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Japan Structured Finance Outlook: Recovery Or Relapse?

Japan's ever-stable securitization markets face headwinds.

In S&P Global Ratings' view, assets backing owner-occupied housing loan receivables and condominium investment loan receivables will likely perform stably in 2021. However, other asset classes will likely perform somewhat negatively.

We consider the assets underlying residential mortgage-backed securities (RMBS), asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS) to be representative asset classes of Japan's securitization market. In this report, we discuss our views on the performance outlooks for Japanese RMBS, ABS, and CMBS deals in 2021.

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. While the early approval of a number of vaccines is a positive development, countries' approval of vaccines is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by mid-2021. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Table 1

Outlooks By Asset Class
Underlying asset class Performance outlook for asset class Expected rating trend
Owner-occupied housing loan receivables; condominium investment loan receivables Stable Stable
Apartment loan receivables Somewhat negative Somewhat negative
Consumer receivables (auto loan receivables, shopping credit receivables, credit card shopping and cashing receivables, consumer loan receivables) Somewhat negative Stable
Corporate receivables (equipment lease receivables, auto lease receivables) Somewhat negative --*
Commercial mortgage loan receivables Somewhat negative --*
*No rated transactions remain. Source: S&P Global Ratings.

Japan Macroeconomic Scenario

We expect the Japanese economy to moderately recover in 2021, rebounding from 2020's negative growth. Real GDP plummeted an annualized 29.9% from the previous year in the second quarter of 2020, as a pandemic-triggered state of emergency slammed the brakes on economic recovery. In the third quarter, however, it grew 22.9% as economic activity resumed. The government's "Go to Travel" campaign, which incentivized domestic tourism, was among the factors contributing to recovery (see chart 1).

Chart 1


Real consumption is not at a pre-pandemic level, even if it did recover somewhat in the third quarter (see chart 2). In addition, real wages continue to fall. Further exacerbating the situation is the risk of a resurgence in infections in 2021.

Our assumption, as of November 2020, is for an increase in consumption in real terms of 3% or less in 2021. We also expect global capital expenditure to remain low in 2021, limiting export recovery.

Chart 2


We assume real GDP growth in Japan of 2.7% in 2021. This is based on our view that the economy will moderately recover after 2020's sharp contraction. From 2022 onward, we expect growth of about 1.0% (see table 2).

Table 2

Real GDP Growth Rates In Japan
(%) 2019a 2020f 2021f 2022f 2023f
Real GDP growth 0.7 -5.5 2.7 1.3 0.9
a--Actual. f--Forecast. Source: S&P Global Ratings.

We assume Japan's unemployment rate to be 2.8% in 2021 (see table 3). A mild improvement in employment conditions from 2022 onward should return the rate to pre-pandemic levels from 2023, in our view.

The employment environment has significant influence on the performance of loans extended to individuals, such as those for owner-occupied housing loans and auto loans. Japan's unemployment rate reached its highest in three years and five months, 3.1%, in October 2020, according to the Ministry of Internal Affairs and Communications. We attribute the sharp rise to a phase of employment adjustment, mainly among nonpermanent employees. The unemployment rate had been declining since 2010. In February 2020, however, it started rising because of the pandemic and has continued to head upward (see chart 3). However, structural features of the Japan labor market have meant unemployment has risen at a slower pace than those of the U.S. and the U.K. Meanwhile, the number of workers on leave who can receive employment adjustment subsidies is increasing.

The active jobs-to-openings ratio had been rising since 2019 because of a labor shortage. However, it has begun declining: Corporations are cautious about hiring because of the pandemic. Furthermore, the number of new job offers, a leading indicator for employment conditions, remains low.

Chart 3


Table 3

Japan's Unemployment Rate
(%) 2019a 2020f 2021f 2022f 2023f
Unemployment rate 2.4 2.8 2.8 2.7 2.4
a--Actual. F—forecast. Source: S&P Global Ratings.

We think Japan's real estate market may remain under downward pressure in 2021, given that the situation related to the COVID-19 pandemic remains fluid. Japan's real estate market, which had been on a slight improvement track, entered a consolidation phase when the outbreak started in 2020.

According to the September 2020 standard land price survey, released by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT), the average standard price of land for any use throughout Japan declined 0.6% from the previous year. The price had been rising since 2018 and logged a 0.4% increase in 2019 (see chart 4). MLIT pointed to pandemic-triggered uncertainty, which led to a decline in demand for real estate, as a factor behind the price contraction. On a use basis, the standard price for residential and commercial land declined. In our view, residential demand waned because of the faltering economy and commercial land prices suffered because of the sharp drop in tourism and dampened demand for office space in commercial areas.

Chart 4


Owner-Occupied RMBS And Condominium Investment RMBS

Performance outlook for underlying assets is stable

The outlook is stable for assets underlying RMBS transactions backed by loans for purchasing owner-occupied houses (owner-occupied RMBS) and RMBS transactions backed by loans for investments in condominiums (condominium investment RMBS).

Since the spring of 2020, loans backing owner-occupied RMBS and condominium investment RMBS have faced the most severe stress seen since the 2008 financial crisis. Performance of these loans has been stable in recent years, with few delinquencies and defaults. However, delinquencies and defaults increased in 2020, in large part because of the fallout from the pandemic. Since autumn of 2020, the delinquency rate has been declining though. We believe the effects of Japan's state of emergency, which lasted from April to May, peaked out in the second half of 2020.

We believe the performance on housing loans is highly correlated with the unemployment rate. In November 2020, we forecast Japan's annual average unemployment rate would be 2.8% in 2020, up from 2.4% in 2019. Nonetheless, we believe the effect of this rise on housing loans will be limited. We assume the unemployment rate is likely to remain around 3%. Our expectation is 2.8% in 2021 and 2.7% in 2022. After factoring in the effects of measures taken by the government and our expected unemployment rate, we forecast a limited impact from COVID-19 on the performance of underlying assets in 2021.

However, pandemic-related economic uncertainty endures. The performance of assets underlying RMBS transactions could face severe pressure if economic recovery takes longer than we expect because of the pandemic and a delay in vaccinating the population of Japan.

Rating trends will likely be stable

We expect rating trends for owner-occupied RMBS and condominium investment RMBS for 2021 to be stable.

We do not rule out the possibility that the performance of assets backing owner-occupied RMBS and condominium investment RMBS will temporarily deteriorate because of the pandemic. In our November 2020 forecasts, however, we assume the Japanese economy will turn around in 2021 and the unemployment rate will remain just below 3%. We therefore expect our ratings on owner-occupied RMBS and condominium investment RMBS to be stable in 2021. We see a low likelihood of a substantial increase in defaults and delinquencies of these loans.

The underlying assets backing Japanese owner-occupied RMBS transactions are largely housing loans with fixed interest rates for their entire loan periods. Therefore, obligors face extremely limited risk from rate hikes, which is another factor supporting the ratings. On the other hand, condominium investment RMBS are backed generally by housing loans with floating interest rates. Therefore, obligors face the risk of rate hikes. Nevertheless, we forecast in November 2020 that Japan's policy rate will remain -0.05% until at least 2023. We also view the risk of a rate hike to be low in the medium term, which also supports the ratings.

Apartment Loan RMBS

Performance outlook for underlying assets is somewhat negative

We expect the performance outlook of assets underlying RMBS transactions typically backed by loans to landowners who build rental apartment buildings (apartment loan RMBS) to be somewhat negative in 2021.

The occurrence of delinquencies and defaults of the assets underlying apartment loan RMBS transactions remained low in 2020. The favorable performance of these assets is attributable to the use of master lease contracts. Developers of the collateral apartment buildings frequently enter master lease contracts with the borrowers of the underlying loans. These contracts allow the borrowers to receive stable master lease rent, regardless of actual occupancy rates or apartment rent levels. As of 2020, master lease contracts have remained effective, allowing borrowers to repay apartment loans mostly with income from master lease contracts.

We believe the performance of apartment loans in 2021 will be supported by the following.

  • Low interest rates likely keeping a lid on loan repayment costs.
  • The increased portion of equity in such loans, as contractual repayments have been made over a long period.

Conversely, COVID-19 could be a new risk factor for apartment loans. Single-occupancy studio apartments account for a large portion of underlying assets. There is a risk that rent from such apartments could further decline and vacancy rates rise because of the pandemic. Termination of employment contracts has risen because of economic weakness and with lectures conducted remotely, demand for studio apartments could decline.

In addition, defects in some apartment buildings constructed by Leopalace21 Corp., a major apartment builder in Japan, may hurt the performance of apartment loans. Since April 2018, when the company disclosed such defects in some of its apartment buildings, it has been examining all its buildings and conducting repairs at its own cost. Given the large number of buildings that need work and the consequent need to relocate some tenants, the vacancy rate of the apartment buildings under its management remains high. Furthermore, because of the pandemic-triggered delays, Leopalace21 is uncertain about when it will be able to complete the examinations and repairs.

In general, rent under master lease contract is reviewed on a regular basis. A material decline in such rent amid a rise in the vacancy rate may pressure the performance of apartment loans.

Although we expect the Japanese economy to turn upward in 2021, we think a recovery for apartment loans is highly likely to take longer.

Rating trend will likely be somewhat negative

We expect the overall rating trend of apartment loan RMBS for 2021 to be somewhat negative. Our view reflects the potential we see for the pandemic to lead to a further decline in rent levels and potential increase in vacancy rates at apartment buildings. In addition, it also reflects a possible increase in loan defaults and delinquencies caused by the negative impact of factors such as declines in master lease rent. Rent from master lease contracts could drop for certain transactions if, for example, problems with defects at apartment buildings persist.

ABS Backed By Consumer Receivables

Performance outlook for consumer receivables is somewhat negative

We expect the performance of consumer receivables--auto loan receivables, shopping credit receivables, credit card receivables (shopping and cashing receivables), and consumer loan receivables--backing ABS transactions to be somewhat negative in 2021.

The performance of securitizations differs depending on borrower attributes and borrower screening. Nevertheless, in 2020, the performance of auto loans backing consumer ABS transactions that we rate did not change materially even during the ongoing coronavirus crisis.

We think the performance of auto loans is highly correlated with the employment rate. Based on this and our forecasts for the unemployment rate, we think it unlikely that there will be a huge deterioration in auto loan performance in 2021. That said, unemployment has been rising, particularly among nonpermanent employees who have had their contracts terminated. Borrowers who are self-employed or nonpermanent employees tend to have less stable income and could struggle to repay loans if they lose their jobs. In addition, with the pandemic situation fluid, prospects for the performance of auto loans are also somewhat uncertain.

Obligors may also sell their vehicles and use the proceeds to repay auto loans if they face difficulties. In such cases, conditions in the used car market may affect the performance of auto loans, in our view.

According to Japan Automobile Dealers Association, the number of registered used cars (passenger cars) decreased during the 2020 state of emergency, but later began recovering. The increase was driven by more people opting to use private vehicles and avoid crowed places such as trains and by the shutdown of automakers' factories. Given the current situation of the pandemic, however, we think the likelihood of increasing demand for used cars supporting auto loan performance is limited.

Rating trend will likely be stable

We expect our ratings on ABS transactions backed by consumer receivables to remain stable in 2021. The outlook for performance of underlying auto loans is somewhat negative, in our view. Nonetheless, we believe this performance will have only limited impact on the ratings. This is mainly because credit enhancement has accumulated due to the repayment of the loans underlying the transactions that we rate. Moreover, the underlying auto loans carry fixed interest rates and therefore would be protected from any rise in interest rates.

ABS Backed By Corporate Receivables

Performance outlook for corporate receivables is somewhat negative

We expect the performance of corporate receivables (including auto lease receivables) backing ABS transactions to be somewhat negative in 2021.

The default rates of pools of corporate receivables generally trend in line with corporate bankruptcies in Japan. According to Teikoku Databank Ltd., the number of corporate bankruptcies started increasing at the beginning of 2020 and reached 847 in July, 8.2% higher than in the previous year. Afterward, however, it began to decline. Corporate activity gradually resumed after the state of emergency was lifted. Furthermore, financial measures to mitigate the economic effects of COVID-19 yielded results. Such measures include government subsidies, consultation for corporations by financial institutions, and the provision of special loans and moratoriums on repayments. That said, pandemic problems could again push up the number of corporate bankruptcies.

We believe important factors for forecasting the performance of underlying lease receivables include the size of the corporate obligors and the categories of business in which they operate. Based on Lease Statistics 2019 published by Japan Leasing Association, the breakdown of the major industries using leases follows.

  • Services (about 25.0%),
  • Manufacturing (about 18.6%), and
  • Wholesale and retail trade (about 15.8%).

In this breakdown, services includes hotels, restaurants, medical, health care, and welfare. In terms of size, small- and medium-sized enterprises (SMEs; corporations with capital of ¥100 million or less and individual proprietors) account for about 51% of total lease transaction volume.

The majority of obligors of Japan's ABS transactions backed by lease receivables are SMEs. The component of asset pools depends on the industries in which originators operate. If asset pools consist mainly of relatively small-sized corporations and have high proportions of industries that are susceptible to the pandemic, such as hotels, restaurants, and travel, obligor bankruptcies are a risk for performance. When analyzing default rates for ABS transactions backed by lease receivables, we consider obligor and industry concentration risk.


Outlook for commercial real estate prices is somewhat negative

We expect the value of properties backing Japanese commercial real estate CMBS to either slightly decline or be unchanged in 2021. In addition, we forecast the value of office buildings will decline slightly and those for rental apartment buildings and distribution and warehouse facilities will be almost flat. In the office market, which has performed well for several years, the vacancy rate has started to rise and rent levels have begun to decline, triggered by the pandemic.

Office buildings

We expect the value of office buildings to remain slightly weak in 2021, except for those in the class-A category. The value of class-A buildings is likely to remain almost unchanged because of robust demand. We believe demand for office leasing will weaken and that the capitalization rate for office buildings has almost reached a peak.

The average vacancy rate of office buildings in Tokyo's business districts as of the end of November 2020 was 4.33%, up 2.77 percentage point from a year earlier, according to data from Miki Shoji Co. Ltd. Average rents for those buildings have been decreasing since hitting a peak in July 2020. As of the end of November 2020, average rents edged up only 0.7% from the previous year.

In our view, the office building leasing market will likely slacken in 2021 because of worsening corporate performances and reviews of office spaces amid a shift to working from home. Meanwhile, we believe the supply-demand balance for offices is unlikely to loosen substantially. This is mainly because we expect the Japanese economy to moderately recover from the previous year in 2021; we see real GDP growth of 2.7%. Moreover, the supply of new office spaces will likely be below average in 2021 and remain so in 2022. The Japan Real Estate Institute's (JREI) survey on real estate investors shows that capitalization rates of office buildings in central Tokyo have remained nearly flat at 4% or so on average in recent years. The value of Japan's commercial real estate has already peaked, which indicates the value may come under pressure over the medium term, in our view.

Rental apartment buildings

We expect the value of rental apartment buildings to remain nearly flat in 2021 on the back of a mild economic recovery in Japan.

Japan's residential rental housing market has not so far suffered substantial damage as a result of the pandemic; rents remain stable for now. Data related to condominium rents from Tokyo Kantei Co. Ltd. shows rent in Tokyo has been rising moderately since January 2020.

Regarding the market for new and existing condominiums, according to the Real Estate Information Network for East Japan, closing numbers for sales of existing condominiums in the greater Tokyo area bottomed in April 2020 and has been increasing since. In addition, contracted prices per square meter for condominiums have risen year on year. This is mainly because buying rebounded after a period of voluntary restraint on sales and business activities during the state of emergency. The value of existing condominiums in the greater Tokyo area is at its highest since the global financial crisis. Therefore, we think values may soften in less competitive locations.

Distribution and warehouse facilities

The distribution and warehouse facilities rental market will likely remain largely unchanged in 2021. Demand from e-commerce and logistics companies for capturing sites has been robust thanks to increased business. In addition, investors from Japan and elsewhere continue to have a strong appetite for distribution and warehouse facilities. This will remain the case in 2021, in our view. This is mainly because:

  • The distribution and warehouse facilities rental market has been stable, and
  • The survey on real estate investors indicates strong demand, with capitalization rates either staying flat or turning downward in some areas.

Vacancy rates in the third quarter of 2020 for distribution and warehouse facilities remain stable, at less than 1% in the greater Tokyo area and 4% or so in the Kinki (greater Osaka and nearby prefectures) region, according to CBRE Inc. Furthermore, we believe the impact of the completion of new properties on the vacancy rates is likely to remain limited in 2021. This is because contracts are generally signed for many large new properties ahead of the completion of construction.

Related Criteria

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Hiroshi Sonoda, Tokyo (81) 3-4550-8474;
Secondary Contacts:Toshiaki Shimizu, Tokyo + 81 3 4550 8302;
Yuji Hashimoto, Tokyo + 81 3 4550 8275;

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