A samurai bond is a yen-denominated debt security that is issued by a non-Japanese company on the Japanese bond market. These bonds enable the issuer to have access to Japanese capital, which can be used either for local investments or to finance existing operations outside Japan. The main advantages of samurai bonds include access to a diversified and deep pool of capital with comparatively lower interest rates. Also, American and European companies that enjoy a certain level of prominence usually have a relatively easy time in raising capital through samurai bonds. Unfortunately, there are continued concerns in the United States about the taxation of these securities, as well as grave concerns relating to the complexity of emitting these bonds that have progressively slowed use of this financial debt tool.
Samurai bonds were formally created in 1970; at the time, only governmental entities could issue them, but this privilege was later extended to large “blue chip” corporations in 1978. The bonds are subject to Japanese regulations and are akin to Yankee bonds in the United States (which are bonds traded in the U.S. foreign bond market). Recent trends have shown an increase in the issuance of samurai bonds; in 2007, issuances tripled to ¥2.2 trillion from ¥741 billion in 2006, but this is expected to be considerably lower from 2008 onward.
Historically, corporations from the United States have been the major issuers in the samurai market. This is mainly because of their high name recognition in Japan and elevated credit ratings. A credit rating of at least A is required to emit bonds on the Japanese market. In recent years, there have been pools of issuers that included companies from Europe, South Korea, Thailand, Australia, and New Zealand, but these are a minor fraction of the current market.
While samurai bonds were originally intended to create an opportunity for foreign companies so that they could raise money for their operations in Japan, many of the funds raised are now immediately converted into other currencies and exit the Japanese capital market to finance international operations.
Advantages And Disadvantages
Samurai bonds have the following advantages. Because they are issued in Japan, it is easy for Japanese institutional investors to invest in them. Also, samurai bonds do not have to be left in the custody of securities companies or other institutions. Japan possesses a large capital market and offers a deep pool of debt capital. Hence, it is an interesting market for larger companies seeking to diversify sources of funding. Also, companies usually find that interest rates are lower in Japan, so foreign companies find it advantageous to emit bonds in this market. As for Japanese institutional investors, foreign firms are very popular because of their high name recognition and good investment rating; as many of these funds are very conservative, they prefer to invest in larger companies with international presence.
The Japanese debt market is partially insulated from the world debt markets and is not always subject to the same variation and influences. It is resistant to outside phenomena, such as the U.S. subprime rout of 2007–08. Hence, it is not subject to the same variations and market swings as the U.S. and European markets, giving companies an alternative financing source during economic downturns. Nonetheless, high taxation and an uncertain fiscal environment related to samurai bonds is a strong deterrent to widespread usage. Continued changes in how the U.S. Internal Revenue Service (IRS) taxes these bonds has considerably shifted usage from U.S. companies. In the past, 60 to 80 percent of the samurai bond market was driven by U.S. firms. Although there are some arrangements to circumvent taxation, they were due to lapse at the end of 2008. Even if both countries continue to negotiate to further harmonize taxation, the lack of a constant policy remains a serious concern of U.S.-based companies.
Also, companies that have issued samurai bonds have found that there are high administrative burdens placed upon issuing companies, and there is a lack of flexibility in the choice of terms and conditions of issuance that create restrictive elements for usage of these bonds. Concurrently, easier issuing procedures and lighter taxation in the European markets (which offer a similar debt security environment) have made the Japanese bond market far less attractive to issuers, and it continues to grow slowly.
- Jose A. Lopez and Mark M. Spiegel, Foreign Bank Lending and Bond Underwriting in Japan During the Lost Decade, Federal Reserve Bank of San Francisco Working Paper Series (Federal Reserve Bank of San Francisco, 2006);
- Mitsuru Misawa, Current Business and Legal Issues in Japan’s Banking and Finance Industry (World Scientific Publishing, 2006);
- Roderick Seeman, “Samurai Bonds,” Japan LawLetter (December, 1987);
- Kazuo Tatewaki, Banking and Finance in Japan (Routledge, 1991).
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