Japanese securitization issuance is down for a second straight year.

New issuance of Japanese securitization transactions (see note 1) totaled about ¥5.7 trillion in 2023, declining by about 5% from the previous year. A 15% reduction in the issuance of residential mortgage-backed securities (RMBS) offset growth of about 7% for asset-backed securities (ABS). RMBS and ABS issuance continues to drive Japan's securitization market. We expect new ABS issuance to be flat and RMBS issuance to decline slightly in 2024.

During surveillance of Japanese securitization transactions that we rate, we did not raise or lower any ratings in 2023 (see notes 2 and 3).

In 2023, macroeconomic indicators such as prices and exchange rates moved significantly. We published the reports listed below detailing our examination of the impact of macroeconomic changes on ABS and RMBS transactions. Our scenario analysis showed that only about 2% of rated RMBS issues would be affected by stress scenarios, such as an additional 5 percentage point uptick in cumulative default rates on our current assumptions or a further 10% decline in property value. In the analysis of correlation and sensitivity, we examined the correlation between surveillance data on transactions we rate and macroeconomic factors during the term of surveillance. The results confirmed a certain correlation between economic indicators, such as GDP and unemployment, and default rates of loans backing the ABS and RMBS transactions.

• Japan RMBS Correlation And Sensitivity Analysis: Land Prices, GDP, And Business Sentiment Are Key, Nov. 1, 2023
• Japan Auto Loan ABS Correlation And Sensitivity Analysis: How Economic Factors Affect Defaults, Aug. 22, 2023
• Scenario Analysis For Japanese RMBS: Harder Landings Would Hurt, April 3, 2023

Chart 1

Second Consecutive Year of Decline

ABS and RMBS sectors continue to drive Japan's securitization market. In 2023, ABS issuance in Japan grew about 7% to about ¥3.4 trillion while RMBS issuance dropped about 15% to about ¥2.2 trillion. The total securitization issuance in Japan declined for the second consecutive year to about ¥5.7 trillion (down about 5%).

In 2023, new car sales rose for the first time in five years with both the pandemic and a semiconductor shortage coming to an end. Auto loan ABS issuance increased about 14% from the previous year.

Auto loan ABS, one of the largest subasset classes in the domestic ABS market, benefited from strong new vehicle sales, in our view.

There was no significant change in the total amount of new housing loan originations in 2023. However, we believe that the decline in new RMBS issuance resulted from a significant decrease in the number of borrowers opting for fixed-rate loans. Many RMBS transactions in Japan are backed by fixed-rate housing loans. In 2023, short-term interest rates remained around 0% while long-term interest rates rose due to the Bank of Japan's policy revisions. The result is a widening of the gap between the two rates. Interest rates on fixed-rate housing loans, linked to long-term rates, increased. In contrast, interest rates on floating-rate housing loans remain low.

We expect a slight decline in the amount of securitization issuance in 2024. ABS issuance is likely to remain unchanged from 2023, given new vehicle sales are also likely to remain flat. A slight decline is likely in RMBS issuance in 2024. This is because, in our view, the spread between long-term and short-term interest rates will widen further and the amount of fixed-rate housing loans, the traditional underlying assets to RMBS transactions, will continue to trend downward. Nevertheless, we believe that a trend toward the securitization of floating-rate housing loans, which have been building up over the past few years, will partially offset the decline in the amount of fixed-rate loans.

Existing Ratings Remain Unchanged

We took no rating actions in our surveillance during 2023.

High inflation persisted in 2023. However, monthly real wages have been declining year on year since April 2022. Wage growth has not kept pace with inflation. Underlying assets for auto loan ABS and RMBS are personal loans. Although lower real wages may affect borrowers' ability to repay, we have not seen a significant change in default rates. Delinquencies, a leading indicator of defaults, have also shown no signs of deterioration. We attribute this to Japan's low unemployment.

Interest rates fluctuated more than in the previous years, due to the BOJ's policy revision. A rise in interest rates on underlying loans may have a negative impact on default rates, as it is likely to increase the repayment burden of borrowers. However, we believe that higher interest rates had a limited impact on the performance of most of the transactions we rate, as they are backed by fixed-rate loans.

We currently have 'AAA (sf)' ratings on most of the transactions we rate. Performance of underlying assets has been stable. Ongoing repayment of the issued liabilities has strengthened the stability of ratings for transactions with sequential amortization. There is no accumulation of credit enhancement for transactions with pro rata redemption. However, we believe that these transactions have adequate credit enhancement to withstand stresses such as an increase in defaults and a decline in property values. Defaults and delinquencies in the apartment loan RMBS transactions we rate remained stable throughout 2023, despite some apartment buildings being less competitive due to aging and issues related to defects in some apartments built by Leopalace21 Corp. We did not take any rating actions.

Servicers Seek To Diversify Customers and Earnings

As of the end of 2023, we had rankings on two residential mortgage loan servicers and one commercial mortgage loan servicer. We took no actions on our evaluations of these servicers in 2023. Our stable ranking outlooks on the servicers remain unchanged.

The two residential mortgage loan servicers handle loan receivables entrusted by Japan Housing Finance Agency (JHF). Loan receivables entrusted by JHF are declining as the balance of JHF's direct loan receivables has been declining. However, these residential mortgage servicers are working to diversify their customer bases and earnings. For example, they are working to expand servicing of loans for private-sector financial institutions and strengthen collection from unsecured loans. The commercial mortgage servicer is also looking to increase new business to secure new sources of earnings.

According to the latest survey by the Ministry of Justice, the outstanding receivables that servicers handle decreased to ¥11.4 trillion in 2022, from a peak of ¥34.3 trillion in 2005. Amount per receivable also declined from about ¥3 million in 2005 to about ¥1 million in 2022. Entrusted receivables account for more than 90% of loan receivables handled by servicers. However, the share of acquired receivables has increased in recent years. This shows that servicers are seeking to expand their scope of business, in our view.

Beyond traditional servicing, efforts among servicers to streamline servicing operations and diversify earnings are key to our servicer evaluation.

J-REIT Bond Issuance Will Likely Remain Low

We did not assign ratings to any J-REIT bonds in 2023. In the overall J-REIT market in Japan, volume and the number of bond issuances continued to be low in 2023. The same goes for the amount of equity offerings. New property acquisitions, both in number and value, recovered in 2023. This is because of some recovery in the office property segment, which declined significantly in 2022, and strong performance in the hotel segment, which benefited from inbound tourist demand. We note, however, that overall performance of J-REITs lags pre-2021 levels. J-REITs that emphasize steady distribution payments and financial health are cautious about property acquisitions. This is because of the possibility of interest rate hikes as policy shifts from monetary easing at a time when cap rates remain low. Thus, J-REITs will highly likely remain selective on property acquisitions, making a limited number in the next one to two years. Nevertheless, we believe that issuances of green bonds, as well as issuances intended for refinancing, will continue to support the J-REIT bond issuance market to some extent.

J-REITs will continue to face pressure on rent and occupancy rates in office properties in 2024, in our view. According to data from Miki Shoji Co. Ltd., the average vacancy rate of office buildings in Tokyo's business districts bottomed at 1.49% in February 2020 and rose substantially through the pandemic. The rate has been stable at between 6% and 7% since the latter half of 2021. Average rents are also trending downward in tandem with the rise in vacancy rates. We forecast vacancy rates of office buildings in central Tokyo will hover around 6.5% in 2024 (6.0% at the end of 2023), based on the following negative factors.

• A moderate decline in demand as companies revise their office strategies and telecommuting and shared offices become widely accepted; and
• Scheduled new large-scale supply in 2025, following a glut in 2023.

Ample demand remains for high-grade properties in favorable locations. However, we expect the office building market to remain somewhat weak, particularly for less competitive properties. Meanwhile, demand for residential properties will likely remain solid. We expect to see modest improvement in retail facilities and hotels as they recover from the pandemic and benefit from increased inbound tourism.

We believe rated J-REITs will continue performing solidly and maintain their current favorable financial standing in the coming 12 months. We expect the quality of their portfolios to help them cope with a somewhat weaker leasing market, particularly for offices. J-REITs we rate all have maintained favorable EBITDA interest coverage ratios, thanks to strong ties with financial institutions and super-low domestic interest rates. We also consider the potential risk of rising interest rates to be limited, as fixed-rate debt accounts for a large portion of their total debt, which has a long average remaining life.

Notes

1. S&P Global Ratings calculations based on public information from rating agencies. Numbers are subject to change with additional information.

2. In this report, figures include rating actions by S&P Global Ratings and S&P Global SF Japan Inc. (SPSF). 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. Any rating affirmations in this report refer to cases where we removed the ratings from CreditWatch without changing the ratings. They do not include cases where we simply maintained the rating on a tranche such as affirmations as a result of a regular periodic review, nor do they include affirmations on ratings on some tranches of a transaction when the ratings on the other tranches were changed.