Steps to shore up the Japanese yen may have helped stop a decline in the stock market last week, but did nothing to alleviate mounting concerns over $5.4 billion of Japanese banks' trust-preferred securities.
The hybrid securities, which let Japanese banks raise regulatory capital cheaply, have lost considerable value since they were issued in February and March.
Although the Federal Reserve recently stepped in to help bolster the yen, the currency is still weak enough to worry investors in Japanese debt.
"To many the yen is the lightning rod of economic health," said bank bond analyst Allerton Smith of Donaldson, Lufkin & Jenrette Inc.
Likewise, the increase in the spreads-or basis-point difference between the yields of Treasuries and of corporate bonds-on Japanese trust-preferred securities has leveled off recently. But traders said spreads have widened by anywhere from 55 basis points over Treasuries to 260 basis points since the trust-preferreds were issued.
Nevertheless, the remaining holders of the securities, predominantly hedge funds, are willing to wait out the risk because of the unusually high yield the securities offer, traders surmised.
"Everybody is waiting for some direction from Japan's policymakers," said one trader. "There has been no fresh investment or decision-making. People who have the securities are holding them and the ones who do not are watching."
The wait is likely to be uncomfortable.
The biggest fear for investors is that the Japanese issuers, which include Sumitomo, Industrial Bank of Japan, Fuji Bank, and Tokai Bank, will default on their dividend payments as their financial health weakens.
"I think there is still a potential for bad news," said analyst Charles Mounts of UBS Securities Inc., who specializes in Yankee bonds, or bonds issued by foreign companies here. "I just came back from Asia and it looks pretty bad. The credit story is very challenging."
How Japan comes out of this banking crisis will largely hinge on policy action, added Mr. Mounts, who has been fielding questions from concerned clients for three days.
Right now "there is no clear policy direction and that is a real impediment," he said. "Policymakers do not have a good track record of coming through with strong, meaningful reforms."
Mr. Smith at Donaldson Lufkin Jenrette agreed, saying the market has become "disappointed" with the actions of the Japanese government.
"Over the weekend the Japanese pledged to come out with a package for economic stimulus," said Mr. Smith. "It turned out to be just a statement" on a potential package for economic stimulus.
Bank bond analyst Katharine Rossow of Chase Securities Inc. also sees more ominous signs for Japanese banks.
On Monday, the analyst alerted clients that Moody's Investors Service had downgraded the subordinated debt of Long-Term Credit Bank of Japan.
Long-Term Credit Bank of Japan has not issued trust-preferred securities, but Ms. Rossow interpreted the downgrade as a warning shot for holders of the securities.
"At minimum, Moody's feels that subordinated bondholders and preferred shareholders are substantially more at risk than they have been in the past."
Yankee bond analyst Kana Norimoto of Salomon Smith Barney disagreed, arguing that investors are passing up a buying opportunity.
The analyst acknowledged that there is "long road ahead" for Japanese banks but subscribed to the "too big to fail" theory, meaning that the government will not allow Japan's largest banks to close.
"There aren't too many high-yielding bonds that are issued out of AAA countries," said Ms. Norimoto, whose firm underwrote the Tokai issue."There aren't too many opportunities like this."