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Glossary

Samurai Bonds

Category — Bond Types
By Konstantin Vasilev Member of the Board of Directors of Cbonds, Ph.D. in Economics
Updated December 17, 2023

What are Samurai Bonds?

Samurai bond is a unique financial instrument representing yen denominated bond issued by foreign entities within Japan’s capital market. These bonds serve as a gateway for non-Japanese governments, supranational organizations, and corporations to secure capital from Japanese investors. The distinct characteristic of samurai bonds is that they are bonds denominated in Japanese yen, thus facilitating access to the Japanese market while averting currency conversion risks. The appeal of samurai bonds extends beyond mere capital raising, encompassing features such as competitive pricing, lower borrowing costs compared to domestic markets, and an opportunity for issuers to diversify their funding sources.

Samurai Bonds

How Do Samurai Bonds Work?

The fundamental mechanism involves foreign entities issuing bonds in Japanese yen, either to raise capital for local investments or to finance operations outside Japan. The appeal of samurai bonds lies in their ability to provide issuers with access to the deep pool of capital available in Japan while mitigating the risks associated with foreign currency fluctuations, as the bonds are inherently denominated in yen.

The process of issuing samurai bonds typically involves collaboration with Japanese banks, selection of underwriters, and adherence to Japanese regulations. Issuers undergo a meticulous approval process, including registration with Japanese authorities and the preparation of a comprehensive bond prospectus detailing the issuer’s financial health, business operations, and the terms and conditions of the bond. The pricing and book-building process plays a crucial role, involving collaboration between underwriters and issuers to determine the bond’s yield and finalize the list of investors. Following this, the bonds undergo settlement and are listed on the Tokyo Stock Exchange, enhancing liquidity in the secondary market. Samurai bonds thus provide an efficient means for non-Japanese companies to raise funds in the stable Japanese market, leveraging the advantages of yen denomination and accessing a diverse investor base.

Benefits

  1. Access to Japanese Capital. Issuing samurai bonds provides a direct channel for foreign companies to tap into the vast pool of capital available in Japan. This access allows companies to secure funds for various purposes, including expanding their operations or financing new projects.

  2. Lower Interest Rates. Samurai bonds often come with relatively lower interest rates compared to other forms of financing. This can be particularly attractive for issuers, as it allows them to borrow at favorable terms, ultimately reducing the overall cost of capital.

  3. Diversification of Funding Sources. By issuing samurai bonds, companies can diversify their sources of funding. This diversification is beneficial for risk management, ensuring that the company is not overly reliant on a single market or type of financing.

  4. Hedging Currency Risk. As samurai bonds are denominated in Japanese yen, they serve as a natural hedge against currency risk. This is advantageous for companies operating in multiple currencies, providing stability and reducing the impact of exchange rate fluctuations.

  5. Attracting Conservative Japanese Investors. The bonds attract conservative institutional investors in Japan who prefer investing in well-established international companies. This interest can result in a broader investor base and increased demand for the bonds.

  6. Stability of the Japanese Market. Japan’s financial markets are known for their stability. By issuing samurai bonds, companies gain access to a market that is not subject to the same variations and swings as more volatile markets in the U.S. and Europe. This stability becomes particularly valuable during economic downturns.

Risks

  1. Currency Risk. Samurai bonds are denominated in Japanese yen. While this helps mitigate currency risk for companies operating in Japan, it introduces a different kind of risk for those whose primary business operates in a different currency. Exchange rate fluctuations between the yen and the company’s native currency can impact the value of the bond and returns.

  2. High Tax Rates and Fiscal Uncertainty. The Samurai bond market is associated with high tax rates and an unclear fiscal environment. This can pose challenges for issuers, especially those from countries with specific tax regulations. Understanding and navigating these tax implications is crucial to avoiding unexpected financial burdens.

  3. Lack of Flexibility in Issuance Terms. Samurai bonds may have less flexibility in terms of issuance compared to other markets. This lack of flexibility could create restrictions for investors or traders looking for more adaptable terms in the bonds, potentially limiting the attractiveness of samurai bonds.

  4. Administrative Burdens. Companies issuing samurai bonds may encounter high administrative burdens. The procedural complexities and regulatory requirements can increase the workload for the issuing companies, necessitating careful consideration of the associated administrative efforts.

  5. Market Growth Challenges. The Samurai bond market has experienced relatively slow growth due to the intricate issuance procedures and complicated tax rules. Companies should be aware of these challenges, and the potential for slower market growth compared to other alternatives.

  6. Uncertainty in Fiscal Policies. The lack of a constant policy is a concern, particularly for U.S.-based companies. Uncertainty in fiscal policies can create challenges in long-term financial planning and decision-making for issuers.

Legal Regulations of Samurai Bonds

  1. Approval Process. Before issuing samurai bonds, foreign entities must obtain approval from the Ministry of Finance in Japan. This process involves a thorough review to ensure compliance with regulatory requirements and to assess the issuer’s creditworthiness.

  2. Registration. Foreign entities must register with the Japan Securities Dealers Association (JSDA) as part of the issuance process. This registration ensures that the bonds meet necessary regulatory standards and provides transparency to investors.

  3. Eligibility Criteria. Issuers must meet specific eligibility criteria, which may include minimum credit ratings and adherence to certain financial standards. The Ministry of Finance sets these criteria to maintain the integrity and stability of the Samurai Bond market.

  4. Selection of Underwriters. Issuers collaborate with Japanese banks that act as underwriters for the samurai bonds. These underwriters play a crucial role in managing the issuance process, including pricing, distribution, and market-making.

  5. Bond Prospectus. A comprehensive bond prospectus must be prepared before issuance. This document provides potential investors with detailed information about the issuer, including financial statements, business operations, credit ratings, and terms and conditions of the bonds.

  6. Settlement and Listing. After the approval and issuance process, the samurai bonds undergo settlement, and they are subsequently listed on the Tokyo Stock Exchange (TSE). Listing on the TSE enhances liquidity and allows investors to trade the bonds in the secondary market.

  7. Regulatory Changes. Issuers must stay informed about any regulatory changes in the Japanese market that may affect the issuance and trading of samurai bonds. These changes could include modifications to eligibility criteria, disclosure requirements, or other regulatory standards.

  8. Currency Conversion and Exchange Control. Given that samurai bonds are denominated in Japanese yen, issuers should be aware of any currency conversion regulations and exchange control policies that may impact the conversion of proceeds into their native currency.

  9. Disclosure and Reporting Requirements. Ongoing compliance with disclosure and reporting requirements is crucial. Issuers must provide timely and accurate information to the Japanese authorities, ensuring transparency for investors.

  10. Tax Implications. Understanding the tax implications associated with samurai bonds is vital. Tax laws may vary depending on the issuer’s home country, and navigating these complexities is essential to avoid unexpected financial obligations.

Historical Perspective of Samurai Bonds

The Samurai Bond market was inaugurated in 1970 when the Japanese Ministry of Finance granted authorization for supranational organizations and highly-rated foreign government entities to issue bonds in Japan. This move came as a response to the growing foreign currency reserves in Japan during the late 1960s. Initially, only governmental entities were allowed to issue bonds, and the market primarily targeted high-credit supranational issuers.

The Asian Development Bank (ADB) played a seminal role in the early days of the Samurai Bond market. In November 1970, ADB issued the first Samurai Bond, amounting to 6 billion yen with a 7-year maturity. The successful acceptance of ADB’s bond set the stage for the gradual expansion of the market.

In 1978, the market witnessed a significant shift as blue-chip corporations were permitted to issue samurai bonds, broadening the spectrum of eligible issuers. Over time, eligibility criteria were relaxed, requiring minimum credit ratings and new types of bonds were introduced, increasing accessibility for a diverse range of entities.

By 1972, Australia issued the first non-Japanese 10 billion yen Samurai Bond, signaling the globalization of the market. Throughout the 1980s and 1990s, liberalization measures were introduced, including the reduction of minimum credit ratings. The market became more accessible to private-sector entities, leading to an increase in the share of the Samurai bond market held by private companies.

In a significant step in 1996, the Samurai market eliminated the minimum requirement for credit ratings, marking a shift toward increased private sector participation. The market continued to evolve with changes in regulations, making it more dynamic and accommodating to various issuers.

As of today, samurai bonds have become a well-established and recognized instrument in the global financial landscape. The market has witnessed various issuers, including governments, supranational entities, and corporations, contributing to its vibrancy.

Samurai Bonds vs. Euroyen and Foreign Bonds

  1. Samurai Bonds. They are denominated in Japanese yen, offering a natural hedge against currency risk, issued in Japan by non-Japanese entities, subject to Japanese regulations. They appeal to conservative Japanese investors interested in stable, international companies.

  2. Euroyen Bonds. Euroyen bonds are issued in countries outside Japan, often in London. They provide a means for foreign entities to tap into the yen-dominated market and offer flexibility in currency denomination but lack the inherent stability of the Japanese market.

  3. Foreign Bonds. They are issued in a domestic market by a foreign entity in the currency of the host country. Foreign bonds offer global diversification and access to specific capital markets. Currency risk is inherent unless the bond is denominated in the issuer’s native currency.

Japanese vs. U.S. and European Markets

The Samurai Bond market stands out when compared to the U.S. and European markets, bringing unique advantages and challenges.

Samurai bonds appeal to issuers seeking stability, as the Japanese market is less prone to variations and market swings. They also attract conservative Japanese institutional investors interested in large international companies. Samurai bonds offer an alternative financing source during economic downturns.

U.S. and European Markets, on the other hand, are known for higher volatility compared to the stable Japanese market. Samurai bonds provide a lower coupon rate than some other bonds, enhancing attractiveness for issuers. Regulatory and fiscal environments in the U.S. can vary, adding complexity for issuers.

Example Cases of Samurai Bond Issuance

  1. Indonesian Government’s Infrastructure Development. The Indonesian government issued 10-year samurai bonds worth 200 billion yen. The funds raised were earmarked for financing crucial infrastructure development projects in Indonesia, including the construction of hospitals, schools, and other vital facilities. The issuance was well-received, with demand exceeding the initial amount, indicating investor confidence in Indonesia’s infrastructure initiatives.

  2. Malaysian Government’s Strategic Bond Issuance. In 2015, the Malaysian government strategically tapped into the Samurai Bond market by issuing bonds worth 31.3 billion yen. This move allowed Malaysia to diversify its funding sources and access capital from the stable Japanese market. The bonds were oversubscribed, reflecting the positive response from Japanese investors and highlighting the attractiveness of Malaysian securities in the Samurai market.

  3. Asian Development Bank’s Pioneering Issue. The Asian Development Bank (ADB) holds the distinction of issuing the first-ever Samurai Bond in November 1970. The bond, amounting to 6 billion yen with a 7-year maturity, marked the inception of the Samurai Bond market. ADB’s successful entry paved the way for subsequent issuances and set the tone for the market’s development.

  4. Sears’ Corporate Samurai Bond. In 1979, Sears, a notable American company, made history by issuing the first corporate Samurai Bond, amounting to 20 billion yen. This issuance expanded the scope of eligible issuers beyond governments and supranational entities to include well-established corporations. Sears’ move demonstrated that the Samurai Bond market was not limited to specific sectors, providing an avenue for diverse entities to raise capital.

  5. Philippine Government’s Participation. The government of the Philippines has shown interest in joining the rising tide of foreign issuers the Japanese capital market and samurai bonds. While specific cases and dates may vary, the participation of the Philippines underscores the appeal of samurai bonds for governments in the Asia-Pacific region seeking to diversify their funding and leverage the stability of the Japanese market.

How to Invest in Samurai Bonds

  1. Research and Due Diligence. Before considering an investment in samurai bonds, conduct thorough research on the specific bonds available in the market. Understand the creditworthiness of the issuer, the terms and conditions of the bonds, and the overall economic conditions in Japan.

  2. Brokerage Services. Engage with a brokerage firm that offers access to the Japanese bond market. Choose a broker with expertise in international bonds, as they can assist you in navigating the complexities of investing in samurai bonds.

  3. Currency Considerations. Samurai bonds are denominated in Japanese yen. Consider the implications of currency exchange rates on your investment. Evaluate the potential impact of yen depreciation or appreciation on the returns of the bonds.

  4. Diversification Strategy. If considering samurai bonds as part of your investment portfolio, ensure a well-diversified approach. Samurai bonds can complement other fixed-income securities and provide exposure to the Japanese market.

  5. Stay Informed About Regulations. Keep abreast of any regulatory changes in the Japanese market that may impact the issuance and trading of samurai bonds. Familiarize yourself with the legal framework and any amendments that may affect foreign investors.

  6. Understand Tax Implications. Samurai bonds may have tax implications depending on your country of residence. Understand the tax regulations related to foreign bond investments and consult with tax advisors to assess any potential tax obligations.

  7. Monitoring Market Conditions. Regularly monitor market conditions, interest rates, and economic indicators in Japan. Changes in these factors can impact the performance of samurai bonds and influence investment decisions.

  8. Utilize Financial Advisors. Seek guidance from financial advisors who specialize in international investments and bonds. They can provide insights into market trends, and potential risks, and assist in crafting a strategy that aligns with your investment goals.

  9. Consider Samurai Bond Funds. If direct investment seems complex, consider investing in mutual funds or exchange-traded funds (ETFs) that focus on samurai bonds. These funds provide diversification and professional management of bond portfolios.

  10. Participate in Primary Issuances or Secondary Market. Samurai bonds can be acquired through primary issuances or the secondary market. Primary issuances involve purchasing bonds directly from the issuer, while the secondary market allows buying and selling of existing bonds between investors.

  11. Evaluate Issuer Credit Ratings. Assess the credit ratings of the issuer to gauge the risk associated with the samurai bonds. Higher credit ratings generally indicate a lower risk of default.

FAQ

  • What is the difference between a shogun bond and a samurai bond?

  • Where are samurai bonds issued in financial institutions?

  • Who can issue Samurai Bonds?

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