Japanese bank credit spreads tighten on central bank bailout

The Bank of Japan said on Wednesday it would buy stocks from the banks to help boost share prices ahead of the fiscal mid-year ending September 30. The announcement came as a relief, pushing Tokyo’s stock market and Japanese bank shares higher.

In the credit protection market, Sumitomo Mitsui Banking Corp (SMBC) was trading at a spread of about 100 basis points on Friday, down from 115bp a week ago. UFJ Bank’s credit default swap spread narrowed to 145-150bp from 169bp last week, and Mizuho was quoted at 160bp, down from 190bp.

The levels nevertheless remain higher than they were three months ago, as Japanese banks’ non-performing loan problems are far from solved, and losses on bad assets are likely to continue to weigh on the banks in the near to medium term.

The tone in the rest of the market also remained positive, although trading volumes remained low, said one trader. Despite the good news from the central bank, participants were still waiting for the government to announce concrete measures to help banks dispose of their bad assets.

But a speech by prime minister Junichiro Koizumi on Thursday proved a disappointment to market participants. The Nikkei 225 Stock Average ended the week at 9481.08 on Friday, 2% lower than Thursday’s close.

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