Japan’s corporate bond market is experiencing a surge, driven by an economic rebound and companies rushing to secure funding ahead of anticipated interest rate hikes. In the current fiscal year, Japanese companies have issued 14.7 trillion yen ($96.8 billion) worth of local-currency bonds, marking a record for the period, according to Bloomberg data.
Anticipation of Higher Interest Rates
The increase in bond issuance highlights significant changes in Japan’s economic landscape. The Bank of Japan has moved away from its ultra-loose monetary policy, while corporate governance reforms are pushing businesses to pursue growth strategies.
“The range of companies issuing bonds has expanded, and even the same companies are moving to raise larger amounts of capital,” said Hajime Suwa, head of capital markets group at Mitsubishi UFJ Morgan Stanley Securities Co.
Economists surveyed by Bloomberg predict that interest rates will rise to around 1.1% by 2027, up from the current 0.5%. However, corporate executives remain optimistic about the broader implications of higher rates. “The flip side of interest rate increases is growth,” said Takashi Ueda, CEO of Mitsui Fudosan Co.
Corporate Borrowing and Inflation
While higher rates will increase borrowing costs, inflation is expected to boost income from corporate assets, mitigating the overall impact. Mitsubishi Corp.’s finance department noted that rising interest rates will have a limited effect on overall financial stability.
Even after recent increases, corporate borrowing rates in Japan remain among the lowest globally, with an average of 1.41%, compared to 0.87% a year ago, according to Bloomberg’s bond index.
Governance Reforms and Investor Activism
Corporate governance changes are also influencing bond market activity. The Tokyo Stock Exchange has encouraged listed companies to improve valuations and shareholder returns, leading to more firms tapping into the bond market.
Sony Group Corp. recently announced a 110 billion yen bond deal with an accelerated syndication period, reflecting a shift towards global financial standards.
Surge in Dealmaking
Japan’s bond market growth is accompanied by a wave of mergers and acquisitions. KDDI Corp. is using bond financing for its acquisition of shares in Lawson Inc., while foreign private equity firms such as KKR & Co. have launched major takeover bids.
Despite this projection, the study also notes that various adjustments—such as consumers switching products, businesses absorbing costs, and changes in global exchange rates—could dampen the inflationary impact.
Business Response to Tariffs
During Trump’s first term, businesses largely absorbed tariff costs, minimizing their impact on prices. However, Fed officials note that this time around, companies seem more inclined to pass costs onto consumers, particularly given the inflationary trends of recent years.
“I do believe that businesses are more likely to pass cost pressures on than they were five years ago,” said Richmond Fed President Thomas Barkin. Once that trend starts, inflation expectations could become self-reinforcing.
Consumer and Market Expectations
While Fed officials do not yet see a loss of confidence in their ability to control inflation, early warning signs are emerging. The University of Michigan’s consumer survey recently showed an increase in inflation expectations, although a similar survey by the New York Fed remained subdued.
Some market-based inflation measures are also rising, but Fed Chair Jerome Powell and other policymakers argue that inflation expectations remain within a range consistent with their 2% target.
Supply Chain Considerations
Chicago Fed President Austan Goolsbee warned that supply chain disruptions could have a more pronounced effect on inflation this time compared to 2018, as the easiest-to-substitute goods have already been shifted out of China.
“If in 2018 companies shifted all the easiest things out of China, then what’s left might be the least substitutable goods. In that case, the impact on inflation might be much larger this time,” Goolsbee said.
Trump’s goal of bringing supply chains back to the U.S. could face significant challenges, as pandemic-related disruptions demonstrated the long-term inflationary pressures of adjusting supply networks.
“The supply side of the economy cannot be an afterthought,” Goolsbee added.