The Japanese asset-backed securities market could expand substantially in 2001 following a series of large mergers by Japanese banks, says a recent Moody's Investors Service report.

If the predicted mergers are accompanied by re-balancing of portfolios, companies that relied on the banking sector for funding may have to resort to securitization of their assets to raise funds.

Furthermore, institutional investors in Japan are having difficulty in allocating available funds, and are increasingly turning to the foreign ABS markets, because of lack of supply in volumes of straight bonds issues. However, there is both potential demand as well as potential supply of Japanese ABS.

Moody's suggests that volumes of commercial mortgage-backed securities, as well as unsecured consumer loans, will increase. Securitization of unsecured consumer loans has been increasing among middle-ranked finance companies, which primarily rely on second-tier regional banks and non-bank financing companies for funding channel.

These lenders have not benefited from the recent injection of funds to larger banks, and several second-tier regional banks are restructuring their lending to this sector.

Keiko Kurasaki at Moody's in Tokyo comments: "Securitization of unsecured consumer loans increased last year, and I think that this year they will keep pace, or even exceed last year's totals. But size of each of these transactions is very small and therefore it is not a strong factor in pushing up overall securitization issuance.

"If the top-tier companies start participating in the market on a full-scale, that would make a difference to volumes."

Recent volatility in the Japanese markets could increase volumes of non-performing loans.

"We are seeing more opportunities to evaluate NPL pools," says Kurasaki.

"There have already been many private inquiries, as financial institutions need to deal with the NPLs they have kept on their balance sheets. But securitization of banks' performing loans is unlikely to increase this year, as the NPL problem is more urgent."

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