Mega banks in Japan have become more frequent issuer of non-yen denominated bonds this year, a trend that is expected to continue as they look to expand their overseas business and secure more cost effective funding.
In the year to March 21, Japanese banks have raised US$5.8 billion in US denominated deals, compared with US$4.1 billion during the same period last year, according to data provider Dealogic.
The favourite currency for diversification has been US dollars and dealers also expect euros to be a popular choice, especially for benchmark issues.
There have also been a number of bonds in Australian dollars. Some banks are also expected to tap the onshore renminbi market as trade between the two countries increases.
Bank of Tokyo-Mitsubishi and Sumitomo Mitsui Banking Corp have been the biggest issuers of US dollar bonds in 2012, raising US$1.2 billion and US$6.1 billion respectively. Mizuho and Nomura have also been active in that market.Japanese Bank US$ DCM Issuance - YTD Comparison
*Please note these are number of tranche, not number of deals
The strength of the yen is one factor why banks are looking offshore to raise funds. Until this year, the yen had been on an appreciating trend for multiple decades—despite the fact that Japan has one of the world’s highest debt-to-GDP ratios at 220.3% and economic growth has stalled.
The yen has performed so well mostly because of its status as a safe haven currency. Its rise is starting to show signs of reversing following more stringent intervention by the central bank. The yen depreciated 4.79% against the US dollar in February.
USD/JPY - 1 Year to March 20 2012
“The banks have been funding in US dollars to promote their business in US dollar market and the US dollar offers cost advantages compared to US dollar swapped from Japanese yen,” Yasuhiro Matsumoto, senior analyst, financial institutions group at Moody's Japan said to Asiamoney PLUS on March 21.
Borrowers have been able to secure cheaper funding cost than they are able to in yen.
“There is a favourable basis for banks for want to fund away from the yen,” said one senior origination source in Tokyo. “If you look at the comparison of whether they can fund in yen and where they can fund in US dollars, the dollar funding comes inside their yen curve.”
Japan’s banks are also responding to greater needs for non-Japan funding from its customers as base as corporates look abroad for growth. Banks are also increasingly looking abroad to expand their operations due to the lack of opportunities at home. Japan has recorded an average quarterly GDP growth of just 0.52% between 1980 and the end of 2011. The country’s GDP contracted 0.2% in the fourth quarter of 2011.
“In the domestic market many Japanese corporates are trying to look or growth overseas as the [local] economy is saturated,” said Matsumoto. “Banks are also expanding their overseas business because there is not the opportunity to grow in Japan.”
Market watchers expect the trend of Japanese banks raising money abroad to continue, particularly in light of the government encouraging local companies to expand overseas.
“Japan is promoting its businesses overseas and trying to encourage companies to make overseas acquisitions. This makes sense as the yen is strong and they can pick up assets at a better price, and also because the domestic economy offers fewer opportunity,” said the DCM source.
This stance has been underpinned by a recent government initiative to fuel economic growth. On March 13 the Bank of Japan (BoJ) disclosed plans to make ¥1 trillion (US$12.5 billion) in US dollar-denominated loans over the next two years to banks. The banks can only use the money for lending and investments aimed at stimulating Japanese growth.
“We also expect the new USD facility to bolster megabanks’ willingness to support overseas clients’ ventures by, for example, lending to trading companies for resources-related acquisitions, or to manufacturers for production line expansions. We consider the size of the programme to be meaningful in the context of recent overseas acquisitions by Japanese banks and companies, wrote Moody’s in a report on March 19.
Large acquisitions by Japanese banks and corporates this year include Dainippon Sumitomo Pharma’s US$2.63 billion offer for Boston Biomedical and Mitsubishi UFJ Financial Group’s US$1.5 billion bid for Pacific Capital Bancorp.