In this paper, we conduct a regression analysis on the spread over Libor (LS) on the domestic straight bond trading market in Japan from May 1997 through March 1998. Our analysis shows that, for non-construction issues, the lower the rating the higher the LS, and that the LS differential among issues with different ratings has expanded since around November 1997 against the background of a growing awareness of credit risk. Our analysis also shows that during the analysis period (May 1997 through March 1998) the coupon rate, which was previously a significant explanatory variable for the LS, lost its significance, and that the coefficient of the remaining maturity, which is also an explanatory variable, switched from negative to positive (the longer the period remaining until maturity, the higher the LS). The heightened awareness of credit risk among investors apparently contributed to both these phenomena, and the latter is particularly noteworthy because it is consistent with the results of empirical analyses in the United States. Finally, for construction issues, our analysis showed that the LS continued to increase following the bankruptcy of several construction companies during the summer of 1997, and that an extremely large premium has arisen for certain issues.

Keywords: Domestic straight bonds; LS (spread over Libor); Credit risk