Japan new corp CDS index plunges on reshuffle

* Benchmark 5-yr iTraxx Japan index plunges due to reshuffle

* Main driver is exit of Aiful, Takefuji from index

TOKYO, Sept 24 - The benchmark index for the Japanese corporate credit default swap market plunged on Thursday following a reshuffle.

The new five-year iTraxx Japan index series 12, was trading 100 basis points after its launch earlier in the day, traders said, sharply below Friday's closing level of 185 basis points for the previous series 11 index. Japanese financial markets were closed for national holidays from Monday to Wednesday.

Credit default swaps, designed to insure bonds against default, are often used to measure investor fears that a company will fail. The higher the spread, the greater the perceived likelihood a company will default.

The difference between the levels of the benchmark indexes was mostly caused by the exit of consumer lender Takefuji Corp and its battered rival Aiful Corp.

"The fall was purely technical," said a CDS trader at a Japanese brokerage. "To prove that, the previous iTraxx Japan series 11 rose to 206 basis points today."

Financial information services company Markit, which calculates the CDS index, announced on Friday that six companies would be excluded from the index, while six new firms including tyre maker Bridgestone Crop would be added.

The index is reshuffled every six months before the launch of a new series, which means there is typically a gap between levels of incoming and old benchmarks. The gap was particularly large this time as CDS spreads for consumer lenders are much wider than those of other companies, meaning holders of bonds issued by those firms need to pay more to buy protection for the debt.

Consumer lenders have been crippled in recent years by regulations lowering maximum interest rates and legal rulings that have forced companies to repay past charges that are now considered illegally high.

CDS traders said they cannot give any indicative spreads for Takefuji and Aiful. Their rival Promise Co Ltd had an indicative price of 1,000-1,700 basis points earlier in the day, they said.

Aiful asked creditors for permission to delay repayments last week.

The benchmark five-year iTraxx Japan index is made up of credit default swap spreads on 50 Japanese investment-grade companies.