Best Company Finances in 53 Years Bad News for Abe: Japan Credit

Jun 11, 2014 10:16 pm ET

June 12 (Bloomberg) -- The balance sheets of Japan’s companies are the strongest in more than half a century as memories of past financial crises impede Prime Minister Shinzo Abe’s efforts to boost borrowing and spending.

The debt-to-equity ratio of Japanese companies, excluding the financial and insurance industry, fell to 0.8 times in the three months ended March 31, the lowest on record dating back to 1960, according to Ministry of Finance numbers compiled by Mizuho Securities Co. Companies cut interest-bearing debt by 44.2 trillion yen ($433 billion) in the period, while they increased capital spending by only 1.3 trillion yen, the ministry data showed.

“From the perspective of Abenomics, it would be preferable to see companies increasing debt and using that money to aid growth,” said Satoko Terasawa, the chief credit analyst in Tokyo at Mizuho Securities, a unit of Japan’s third-largest bank. “For Japanese companies memories of suffering under debt in the wake of the Lehman shock are still fresh.”

Abe aims to spur corporate spending that would lead to higher profits and wages to offset the impact on household budgets of emerging inflation. Companies including SoftBank Corp. and Suntory Holdings Ltd. have tapped the world’s lowest funding costs to finance overseas acquisitions, a sign they are investing in growing markets abroad instead of in Japan.

‘Debt Phobia’

Japanese companies pay on average 22 basis points more than sovereign debt to sell bonds, the least since 2007, according to Bank of America Merrill Lynch data. That compared with an average spread of 106 basis points, or 1.06 percentage points, on company notes worldwide, the data show.

Companies in Japan have a “debt phobia” because of their own experience of working through a financial crisis in the 1990s that was triggered by the bursting of a domestic real estate bubble, according to Yoji Otani, an equity analyst in Tokyo at Deutsche Bank AG.

The collapse of Lehman Brothers Holdings Inc. in 2008 sparked global financial turmoil and prompted regulators around the world to institute rules that restricted lending.

“Companies have experienced the fear of not being able to borrow from banks when there is a financial crisis,” Otani said by telephone yesterday. “Even if the mood has improved with Abenomics, companies still don’t have that certainty.”

Falling Wages

The Bank of Japan, led by Haruhiko Kuroda, Abe’s hand- picked governor, is buying about 7 trillion yen of local sovereign bonds a month to try to fuel 2 percent inflation. Core consumer prices rose 3.2 percent in April from a year earlier, equivalent to a 1.5 percent increase when the effects of a sales-tax increase that month are excluded, according to BOJ estimates.

Wages have failed to keep pace with inflation, with regular payments excluding overtime and bonuses falling 0.2 percent in April from a year earlier, Labor Ministry data last week showed.

Abe’s government released on June 10 a draft summarizing the main themes of its growth strategy, including a push for “growth-orientated corporate tax reform.” Details on the planned changes weren’t provided.

Total equity at companies rose 28 trillion yen at the end of March to a record 547.9 trillion yen, while interest-bearing debt declined 44 trillion yen to 437.6 trillion yen, the lowest since 1988, according to the Finance Ministry survey. Firms on average recorded a recurring profit margin of 4.8 percent last fiscal year, also the highest on record going to 1960.

Shift Overseas

Not all companies are focusing on reducing debt, as the country’s declining population drives some of Japan’s biggest brands overseas. There’s little room for continued improvement in company balance sheets, and more businesses will probably use their improved financial strength to seize growth opportunities, Mizuho’s Terasawa said.

Japanese acquisitions abroad totaled $68.3 billion in the last 12 months, compared with the equivalent of $39.5 billion in purchases at home, data compiled by Bloomberg shows.

SoftBank, the wireless carrier led by billionaire Masayoshi Son that bought the U.S.’s Sprint Corp. last year for $21.6 billion, is nearing an agreement to acquire T-Mobile US Inc. in a deal that could value that company’s equity at about $31 billion. SoftBank’s net debt increased to 7.2 trillion yen last fiscal year from 2.3 trillion yen a year earlier, according to data compiled by Bloomberg.

Suntory Holdings, which agreed to buy Beam Inc. for $16 billion, saw its credit rating cut two levels by Moody’s Investors Service in May to Baa2, two ranks above junk.

Investment Outlook

While Japanese companies will probably boost investments at home as the economy improves, the scale of those expenditures isn’t likely to be “explosive,” according to Takayuki Atake, an analyst in Tokyo at SMBC Nikko Securities Inc. For companies that don’t need to go overseas, they will probably increase share buybacks and dividends, Atake said.

Japan’s economy grew at an annualized 6.7 percent in the first three months of the year, the Cabinet Office said in Tokyo on June 9, faster than the preliminary reading of a 5.9 percent expansion. Business investment rose 7.6 percent from the previous quarter. That suggested a rebound from a forecast contraction this quarter after April’s sales tax increase to 8 percent from 5 percent may be quicker than expected.

The BOJ’s unprecedented stimulus has pushed down Japanese government bond yields to 0.6 percent, the lowest in the world. The yen has risen 3.2 percent in 2014 to 102.07 per dollar as of 7:46 p.m. in Tokyo yesterday, after plunging almost 18 percent last year.

Sales of straight bonds by local companies are at their lowest in eight years even as the average yield was near the least since June 2003 this week at 0.41 percent. Issuances are down 22 percent compared to the same period last year.

“Overall, there is still a strong impression that debt is bad,” said Mizuho’s Terasawa.

--With assistance from Ben Scent in Hong Kong.