ANALYSIS: Japan banks set to benefit from ‘Abenomics’ policy

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Financial markets have been shouting "Japan is back" for several months and the country's lenders in the commercial aircraft marketplace are set to benefit from Japan's monetary upheaval.

"Abenomics", the name of new prime minister Shinzo Abe expansionary agenda, has three main "arrows": fiscal and monetary expansion as well as structural reform. But so far it has been all about creating and distributing money.

The prime minister has ordered one of the largest ever stimulus package with more than yen (Y) 10 trillion ($107 billion) of new debt funded spending and has given the task to the Bank of Japan to end almost 20 years of consumer-price declines.

Whether he succeeds in ending 20 years-plus of deflation with a 2% inflation target is open to discussion but so far the monetary push has excited markets.

A campaign promise to aid export dependent manufacturers by depreciating the yen became self-filling; traders, expecting an assault on the currency, have knocked off more than 25% its exchange rate against the dollar since November 2012.

Potential Japanese investors are betting on further depreciation the yen versus the dollar. "Japanese investors are now buying more US dollars and this could trigger more activity in the Japanese operating lease with call option market," says a banking source. Easier money is expected to find its way to businesses, which will increase investment instead of hoarding cash.

As one European banker points out, Japanese commercial banks have all indicators ready to push for further growth. "Japanese banks have refunded their debt obligations and hold not much debt now on their balance sheet. In addition they have an abundance of liquidity," he says. Japanese institutions have been active over the past year with the acquisitions of the RBS Aviation Capital and Jackson Square Aviation portfolios. Both acquisitions are partly financed by Japanese lenders.

The Japan Bank for International Cooperation (JBIC) is co-financing the acquisition of Jackson Square by Mitsubishi UFJ Lease & Finance (MUL) with The Bank of Tokyo-Mitsubishi UFJ. The $678 million loan agreement funds the outstanding equity interests in Jackson Square after MUL agreed to buy Oaktree Capital Group's Jackson Square Aviation for 100 billion yen last October.

The financing marks JBIC's second transaction involving an aircraft portfolio purchase over the past 12 months. In June 2012, it signed a $3 billion loan agreement with RBS Aerospace (now SMBC Aviation Capital) to support the lessor's acquisition by three Japanese companies. The loan was co-financed with SMBC, which brings the total co-financing amount to $5.06 billion.

JBIC says it continue to support overseas merger and acquisitions activities of Japanese companies in cooperation with private financial institutions.

"Institutions are desperate to further increase their presence in the aerospace market and the injection of money from the Bank of Japan may result in more acquisitions," says the banker.

"All indicators converge to more asset demand emerging from Japan," he adds.

The mood at last week's International Society of Transport Aircraft Trading (ISTAT) conference in Tokyo reflected this sentiment. Beyond the three-mega banks (SMBC, BTMU and Mizuho) Japanese lenders are increasing their exposure in commercial aircraft finance.

With the new fiscal year starting some banks are doubling their participation in the market and gradually increasing the exposure to different types of deals.

One thing that may not change is that banks are still very selective. "Japanese banks have opened their credit risk outside their top-tier airline customers but when it comes to the credit committee decision, it is a reality check," says the banker.

"The new lenders tend to feel comfortable with easiest deals like fully amortised loans for top-tier airline credits," says a Japanese banker.

"They continue to bid more aggressively on top-tier airlines and as a result pricing continues to decline," he adds.

The Japanese banker points out that some banks are willing to open up to lower credits aside conventional transactions.

Boeing said last month that an expected record commercial aircraft deliveries in 2013 are fuelling strong investor interest in aviation as well as marking Japan's return to being a significant source of capital. The US manufacturer expect Japanese banks to finance $5.5 billion of Boeing new deliveries in 2013, which is equivalent to 12% of its deliveries. This is an increase from $2.6 billion in 2011.

"Japan is in an excellent position to prosper from aircraft investment, thanks to its access to capital and low-cost funding, and a solid understanding of the associated strategies involved in financing and leasing," said Foster Arata, vice president for Asia, Greater China and India for Boeing Capital Corp. "The Japan market, in particular, is being driven by capital availability resulting from the country's high saver rate and the need to connect pension and other funds with strong-performing investments."