finance such purchases is an option.

Nearly 60% of listed Japanese companies are now effectively debt-free. But if they remain risk-averse and complacent, they will have a hard time generating growth and winning investor support.





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