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Performance Watch: Japan Private-Sector RMBS' Higher Volatility Is Manageable

Japanese private-sector RMBS transactions have on the whole performed stably through the pandemic. The observed slight increase in volatility since the pandemic began through to August 2021 is absorbed when looking at longer-term trends. Barring a serious worsening of conditions because of a pandemic resurgence, the sector looks set to remain stable.


Default rate

The annualized default rate for underlying loans backing residential mortgage-backed securities (RMBS) transactions increased to about 0.5% after a first state of emergency was declared in April 2020. S&P Global Ratings has observed somewhat higher volatility since then. However, the annualized 12-month moving average of the default rate has been stable at 0.1%-0.2% since 2004. This demonstrates that COVID-19 had a limited impact on transactions we rate (see chart 1).

We forecast that the underlying asset performance will be stable for the foreseeable future. This is because restrictions on economic activity have been gradually lifted as the pandemic has receded. We estimate that the unemployment rate in Japan will remain low at around 2.5% through 2024. However, the performance of the underlying assets could deteriorate if economic activities are strongly restricted because of a resurgence of the pandemic.

Delinquency rate

The index pool's two-month delinquency rate on a 12-month moving average basis has remained basically flat at about 0.25% since 2014 (see chart 4). However, the rate has been gradually declining since 2020 and is currently at about 0.15%. This is because some underperforming transactions were fully redeemed after 2020 and the average credit quality of remaining transactions in the index pool has improved.

If we exclude the outlying transactions that significantly skewed the data, we found the two-month delinquency rate had been at around 0.1% since 2010. However, it has risen to around 0.15%. This slight deterioration in performance, due to the pandemic, has been limited.

Generally, seasoning and the delinquency rates of pools correlate. The delinquency rate rises as seasoning increases (see chart 5).

Prepayment rate

The prepayment rate for the transactions backed by loans originated after the introduction of the negative interest rate policy by the Bank of Japan in January 2016 has been low. We see no material impact from COVID-19 on the prepayment rate so far. The prepayment rate on a 12-month moving average basis has been stable at about 4% since 2019, the lowest level ever(see chart 6). We believe that the low prepayment rate will endure as long as the current low interest rate environment continues.

S&P Global Ratings believes the new omicron variant is a stark reminder that the COVID-19 pandemic is far from over. Although already declared a variant of concern by the World Health Organization, uncertainty still surrounds its transmissibility, severity, and the effectiveness of existing vaccines against it. Early evidence points toward faster transmissibility, which has led many countries to close their borders with Southern Africa or reimpose international travel restrictions. Over coming weeks, we expect additional evidence and testing will show the extent of the danger it poses to enable us to make a more informed assessment of the risks to credit. Meanwhile, we expect the markets to take a precautionary stance and governments to put into place short-term containment measures. Nevertheless, we believe this shows that, once again, more coordinated, and decisive efforts are needed to vaccinate the world's population to prevent the emergence of new, more dangerous variants.


Default rate

Chart 1


Chart 2


Chart 3


Delinquency rate

Chart 4


Chart 5


Prepayment rate

Chart 6


Chart 7


Index Pool Outline

Chart 8


Chart 9


Calculation Of Indices

Default rate (annualized)

The default rate is the weighted average of the default rates of the individual deals of the pool for a term--"t". In many transactions, a loan is considered in default when the obligor misses three to seven payments.

Default rate for "t" = Amount of defaulted receivables for term "t" (principal)/receivables outstanding at the beginning of term "t" (principal) X 100 X 12

Cumulative default rate

The cumulative default rate is the weighted average of the cumulative default rates of the individual deals of the pool for a term--"t".

Cumulative default rate for "t" = Cumulative default amount from transaction issuance to the end of term "t" (principal)/initial receivables outstanding (principal) X 100

Delinquency rate

The delinquency rate is the weighted average of the delinquency rates of the individual deals of the pool for a term--"t".

Delinquency rate for "t" = Amount of delinquent receivables (two payments missed) for term "t" (principal)/receivables outstanding at the beginning of term "t" (principal) X 100

Prepayment rate (annualized)

The prepayment rate is the weighted average of the prepayment rates of the individual deals of the pool for a term--"t".

Prepayment rate for "t" = Amount of prepaid receivables for term "t" (principal)/receivables outstanding at the beginning of term "t" (principal) X 100 X 12


1. In this report, S&P Global Ratings describes the combined performance trend of pools of all the residential mortgage-backed securities (RMBS) transactions it rates that companies in Japan's private sector originated (the index pool). We have performed surveillance on such deals.

2. In this report, transactions S&P Global Ratings rates include transactions that S&P Global SF Japan Inc. (SPSF) rates. SPSF is a registered credit rating agency under Japan's Financial Instruments and Exchange Act (FIEA) but is not registered as a Nationally Recognized Statistical Rating Organization (NRSRO) under U.S. laws. Therefore the credit ratings assigned by SPSF are Registered Credit Ratings under FIEA but are not Credit Ratings issued by an NRSRO under U.S. laws.

3. In this report, all the underlying asset pool of each RMBS are regarded altogether as one pool, the index pool. We calculate the index pool's performance with data in a dynamic format at certain points and also in a static format, under which the outstanding balance of receivables declines as time passes, once a certain amount of time has passed since transaction closures. We included data from collections through August 2021. Charts in the report that show data on a monthly basis do so up to the 150th month. This is because the limited number of transactions aged over 150 months in the index pool makes it more susceptible to individual transaction volatility after this period.

4. To calculate delinquency rates in this report, we define delinquent receivables as loans that are two payments overdue.

Related Criteria

Related Research

This report does not constitute a rating action.

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

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