Japan's corporate bond market is experiencing a significant shift with a push for greater use of investor protections, known as covenants. A working group led by the Japan Securities Dealers Association (JSDA) concluded meetings in June, recommending the application of "Change of Control" clauses and reporting covenants for bonds rated BBB+ and lower. These measures aim to protect investors during ownership changes and provide early notification of increased default risk, potentially opening the debt market to more lower-rated companies.
This development comes amidst a robust period for Japanese corporate debt sales. In the 12 months through December, local-currency corporate debt sales hit a record ¥16.5 trillion ($105 billion), and bankers expect another strong year in 2026. This surge is partly driven by an M&A boom and increased capital spending by Japanese companies as the economy moves away from deflation and experiences rising interest rates.
While higher interest rates have increased borrowing costs, they have also attracted investors to fixed-income securities. Corporate bond issuance reached ¥16.7 trillion ($106 billion) in the financial year through March. However, the increased borrowing has led to a 4.6% rise in debt for Nikkei 225 companies, totaling ¥678 trillion ($4.2 trillion) in the fiscal year through March, coinciding with an increase in credit rating downgrades in 2025. This situation highlights the growing need for investor safeguards as companies ramp up borrowing.
