A samurai bond is “a yen-dominated bond issued in Tokyo by non- Japanese companies and subject to Japanese regulations”. These bonds provide the issuer with an access to Japanese capital, which can be used for local investments or for financing operations outside Japan. Foreign borrowers may want to issue in Samurai market to hedge against foreign currency exchange risk. Another intention may be simultaneously exchanging the issue into another currency, in order to take advantage of lower costs. Lower costs may result from investor preferences that differ across segmented markets or from temporary market conditions that differentially affect the swaps and bond markets.

History

“Samurai Bond Market was opened in 1970 when the Ministry of Finance authorized supranational and highly rated foreign government entities to issue Samurai bonds within certain size and maturity restrictions”. The market opened due to growing Japanese foreign currency reserves during late 60’s. The exchange rate of the yen at that time was fixed at 360 yen per US dollar. “It was revalued to 308 yen in 1971 and moved to a floating rate system in February 1973”. To discourage foreign exchange pressure, the Japanese government decided to open capital market allowing foreign entities to issue yen- dominated bonds. However, at the time the market opened, only governmental entities could issue bonds. The Blue chip (stock market) corporations were allowed to issue Samurai bond later in 1978.

The Asian Development Bank issued the first Samurai bond in November 1970.The issue amount was 6 billion yen with a 7-year maturity, and the bond was accepted very well in the market. At first, Asian Development Bank and other high credit supranational issuers were given an access priority to the market. To control stream of issuance, the special criteria was established. Those who were unable to meet eligibility criteria could finance yen through yen-dominated private placement bonds. They were permitted to target a restricted number of institutional investments, and terms and liquidity were under close control. In 1972 the first non- Japanese 10 billion yen bond was issued by Australia. In 1979, Sears made the first corporate Samurai bond issue for 20 billion yen. At that time, Samurai market gradually became accessible to more issuers through the alleviation of eligibility criteria, which now required minimum credit ratings, and through liberalization of new kinds of bonds. In addition,Samurai bonds provided an opportunity of issuing in two different currencies, as well as interest and principal were paid in ether of these currencies.

Liquidation of Rating Requirement

In 1984, a liberalization step was taken to reduce the required minimum credit rating from double A to single A.  “In 1991, the minimum rating requirement for foreign governments, central banks, and foreign government- guaranteed institutions was lowered to triple-B”. In January 1996, Samurai market eliminated the minimum requirement for credit rating, increasing private sector share of the Samurai bond market.

Required Standards

The eligibility criteria for issuing Samurai bonds were not loosened until April 1985. When examining applications from potential samurai issuers, the Ministry of Finance considered the tendency of the Japanese capital account balance and the liquidity in the country’s economy. “For the actual issuance of Samurai bonds, the Ministry of Finance set a quota per quarter year, and employed a queue system”. “Borrowers, if they agreed upon the terms of underwriting, entered the quota by rotation from the top of the queue”. In 1998, the Ministry of Finance’s close regulatory control was annulled.

Deregulation of Samurai Market

	Deregulation measure	Remarks	Issues	Volume (Yen bil)
1970	Supranational issuance allowed	Asian Development Bank the first Samurai bond	1	6
1972	Sovereign issuance allowed Yen private placements by non- residents started	Australia becomes first sovereign Samurai issuer, Mexico and Brazil debut in 1973	6	85
1979	Corporate issuance starts	Sears Overseas Finance NV issues the first corporate Samurai bond	16	333
1984	Public issuer rating criteria broadened to single A	Bank of China issues debut Samurai	37	915
1986	Financial parameters and single A rating as criteria for private issuers	Samurai issuance decreases as Euroyen issuance is widely liberalized	21	590
1988	Introduction of shelf registration	First issue by Greece, later to become one of the largest sovereign borrowers	22	635
1989	First reverse dual currency Samurai issue	Denmark issued the first reverse dual Samurai Bond - main forex exposure 34structure to date (currently as PRDC)	47	1,126
1991	Sovereigns broadened to BBB, FRN issuance	First BBB-rated sovereign issue takes place in 1994 (Central Bank of Tunisia)	34	681
1992	Public sector broadened to BBB	Ankara Municipality issues first BBB public sector Samurai	53	1,700
1994	Private sector issuers broadened to BBB	PEMEX issues first BBB rated corporate Samurai	55	1,163
1995	First dual currency Samurai issue	Popularity of dual currency structure among retail investors as yen depreciates	35	1,115
1996	Lifting of issuance eligibility criteria, but financial institutions remain shut from the market	Brazil issues the first sub- investment grade bond in the Samurai market; market on the way to record in 1996	153	3,874
1996	Foreign non-banks allowed to issue for purposes other than lending	FMCC issues Samurai bond as the first non-bank issuer
1997	Samurai issuance by overseas commercial banks liberated	Citicorp becomes first commercial bank to issue a Samurai	85	2,123
1998	Issuance of Nikkei-linked Samurai bonds liberalized	No issuance so far	14	205
1999	Foreign non-bankers allowed to issue for general finance purposes	Associates debut in 1999, Household Finance - 7 issues since 2000	10	661
2003	Single A and higher rated foreign non-sovereigns not listed at TSE eligible for shelf registration	Several corporations have already taken advantage of the measure	27	641

Advantages

• Samurai bonds provide access to a diversified and deep pool of capital
• Samurai bonds have relatively lower interest rates
• Japanese institutional investors can easily invest in Samurai bonds because they are issued in Japan
• ”Samurai bonds do not have to be left in the custody of securities companies or other institutions”
• ”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”
• ”Japanese market 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”

Disadvantages

• Samurai bond market has high tax rates and an unclear fiscal environment
• Lack of a constant policy remains a serious concern of U.S.-based companies
• Lack of flexibility of issuance terms and conditions that create restrictions to use bonds
• Companies that have issued samurai bonds have found high administrative burdens placed upon issuing companies
• Complicated issuing procedures and high taxes have made Samurai bond market less attractive than European markets, and experience slow growth