"We believe that the level of primary issuance in the Samurai bond market will still be at a similar level to last year," said Kazuhide Tanaka, deputy general manager for the debt capital markets division at Tokyo-Mitsubishi Securities.
Tanaka's confidence in the market is underpinned by the substantial growth in issuer interest in the yen denominated debt market last year. Yen denominated bond issuance rocketed in 2000, increasing from ¥2.6tr in 1998 to ¥10.7tr. A number of factors helped spur the increase, including diversification away from the euro and dollar debt markets which had experienced volatility over the last year, a sharp drop in domestic corporate issuance from Japanese corporates, and the attraction for non-Japanese companies to take advantage of the country's zero interest rate policy for most of last year, according to Juntrao Fujii, director and deputy president for Tokyo-Mitsubishi Securities.
Another important factor favouring the increase in Samurai bond issuance by US corporates was the Financial Accounting Standards Board's Rule 133, which came into effect in January, in which US corporates had to mark derivatives to market, leaving room for plenty of volatility in their returns. For corporates with Japanese assets that required financing or desiring yen exposure, issuing debt directly into the currency has become more attractive idea than using swap market.
Nevertheless, the picture for the Japanese economy does not look rosy this year. As a result of decreasing demand from the US and Asian regions due to economic slowdowns, Japanese GDP growth for this year is estimated by Tokyo-Mitsubishi to be 0.4%, compared with 1.2% in 2000. "Japanese corporates will have to enter an adjustment phase and improvements in corporate earnings is unlikely as corporates feel the pinch of the drop in external demand," said Fujii.
He added that the Japanese yen would also come under pressure due to political uncertainty and lack of financial reforms. "To be frank, I cannot tell you what level the yen could be - my crystal ball is very humid at this stage," he said, but added that he personally expects the currency to weaken slightly. He believes that the Bank of Japan is likely to return to the zero interest rate policy, to help stem the economic slowdown in the coming months.
Despite the economic situation, Fujii believes that the interest from US corporates to issue Samurai bonds remains and will help keep up volumes of yen denominated primary issuance.
Fujii noted that Japanese investors have become more cautious due to recent company rating downgrades. The most notable example is Xerox, which has seen the value of its bonds halve after its rating drops. But he is convinced that this points to an increasing sophistication and differentiation between offshore names by Japanese investors: "There has been little primary activity from November until February this year, but the period of low activity means that there is greater focus by the investors on individual stories. That is surely a good thing." He remains confident that issuers would continue to want to diversify their funding sources and access the market.
Officials familiar with the Samurai bond market said that issues later in the year were likely to derive from automobile and telecoms companies, together with emerging market sovereigns continuing to access the market, such as Tunisia. British Telecom has already made a shelf registration for ¥500bn in February, although no definite plans for a bond issue have been announced. Korea Electric Power Corp is also expected to mandate a yen denominated bond issue for the equivalent of $300m this week.