12/87 SAMURAI BONDS

The Samurai bond market was initiated in 1970 with an issue by the Asian Development Bank. Although initially limited to government and semi-governmental issuers such as the Asian Development Bank and the World Bank, corporate issuers began from 1978 with such prominent issuers as Sears Roebuck, Dow Chemical and American Express. Although all that is required for an issue at present is a single A rating from a credit rating institution, the market has dramatically slowed since 1985 when the Euroyen market was launched. In addition to easier issuing procedures lack of taxation in the Euromarkets made the market far more attractive to issuers and investors. The Samurai bond market is regarded as a safe investment area as there has yet to be a default on a bond. Nevertheless, investors (mostly Japanese institutions) have in recent years become disenchanted with the bonds due to the proclivity of issuers to repay the bonds and issue new bonds when interest rates go down. That may be a common strategy of corporate treasurers in the West but is extremely rare among Japanese domestic issues. During 1987 at least 43 of the outstanding bond issues in the Samurai bond market were refinanced in this manner. In contrast, until 1985 only two Samurai bond issues had been refinanced in this way. As Japanese institutional investors were strongly opposed to the practice, from late 1985 Japanese securities companies tried to enforce a policy that any Samurai bond issuer that thus refinanced a bond issue would not longer be permitted to make another Samurai bond issue. This policy had to be dropped after a few months however, as the Euroyen market offered a ready alternative for issuers.

The result of these refinancing of course has been to reduce the size of the market from a peak of 5.52 trillion yen at the end of April 1986 to 4.7 trillion yen at the end of July 1987. One positive aspect for the market in recent months however has been the willingness of local banks to use the market to help their advance into the international business sector. Still too small to make much of a mark in international financial markets, but eager to make the first step the Samurai bond market presents a local opportunity to advance into the international sphere. Recently, for example, a group of over 40 local banks were able to convince the World Bank to make an issue that would be handled totally by local banks.

THE JAPAN LAWLETTER, December, 1987. By Roderick Seeman