SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 2 May 2016ContactsIrina Baron Asst Dir-Research Associate irina.baron@moodys.comXian Li 212-553-1404Senior Research Analyst xian.li@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research,Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products.For further detail, please see the last page.Sovereign Risk ReportJapan Sovereign Credit Risk Measures Withstand BOJ PauseBroad-based declines in Asia-Pacifics market-based measures of credit risk reflect the improving trend in global sovereign risk. Of the 70 countries in our Sovereign EDFTM (Expected Default Frequency1) database, more than two thirds have seen their Sovereign EDF measures decline since the beginning of the year. Just five sovereign EDFs have risen by 10 basis points or more. The two key drivers of the sovereign EDF the general measure of investor risk aversion (known as the Market Sharpe Ratio) and the CDS spreads on government bonds have both helped to lower Sovereign EDF measures in 2016. The Asia-Pacific region is indicative of this trend, with all but one of the regions sovereigns improving since the start of the year (see Exhibit 1). Japan's Sovereign EDF measure exhibited some of the largest improvements, declining from 0.13% to its current 0.07%. The one exception is Hong Kong; its five-year Sovereign EDF measure increased slightly from 0.09% in January to its current 0.13%.Exhibit 1Asia-Pacific Sovereign EDF measuresSource: CreditEdgeMOODY'S ANALYTICS SOVEREIGN AND SUPRANATIONAL2 2 May 2016 Sovereign Risk Report: Japan Sovereign Credit Risk Measures Withstand BOJ PauseThe recent volatility in sovereign debt and other financial markets observed this past week was triggered by a sharp decline in the Japanese Nikkei index on April 28. The drop in Japanese equity prices followed the Bank of Japans decision to leave monetary policy unchanged, as some investors hoped for new measures to combat Japans stagnant economy....
