Japan’s bond issuers have been pouring into the dollar and euro markets over the last two years driving volumes up to $105.6bn-equivalent in 2018 and $114.8bn in 2017, according to Dealogic. That compares to $83.9bn raised in 2016, and $27.5bn in 2010.
“In the past, Japanese corporates relied on the domestic market or the lending market,” says Ryota Suzuki, head of Japan debt capital markets at Bank of America. The domestic market is still important, but its ability to fund corporate Japan has dwindled. “The domestic market does not have great capacity compared to 2014 and 2015,” says Suzuki. “[Investor] diversification is of growing importance, due to the domestic market,” he adds, with ever more Japanese borrowers making their international market debuts.
Foreign currency bond issuance hit a record in 2017 and stayed high in 2018, says Hiroki Shibata, analytical manager for corporate ratings at S&P Global Ratings Japan.
Borrowers last year included Marubeni Corp, Toyota Tsusho Corp, Central Japan Railway Co, Toyota Industries Corp and Mitsui Fudosan Co.
Dollar and euro funding costs for Japanese borrowers have been higher than yen in the last year but changing funding needs have made foreign currency bonds more appealing. “Economically, and from a funding diversification perspective, it makes sense,” says Shibata. “Over the next two to three years, this is likely to continue.”
Japanese borrowers have increased their need for foreign currencies as they look abroad for merger and acquisition opportunities, says Shibata. Outbound M&A needs international funding. This trend of keeping the funding in the currency in which it was raised has removed the need for expensive cross-currency swaps.
“While Japanese industrial companies are likely to continue expanding overseas, it will be even more strategically important that they maintain the ability to raise timely and stable financing in foreign currencies,” says Shibata. “We expect this trend to continue in 2019, despite the slowing global economy because Japan’s corporations are likely to continue to expand overseas business[es] under their longer term growth strategy.”
Still, the growth of Japanese borrowers in the international market could slow if the domestic economy worsens. A prolonged trade dispute between the US and China could also weaken dollar market conditions. “Japanese corporates may postpone capex or investments,” says Shibata.
It is not just the cream of Japanese corporates that are seeking funding overseas, however. Japanese investors are notoriously demanding on credit quality and this has priced many borrowers out of their home market.
“Weaker credits [find] it challenging to raise funds,” says Shibata. “A lot of investors can take credit risk in the US that is totally different from the Japanese domestic market.” Japanese investors usually want a triple-B rating or higher, whereas US investors will accept single or double-B names.
Suzuki agrees: “[International markets are] not only for investment grade [borrowers].”
Japan’s green bond issuers have spurred euro issuance and the mega banks have helped spur international green bond issuance, says Raj Malhotra, head of DCM for Asia Pacific at Société Générale. “You’re seeing the internationalisation of Japanese borrowers,” he says.
Japanese banks are also looking offshore for funding to meet total loss-absorbing capacity (TLAC) standards. Systemically important banks around the world are raising TLAC debt to combat the ‘too-big-to-fail’ problem.
In Japan, the TLAC implementation date for Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group is March 31, according to the Financial Services Agency of Japan.
By this time they need a minimum external TLAC of 16% of their consolidated risk-weighted assets (RWAs) and 6% of Basel III leverage exposure. These requirements rise to 18% and 6.75% respectively by March 2022.
Nomura Holdings must meet the same targets by March 31, 2021 and March 31, 2024.
Offshore investors are an important additional pool of cash for this, says Yusuke Ueda, chief credit strategist at Mitsubishi UFJ Morgan Stanley Securities Co. Some of the Japanese banks also have US businesses so they must raise dollar funding to meet US TLAC related standards as well, he says.
Japanese borrowers are also using international bond markets to diversify investor bases — increasingly important in volatile markets. Diversification offers stability against currency fluctuation. “Japan-based corporations have typically obtained funds in yen from domestic banks and used currency swaps to hedge against currency risk,” says Shibata.
But for those that do want to swap to yen, the transaction could still be cheaper than a domestic bond sale, says Suzuki. “It’s natural for these issuers to issue international bonds,” he says. “They are making liability diversification plays.”
Dollar and euro markets have seen the bulk of Japan’s international issuance as they offer enough depth for the hefty funding needs, says Tatsuya Yasuda, Nomura’s head of international DCM. “Sterling and Australian dollar bonds may be attractive, but can they give you $1bn from a single deal? It is more normal to get $500m from a benchmark deal in these markets,” he says, adding that the other markets are best approached with private placements.