“Financial Risk and Crisis Management after
the Global Financial Crisis” Series No.3 (12/2015)

Shocks in Japanese Corporate Bond Market
during the Global Financial Crisis1

Yukihiro Yasudai
Professor, Graduate School of Commerce and Management,
Hitotsubashi University

This document is an English translation of the original Japanese, which appears in
the Dec. 2015 edition of The Japan Economic Research Institute Monthly Report,
published by The Japan Economic Research Institute.
11. Introduction2
This paper seeks to investigate the financing behaviors of Japanese firms
during the global financial crisis. This crisis, which originated from the burstof the US housing bubble following a manifestation of the subprime loan
dilemma, was not limited to American borders; instead, this financial crisis“went global” and exerted enormous influence on European economies aswell as those in the rest of the world. While the crisis did have a negative
influence on Japan’s real economy, primarily in export businesses, theimpact on Japan’s financial system was not substantial; in fact, Japan’s
economy was quite unaffected given its financial institutions’ lack of
securitized product holdings.
This paper explores the kinds of effects exerted by the global financial
crisis on Japanese firms and investigates the effects on financing behaviors
taken by these firms during the crisis. More specifically, this study sets its
focus on Japan’s publicly-listed companies, analyzing the corporate bondmarket. Regarding financial issues in Japan, we are already aware thatbank lending was expanded dramatically in light of the dysfunction of thecorporate bond and corporate paper markets during the collapse of Lehman
Brothers in September 2008 (Bank of Japan, 2010). However, it is currently
deemed necessary to conduct a broad set of verifications as to the specifickinds of actions taken by the Japanese corporate world in response to theglobal financial crisis. This is crucial due to the lack of clarity yielded by, forexample, only analyzing aggregated data from the corporate bond market ex
post facto; as will be noted in this document, the influence exerted by thecrisis on each firm differs greatly depending on the individual firm
characteristics.
In academia, a broad range of verification has been conducted on financing
activity and other areas pertaining to the effects exerted on the average firmby the failure of the financial sector, particularly in the US. Among them,
research conducted by Almeida et al. (2011), Ivashina and Scharfstein (2010),
Flannery et al. (2013), and others serve as examples of studies into the
Acknowledgement: Graphical representations in this paper were created with the assistanceof Yan Juxin (2nd year doctoral student, Hitotsubashi University Graduate School). Thisacknowledgement serves to express gratitude for that assistance.
2effects of the financial crisis in the US. Almeida et al. (2011) compared firms
holding large amounts of long-term debt approaching maturity in 3Q 2007
(and thereafter) with firms characterized similarly, except for their debt
holdings. These studies also empirically demonstrated that long-term
debt-holding firms were more apt to curtail capital investments. Ivashina
and Scharfstein (2010) empirically confirmed that bank lending shrank by asmuch as 47% in 4Q 2008. Flannery et al. (2013) gave empirical proof that
reduced lending in the US banking sector caused by the global financial
crisis’s negative impacts led to reduced corporate investment.
However, these previous studies have latent endogenous problems (e.g.,
identifying causal relationships, coefficient estimation bias, and other issues
that limit the credibility of verification results) because the financial crisis
originated in the US. Conversely, since we may consider Japanese financial
institutions and firms as relative bystanders with respect to the global
financial crisis and the external crisis they experienced, we may thenpostulate that Japan’s perspective allows for testing causal relationships.
According to research by Uchino (2013) on this topic, firms directly exposedto the aforementioned dysfunction of the corporate bond market would react
to the crisis by expanding borrowing behavior from banks without decreases
in capital investment. Though this paper emulates Uchino’s (2013)awareness of the issues at hand, it will add a more medium- to long-termview to this scenario.
The remainder of this paper is structured as follows. Section 2 provides a
medium- to long-term overview of the Japanese corporate financing
environment, followed by an investigation of the types of effects exerted onJapan’s stock markets and the corporate sector by the global financial crisis.
Section 3 focuses more sharply on the effects of the global financial crisis on
Japan’s corporate bond market. Section 4 summarizes the key points in thispaper and the issues to be dealt with going forward.

2. Medium- to Long-term Trends in Japan’s Corporate Financing
Environment
This section will take a somewhat broad perspective on investigating thecontext behind Japan’s corporate financing environment. More specifically, itwill seek to provide an overview of Japan’s corporate sector as an excess
funding sector since the latter half of the 1990s, the evasion of
non-performing loan problems for banks (which serve as primary lendingorgans), overall financial health, the ongoing trend of sluggish loan funding
after the financial crisis in Japan, and other contextual trends. Amid the
backdrop comprising these trends, this section will then delve into the effects
exerted by the global financial upon Japanese firms and the kinds ofreactions those firms took in terms of corporate financing.
2.1 From a Medium- to Long-Term Perspective
It is common knowledge that since the financial crisis in Japan in the late
1990s and through the 2000s to the present day, Japan’s firm sector has
experienced a monumental revolution. Since the 2000s, Japan has seen
many regulatory reforms, including changes to governance, the accounting
Big Bang, enactment of the Companies Act and the Financial Instruments
and Exchange Act, and enactment of a corporate governance code currently
under great scrutiny.
Amid the context provided by the aforementioned changes in the economic
environment and this chain of regulatory reforms, we may observe quite
notably and clearly in Figure 1 that Japan’s corporate sector had become asector of excess funding since around 1998. Japanese corporations continued
to have an overall funding excess through the 2000s as well. The scale of that
excess shrank greatly during the Izanami Boom3, but it is clear that it is once
again expanding since the global financial crisis. Though it does digress fromthis paper’s topic, we may take away one key impression that government
deficits tend to run contrastingly to surpluses in the corporate sector.
When viewed from the perspective of Japan’s banks, which serve as
primary lenders in the economy, we notice in Figure 2 that despite upward
trends in account balances, funds on loan have trended downward. We may
specifically take away from this data that since 1998, when Japan was in thethroes of a financial crisis, the gap between account balances and loans has
been continuously expanding, with a temporary jump in loans during the3

An economic boom that occurred in Japan between 2002 and 2008

global financial crisis that was, nevertheless, not enough to subvert thelong-term expansionary trend. Note that much of this gap corresponds toJapanese government bond purchases.
Figure 1.

Trends for Excess/Shortage of Funding for Japan’s Three Major
Economic Entity Classifications

percentage vs. nominal GDP
Corporations

Government

Households

Source: Based on the Bank of Japan’s “Statistics on Funding Circulation” and Japan Cabinet
Office’s “Private Economic Statistics”; Vertical scale: percentage.
Figure 2.

Japanese Domestic Banks: Loans vs. Deposits

Loans

Deposits

Source: Based on the Bank of Japan’s “Monthly Report on Financial and Economic
Statistics”; Vertical scale: trillion yen.

Figure 3.

Ratio of non-performing loans vs. Total loans outstanding

Source: Based on the Financial Services Agency’s “On Loans Disclosed in Accordance with
the Requirements of the Financial Reconstruction Act”; Vertical scale: percentage.

Figure 3 expresses movement over time in the ratio of non-performing
loans to the total lending balance. We may first surmise that Japan’s
financial crisis had not yet abated as of the early 2000s. On the other hand,
this ratio did maintain sub-2% levels after 2006, indicating that the financial
system had returned to a healthy state. Even a great jump was not observedin this non-performing loan ratio on the occasion of the global financial crisis.
In addition, given that holdings of American financial institutions’securitized products—ground zero for the global financial crisis—were
extremely thin among Japanese institutions, we may say that Japan’s
financial system was a healthy one overall.
2.2 Trends in Japanese Stock Prices and Company Performance
Under such conditions, we may say that the financial crisis thatmanifested in the US had ripple effects on the Japanese economy around2007. This section primarily explores the effects on two areas in Japan: thestock market and the real economy.
Observing the movements in the Nikkei average as portrayed in Figure 4,
it is evident that the stock markets saw a major plunge around 2007. As will
be observed later, corporate bond spreads in mid-2007 had alreadymanifested signs of the crisis in the US, and the rapid strengthening of theyen had already begun to propagate its ill effects on the Japanese stock
market.
With the yen rising, an immediate downward trend can be seen in thestock market, followed by knock-on effects in the real economy, notably
including 2009’s drastic decreases in economic indicators caused by factors
such as falling export numbers in the manufacturing sector. Figure 5
displays the operating profit on sales for both the manufacturing sector andall industries: although both manifest a major drop in 2009, manufacturers
see a particularly marked drop to −4%, revealing clear effects of the global
financial crisis.
Figure 4.

Nikkei Close Prices

Source: Based on data from the “Nikkei NEEDS”; Vertical scale: yen.

Figure 5.

Ratio of Operating Profits to Sales

Manufacturing Industry

All Industries

Source: Based on the Ministry of Finance’s “Corporation Statistics”; Vertical scale: percentage.

3. Effects of the Global Financial Crisis on Japanese Corporate
Bond Issues
This section focuses its attention more specifically on the Japanese
corporate bond market, making detailed observations on the kinds of effects
the global financial crisis had on publicly-listed Japanese firms4. Though theeffects discussed in this section particularly refer to the temporary
dysfunction created after the collapse of Lehman Brothers, the bipolarizationof these effects based on firm valuation must also be covered. In short, whilefirms with relatively high credit risk faced frozen effects (difficulty in bondissuing), those with relatively low credit risk saw lower financing costs andsafe haven effects (increased bond issues); thus, two polar opposite effects
came into play.
3.1 Effects of the Global Financial Crisis on the Corporate Bond Market
Although the effects on the real market in Japan were pronounced in 2009,
especially in the manufacturing sector as mentioned above, we must wonder
exactly when and how Japan’s financial sector began to be influenced by thecrisis. This section seeks to expound on this concept based on research
currently being conducted by Kim et al. (2015).
The following represents a deeper investigation into the specific effects
exerted on the Japanese corporate bond market. First, Figure 6 shows public
issuances of straight domestic corporate bond by the number and value ofissuances (this and following graphs exclude the financial industry). The
graph shows that the expansionary approach of 2005 and following years
saw a reversal in both issuance amounts and volumes in 2008, when thefinancial crisis occurred. The year 2008 saw approximately ¥500 billion in
issuance amounts (13% down versus the previous year) and approximately
50 fewer issuances (20% down versus the previous year). Given that thecrisis occurred in September 2008, these data reflect the dysfunction createdin the market.
Of particular interest is the following year (2009), when issuance values
4

Note that since there was only a small market for bonds issued by Japanese firms overseas, thelimited ability to issue reduced the ability for that channel to exert effects on Japan during the
global financial crisis to negligible levels, and this is said to be an upside to Japanese firms’
positions at the time [see Gozzi et al. (2015) and others for more].

saw greater increases over 2008. As can be seen in the graph, the reaction
and rapid recovery from the crisis created quite a “shock” in the market.
Though issuance volumes in 2009 had not yet returned to pre-Lehman
Brothers Crisis levels observed in 2007, issuance values had increased
greatly, approaching nearly ¥6 trillion (60% gain versus the previousyear)—its highest since 2000.
Figure 6.

Values/Volumes of Publicly-Issued Straight Domestic Corporate Bonds

No. of Issuances(left)

Issuance Value(right)

Source: Based on data from the “Nikkei NEEDS”; Vertical scales: number of issuances (left),billions of yen (right).

Figure 7.

Values/Volumes of Issuances of Rated Straight Domestic Corporate Bonds

No. of Issuances(left)

Issuance Value(right)

Source: Based on data from the “Nikkei NEEDS”; Vertical scales: number of issuances (left),billions of yen (right).

Figure 8.

Values/Volumes of Issuances of Unrated Straight Domestic Corporate Bonds

No. of Issuances(left)

Issuance Value(right)

Source: Based on data from the “Nikkei NEEDS”; Vertical scales: number of issuances (left),billions of yen (right).

Figures 7 and 8 split the bonds applicable in Figure 6 into rated andunrated bonds. Based on Figure 7, we may determine that rated straightdomestic corporate bond issuance value trended consistently positive from2004 to 2009. In other words, it would be a stretch to say that these issuancevalues alone give us a solid picture of the effects of Lehman Brothers’bankruptcy. We may then note from Figure 6 that the number of bonds
issued in 2008 dropped by 20 versus 2007. This means that for each bondissued in 2008, on average, the issuance value had risen versus 2007.
Issuances in 2009 were quite interestingly much higher than those seen in2007, in contrast with those displayed in Figure 6.
To follow up by observing unrated straight domestic corporate bondissuances in Figure 8, the issuance values and volumes in 2008 were bothsignificantly less than in the previous year, clearly indicating the effects ofthe collapse of Lehman Brothers: values dropped by approximately ¥600
billion, and volumes dropped by approximately 40 issuances. We may also
note that while issuance values in 2009 had recovered somewhat comparedwith those in 2008, the post-2007 trend of decreasing issuance volumes
continued to 2010. In short, we may take away from this data that the effectsof the global financial crisis on the corporate bond market were notably
profound on unrated bonds and the relatively high credit risk-carrying firmsthat issued them.

Figure 9.

Issuance of Japanese Corporate Bonds, by Rating

Source: Based on data from the Japan Securities Dealers Association; Vertical scale: billions of yen.

To further investigate rated straight domestic corporate bonds, Figure 9
divides rated bonds by rating grade on a monthly scale. These data indicatethat firms with an A rating or below issued bonds a great deal less. Of
particular note here is that BBB issuance values hit zero in the months ofOctober and November following the Lehman Brothers’ bankruptcy (frozen
effects).
We may conclude, based on the above information, that the effects of the
global financial crisis were tantamount to causing a temporary dysfunctionin the corporate bond market, affecting relatively high credit risk-carrying
firms (including unrated or poorly-rated firms). In other words, the increasein bond-based financing primarily by highly-rated firms, suggesting theeffects of the global financial crisis were polarized according to credit risk.
3.2

Characterizing Japanese Corporate Bond Spreads

On that note, why exactly were highly-rated firms increasing their bondissuances? An interesting phenomenon is suggested by the data represented
in Figures 10 and 11. Figure 10 displays US corporate bond spreads by
rating grade versus government bond. In the US, the epicenter of the global
financial crisis, we can see that spreads had already begun to skyrocket as of
mid-2007, regardless of bond rating. After the Lehman Brothers’ collapse,
spreads saw even further leaps, with AAA-rated bonds temporarily pushing
past 5% and BBB-rated bonds temporarily exceeding 8%.

The graph in Figure 11 displays credit spreads for Japanese corporate
bonds versus government bond by rating grade. We may notice several pointsof contrast here against similar data from the US. First, though there is a
visible jump in spreads, the severity of that jump is muted compared withthat seen in the US. The time periods over which those spreads arose
Figure 10.

Spreads of U.S. Corporate Bonds Yields over Government Bonds by Rating

Source: Based on BIS data; Vertical scale: percentage.
Figure 11.

Spreads of Japan Corporate Bonds Yields over Government Bonds, by Rating

Source: Based on BIS data; Vertical scale: percentage.

also differ notably from that in the US: Japanese spreads rose most pointedly
in the wake of the collapse of Lehman Brothers. Further, reviewing thestructure of these increasing spreads between differently-rated bonds, whilespreads did notably increase among the BBB and A ratings, AAA- andAA-rated bonds, in fact, saw lower spreads in 2008 and thereafter, with
AAA-rated bonds having nearly zero spread. This bipolar phenomenon,
based on bond rating, contrasts against the US’ uniform credit spreadincreases, regardless of bond rating.
Figure 12.

Japanese Domestic Bank Total Lending during the Global Financial Crisis

Source: Based on the Bank of Japan’s “Monthly Report on Financial and Economic
Statistics”; Vertical scale: trillions of yen.

The above implies that highly-rated firms with low credit risk foundthemselves in an environment more conducive to financing, aided bydecreasing interest rates, which suggests they were more proactive infinancing through corporate bonds at this time (safe haven effects). Naturally,
we may surmise that highly-rated firms were also forced to bond issuing in
the face of liquidity issues; however, decreasing financing costs also were atplay, making this aforementioned bipolarization a phenomenon inherent toJapan.
Kim et al. (2015) and Yasuda (2014) conducted detailed research into theabove points from the perspective of corporate bond maturing. For individual
Japanese corporations, published tables of bonds and debentures allow forcollecting data on redemption amounts for bonds maturing within a year ofthese tables being published. This research utilizes regression analysis toinvestigate how firms finance corporate bond maturity redemption amounts.

Though maturity redemption amounts and repayment schedules are
determined at the initial time of financing, Lehman Brothers’ bankruptcy
represents an unexpected event not previously accounted for in these
determinations. To wit, if a firm were to have planned a new bond issuanceto cover redemption value, the unexpected bond market dysfunction causedby the crisis could require that firm to finance via some other method tocover the redemption. When verifying this point, we find that abipolarization phenomenon did, in fact, occur in a nearly uniform fashion.
We may surmise given the above that though the Lehman Brothers’
collapse may exist as a single phenomenon and a single concept, the effects ofthe global financial crisis did vary based on corporate characteristics likecredit risk.
3.3

Dysfunction in the Corporate Bond Market and Increased Bank
Lending

As observed previously, firms affected by the temporary dysfunction of thecorporate bond market caused by Lehman Brothers’ bankruptcy shifted theirfinancing methods toward borrowing from banks as per the Bank of Japan(2010). As noted in Figure 2, though there was a downward trend in total
lending amounts, lending did increase during the global financial crisis.
Figure 12 displays similar lending data as in Figure 2 but on a shorter-term
scale. This smaller scale clearly indicates a major jump of slightly less than
¥20 trillion in bank lending after the crisis, from approximately ¥420 trillion
to ¥440 trillion. These points have been rigorously verified even as far as theindividual corporation level in academia, as can be observed in the researchof Uchino (2013), Kim et al. (2015), and others.
Given the above points, it is feasible that we may assign some degree ofvalue to the functioning of positive, indirect aspects of the financial system
during the global financial crisis.
3.4

Effects on Corporate Use of Bond Issues

To conclude, let us observe the purposes for corporate bond issuances wereused. Figure 13 shows the proportion of corporate bond funding uses. Thoughcare is needed given that the multiple responses provided do not result in aperfect 100% total, we may say that these data are useful in coming to terms

with the overall picture of bond issuance-related funding uses. The greatest
proportion comes from repayment of borrowed funds. The majority ofissuance cases were meant to cover bond redemptions, bank loans, or otherborrowed funds. Of particular interest is the fact that capital investment
continued its upward trend through to 2009 despite the financial crisis. We
Figure 13.

Usage of Funds Raised by Public Straight Corporate Bonds

capital investment

operational funding

repaying borrowed funds

other (subsidiary investments, etc.)

Source: Based on data from the “Nikkei NEEDS”; Vertical scale: percentage.

may also note that highly-rated firms’ bond issuances and shifts to banklending helped avoid reductions in capital expenditures. On the other hand,
the year 2010 and thereafter saw firmly low levels; that is, the effects of the
global financial crisis may have only begun to reverberate in the Japanesemarket at a later date. As an interesting side note, the “Other (subsidiaryinvestments, etc.)” section arose when the crisis occurred. This suggests thatfirms issued bonds to prop up their subsidiaries, which is an area meriting
further study.

4. Conclusion
This paper first takes a slightly broad view of Japan’s corporate financing
environment, observing the following trends: (1) Japan’s corporate sector
was one of excess funding in the late 1990s and thereafter, and (2) banks, asmajor lenders, were able to shrug off non-performing loan problems and keep
the funding market healthy, although (3) there continues to be a sluggish
lending trend since Japan’s financial crisis.
In addition, the paper more specifically highlights Japan’s corporate bondmarket and investigates, in detail, the effects that the global financial crisis
had on Japanese publicly-listed companies. These include the bipolar
phenomenon of the following: (4) the Lehman Brothers’ collapse caused atemporary dysfunction in the market, with major frozen effects (difficulty inbond issuing) for firms with relatively high credit risk, whereas (5) safe
haven effects (increased bond issues) benefitted firms with relatively low
credit risk. Further, this paper observed that (6) firms facing difficulty withfinancing filled that gap with bank loans, making effects on overall capital
investment not so clearly visible. The above suggests that the corporate bondand bank lending markets play complementary roles against one
another—not pitting direct finance against indirect—which implies the joint
usefulness of having both routes available for creation of a healthy,functioning market.
As mentioned in the previous section, clarification on the usage for funding
subsidiaries is an extremely interesting topic meriting further exploration.
This is particularly poignant for mergers and acquisitions (M&A) and otherareas due to the rise of consolidated group management seen since the 2000s
after the accounting Big Bang and its combination with the enactment of theCompanies Act.

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Journal of the Japanese International Economics 29, 74-97.

i

Profile: Yukihiro Yasuda

Born: 1972
Completed doctoral studies at Hitotsubashi University’s Graduate School, Division ofCommerce in 2002, obtaining a Ph.D. in Commerce; held positions as lecturer, assistantprofessor, associate professor, and professor at Tokyo Keizai University, taking his current
position in 2015; visiting scholar at Haas School of Business, University of California, Berkeley,from 2006 to 2008
Specializes in: Financial Theory, Corporate Finance Theory
Major Works:“Financial Theory” (Jointly Authored), Yuhikaku Publishing, 2007
“University Classes for High School Students” (Jointly Authored), Kobundo Publishing, 2008
“Determination Factors for Implementing Stock Options” (Jointly Authored), Modern Finance,
2011“Disclosures of Material Weaknesses by Japanese Firms after the Passage of the 2006 Financial
Instruments and Exchange Law” (Jointly Authored), Journal of Banking and Finance, 2013