Japanese bank spreads tighten on possible state capital injection

Spreads on Japanese bank credit default swaps continued to tighten this week following speculation that the government may inject capital into the country's ailing banking system. The move would help banks combat their disposal of spiralling bad loans, and bring further support to the sector after the Bank of Japan (BoJ) last week said it would buy shares from banks to boost their capital ratios, dealers in Tokyo said.

After an initial widening earlier this week, as participants became sceptical of government support for the BoJ’s initiatives, credit spreads on senior five-year bank debt tightened about 10 to 15 basis points.The tightening was also fuelled by speculation that Hakuo Yanagisawa, minister in charge of the country’s financial watchdog, the Financial Services Agency (FSA), who has been against further bank bailouts, could be replaced as early as Monday, paving the way for a government bailout of