Japan firms face credit crunch as crisis hits home

By Hideyuki Sano - Analysis

TOKYO (Reuters) - The global credit crunch is starting to chill lending in Japan, squeezing companies that have so far escaped the worst of the crisis gripping the much of the industrialized world.

With credit markets seizing up and banks cutting back lending, small businesses, which together employ about 70 percent of the Japanese workforce, could suffer the most, analysts said.

This credit squeeze pales in comparison to crisis that gripped Japan in the 1990s after a stock and property bubble collapsed. But the timing could not be worse, with Japan in recession, exports crumbling, and the risk of deflation rising.

For much of the credit crisis sparked by U.S. mortgage defaults in last year, Japan has been an oasis of calm; its banks and investors serving as a vital source of liquidity for credit-starved companies around the world.

That began to change in September when the crisis wrecked banks from the United States to Iceland and spread panic among investors, triggering a stock market crash in Tokyo.

Japan's corporate bond market has almost seized up after U.S. investment bank Lehman Brothers and Kaupthing, Iceland's largest bank, defaulted on yen-denominated Samurai bonds, the first Samurai default since Argentina in 2002. The defaults shocked investors who had favored Samurais, or yen bonds sold in Japan by non-Japanese borrowers, because of their customarily strong credit ratings.

The collapse in global stocks also sapped their appetite for risk. Japan's Nikkei share average plunged 24 percent in October, its biggest fall in its 58-year history.

"They've taken on too many credit risks and got burned. They can't take on more credit risks," said Takeo Okuhara, economist at Daiwa SB Asset Management.

Until September the Japanese bond market was one of the few funding sources available to Western banks wounded by credit market losses.

Over the past two years, an average of about 750 billion yen ($7.87 billion) of corporate bonds were sold every month. Nearly one trillion yen worth of bonds were issued in September alone.

But new issues have dwindled over the past few weeks.

As of Thursday, eight utility companies had sold a total of 225 billion yen of bonds in the past two weeks after a one-month lull in issuance from private corporate bonds.

BANKS CAUTIOUS

While there are some signs that issuance is recovering, companies with low credit ratings will likely struggle to raise funds via the bond market, analysts said.

"Investors are not buying bonds unless they are issued by companies with high credit ratings, said Okuhara.