Credit derivative products incorporating constant proportion portfolio insurance are starting to make inroads in Japan, on the back of growing client comfort with the concept. While European investors got familiar with CPPI by investing in capital-protected mutual funds and hedge funds, Japanese investors have tended to invest directly in the funds and therefore been more apprehensive when it comes to applying the strategy to credit.
Credit houses have been educating clients on strategies in recent months and a handful of deals have been completed. So far, both credit index-linked structures and managed credit strategies that employ CPPI have been sold in Japan. "It's still a marginal business, but after a track record is built up I expect this to really take off by the end of the year," said a credit head at a European house in Tokyo. He continued, however, that in addition to increasing awareness of the capital protection mechanism, when it becomes clearer what treatment such products will receive under the Basel II accords, there should be greater take-up from clients.