Reasoning their conclusion, S&Ps analysts say Japanese industrial production is still declining compared with last years levels, even though the rate of decline has eased in recent months.

Private-sector machinery orders (excluding volatile components) declined 6.2 per cent from the previous month in March (and 21.3 per cent below the corresponding period a year earlier), and have not yet established a recovery trend. The number of small and midsize firms reporting tight financial positions significantly outnumbered those reporting easy financial positions in the March Tankan survey.

Amid these conditions, rising bond issuance appears unlikely except by those firms that have urgent, immediate refinancing needs. Despite poor fundamentals, market participants are expecting this years issuance to surpass levels seen in the previous fiscal year.

To date this year, 192 issues have accounted for issuance volume of US$46.3 billion (JPY5.5 trillion) in the Japanese corporate bond market. This is up $2.2 billion from the $44.1 billion (JPY5.3 trillion) that was raised in the first five months of last year.

The primary reason for most of the year-over-year increase is the customary burst of issuance in April which marks the start of the new fiscal year. Cash-rich investors who were waiting on the sidelines to avert a possible crisis during the fiscal yearend are now more willing to re-enter the market, explains S&P.

As was the case last year, bond-market financing remains the exclusive privilege of investment-grade firms, with double-A-minus rated issuers accounting for the single largest portion of issuance. Interestingly, issuance at the lower end of the investment-grade spectrum actually increased this year compared to a year ago.

Although this issuance is by issuers that were downgraded within the past six months, these figures also hint at the markets willingness to absorb debt issued by lower-tier firms, provided investors are adequately compensated in terms of yield. It is also indicative of a gradually shifting relationship between lenders and borrowers that is geared increasingly towards risk-based lending as opposed to earlier relationship-driven practices.

Indeed, all firms (large, midsize and small) reported rising interest rates charged even on bank loans in the most recent Tankan survey. Moreover, investors search for yield is also leading to greater interest in lower-rated bonds. The introduction of capped depositor protection on bank deposits has fuelled retail interest in corporate bonds, both due to higher yield potential as well as a method of financial diversification. As a result, spreads among single-A rated bonds have narrowed in recent weeks.

By sector, the biggest drop in new issues came from the utility sector. Notwithstanding regulatory support for electric power companies that facilitates low funding costs from capital markets and banks, the sector continues to suffer from anaemic demand in an overall low-growth environment. Electricity usage by large industrial users was 4.9 per cent below its year-earlier level in March, the 14^th consecutive decline. The utility sectors share of new issues dropped from 19 per cent to 12 per cent of total issuance. The next biggest drop was registered in the globally challenged telecommunications sector.

Bond issuance actually picked up in the industrial and financial institutions sectors, both among the leading borrowers in the bond market.