In recent years, Japan’s major corporations have increasingly relied on the corporate bond market as a source of debt finance. From 1996 to 1998, the issuance of corporate bonds increased more than 46 percent, from trillion yen to about 45 trillion yen (Table 1).1 At the same time, loans from Japan’s banking sector decreased about 17 trillion yen. As the corporate bond market grew, the spreads between the yields on Japanese corporate and government bonds widened dramatically. In this edition of Current Issues, we investigate the reasons for the pronounced increase in spreads in Japan’s corporate bond market. We first consider the effect of weak macroeconomic conditions on spreads. Slowed economic growth,.
