Samurai Bonds

What are Samurai Bonds?

Samurai bond is a financial instrument issued by foreign entities within Japan’s capital market. These bonds are denominated in Japanese yen, thus facilitating access to the Japanese market while averting currency conversion risks. These bonds serve as a gateway for non-Japanese governments, supranational organizations, and corporations to secure capital from Japanese investors. Examples of Samurai Bonds are Banque Federative du Credit Mutuel, 0.449% 21oct2031, JPY (37th) and Poland, Bonds 2.81% 16nov2037, JPY (7).

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 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 avoid 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.

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.

Example Historical 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.