Domestic issuance continues to be the preferred route for most asset-backed issuers in Japan, where all ABS issues launched in the past several weeks were aimed at domestic investors.

Japan's near-zero interest rates, combined with a high level of domestic liquidity after the government injected 7.45 trillion ($70 billion) in public funds into the banking system in March, have left domestic investors starved for yield, said sources in Tokyo. And since asset-backeds offer a slight premium over other fixed-income instruments, investors have quickly snapped them up.

"Domestic issuance is definitely the way to go now, since it is so much cheaper," commented one banker. "The overriding factor has been hunger for yen assets domestically, and a lot of free money floating around the Japanese market looking for somewhere to go."

Spreads on asset-backeds have contracted faster in Japan than they have in the Euromarket, noted another banker. "Over the summer we saw a widening of spreads in general in the [European] credit markets, and though it wasn't driven by sentiment towards Japan, spreads were a bit soft compared to the Japanese market."

Spreads have also tightened dramatically, not just for asset-backeds but also for all Japanese corporate bonds, he added. Finally, the so-called Japan premium exacted by foreign investors still exists, though it has shrunk drastically since earlier this year, he said.

The slow but steady rise of Japan's domestic ABS market contrasts with the pattern of issuance earlier this year, which saw at least 10 Japanese issues that funded in the Euromarket.

Many international firms staffed up their securitization teams in Tokyo, to capitalize on what they thought would be a growing number of international ABS deals (ASRI, 3/22/99, p.1).

"Everyone was definitely hopeful for more international deals. From the point of view of international firms which are not as established in Japan, it's not the expected outcome by any stretch of the imagination," admitted one Japan ABS head.

Yet Japanese issuers will turn back to the Euromarket before long, said a London-based banker. Prices which investors are willing to pay for Japan ABS in Europe are becoming competitive with prices in Japan, he explained.

"The Euromarket is catching up now, and we're starting to see a very firm bid for paper. I wouldn't say it's more competitive than the Japan domestic market. But it's definitely getting closer," he added.

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