Japan`s default risk falls below Korea`s for 1st time in 5 months

Japan`s default risk index has fallen below that of Korea for the first time in five months, with the Japanese economy showing signs of recovery due to the depreciating yen.

According to the Korea Center for International Finance on Monday, the credit default swap premium for Japan`s treasuries was 0.62 percent last Tuesday, lower than 0.64 percent for Korea. This was the first time for Japan`s premium to fall below Korea`s since Oct. 11 last year. Japan`s CDS premium fell further to 0.61 percent last Thursday, widening the gap with Korea`s.

The CDS premium, or the spread on CDS, reflects the cost of hedging credit risks in corporate or sovereign debt. A lower number indicates lower default risk for the bond issuer.

Korea`s default risk had generally been higher than Japan`s, but fell below Japan`s after the three major international credit rating agencies upgraded Korea`s sovereign credit rating in the second half of last year.

The recent fall in Japan`s CDS premium comes as Japanese Prime Minister Shinzo Abe is pushing for quantitative easing and economic stimulus, which have helped raise exports and real estate rental fees and ultimately boosting the sluggish Japanese economy.

Due to Tokyo`s low yen policy, Japan`s stock markets are also rising faster than Korea`s. As of Friday last week, Japan`s Nikkei index surged by 18.2 percent from the end of last year, while Korea`s main stock index KOSPI rose merger 0.4 percent over the same period.

weappon@donga.com