Total issuance by Japanese borrowers topped $25 billion, on September 1 1999, surpassing the $21 billion traded in the same period last year. The Japanese Euro-MTN market has been on a rollercoaster ride in the last two years. Now it is fighting back. But the nation is still reeling after the economic crisis. And the psychological impact on issuers and investors will take a long time to fade. The government is striving hard to get things back on track. Radical changes are happening in the capital markets and the banking sector. Dealers have been relieved to see business pick-up in Japan, but some are concerned whether it can keep going. Hisashi Sumiyoshi, deputy general manager, debt capital markets at Daiwa Sumitomo Bank (Daiwa), is hesitantly optimistic. He says: "We all have our fingers crossed and hope that the trend will continue. But real recovery may not be established for a while. It would only take another blip in the economy and premiums would rocket again. That's why we are concerned about year-end." Despite the Japanese government financially supporting its banking sector at the end of 1998 by injecting over ¥7,000 billion ($63.7 billion) in an attempt to boost the industry, conditions are still shaky. And, in August 1999, Kiichi Miyazawa, the newly appointed finance minister, announced an additional budget would be needed in fiscal 1999 to ensure buoyancy of the economy. Akifumi Sakurai, assistant manager, debt capital markets at Nomura Securities (Nomura), believes the public cash kick-started activity in many flagging sectors. He says: "Japanese institutional investors saw this as an opportunity to increase their investment in Japanese corporates. The number of Japanese Euro-MTN trades off our desk increased after that. The number of deals we did in the second quarter of this year was more than double that of the first quarter." But Japan is not out of the woods. The lasting effects of economic breakdown are still being seen by Euro-MTN traders. Sumiyoshi, at Daiwa, believes the investor base contracted during market difficulties and some valuable buyers were lost. He says: "The Japanese investor base hasn't expanded that much in the last three years. Some investor categories like regional banks were pushed out of the market in 1998 because the stamp premium was too high." Until last year issuance by Japanese borrowers had been rapidly increasing. The loss of confidence in the economy radically reduced business. Total issuance of non-syndicated debt in 1998 by borrowers of Japanese nationality reached only $14.6 billion-worth. This was only half the amount traded in the previous year, when figures topped $28.9 billion. This is according to MTNWare, excluding financially repackaged borrowers and self-led issues, and deals of more than $250 million and with a term less than 365 days. Sakurai, at Nomura, noted a shift in types of issuance in 1998. He says: "Issuers increased their issuance of straight domestic bonds to raise funds, because the banking sector was reluctant to finance domestic companies." But figures recorded on September 1 this year show improvements in the market from last year. And a glut of issuance is expected in the autumn as issuers rush to get funding done before the end of the year. Many issuers have been pleased to see this turnaround in 1999. Hiroaki Nagasaka is the deputy manager of the finance department at Asahi Chemicals. He says: "We think investor confidence is returning. The issuance of bonds is fewer this year than last. And we feel that investors have good appetite for our issuance of Euro-MTNs now." But Asahi Chemicals has done only one trade so far in 1999. Its ¥1 billion ($9.08 million) reverse-dual currency note was issued in March. Though issuance is rising again, investor nervousness continues to linger. For some borrowers it is proving increasingly difficult to sell paper. Christopher Cox, director, Euro-MTN trading at Nikko Salomon Smith Barney (NSSB), says: "A few years ago we could sell the full range of credit ratings here, but that is not true now. Sovereigns and highly rated credits are in demand and there is appetite for low rated issuers offering high yield opportunities. But many European single-A borrowers have fallen on stony ground." Sakurai, at Nomura, observes the problem is also true for low rated borrowers. He says: "For those downgraded below triple-B it has become hard to issue notes, not only off Euro-MTNs but also domestic bonds. Most Japanese investors do not want the credit risk involved with these notes." Even established Japanese issuers with familiar names in the market are finding themselves in difficulty because their ratings were downgraded in 1998. Concerns about market volatility across Asia also led Japanese investors to be cautious in their spending abroad. Emerging market borrowers in Asia suffered because Japanese investors were reluctant to take credit risk. Though dealers believe this situation is improving, there are still obstacles to overcome. Cox, at NSSB, says: "Japanese investors will look at Asian credits. They feel more comfortable with regional credits than those of Latin America, for example, but they still need convincing that stability can be assured." The type of notes sold into Japan has been affected by market dislocation. Twenty-nine percent of notes issued in yen between January 1 and September 1 1999 have had terms of 365 days or less. And for notes with longer maturities investors increasingly request the safety net of a built-in call option. Sakurai, at Nomura, says: "Notes with very short terms such as six months, one year or two years, have become favourable with Japanese investors who want to limit credit risk. Also as the yield curve of the yen has flattened at a very low level, investors wanting to get higher interest rates with structured notes have tended to take risk such as yield risk or foreign exchange risk and have chosen callable notes. Bermudan callables and knock-in options have been especially popular." Dealers have been under pressure during difficult market conditions to please both issuers and investors. Cox, at NSSB says: "The flat, stable dollar yield curve and low interest rates in Japan means that our challenge is to create increasingly complex structure ideas. If this situation changes going forward and Japanese rates rise the market will revert back to comparatively vanilla business again." Historically, Japan has been viewed by the rest of the world as a land abundant with cash-rich investors. Five years ago yen topped the currency league table for Euro-MTN issuance according to MTNWare, for non-syndicated debt, excluding financially repackaged facilities and self-led issues and trades of more than $250 million and with a term less than 365 days. Between 1994 and 1997 yen remained in pole position with over $200.7 billion-worth traded and a 50the market, compared to only $88.5 billion. But in 1998, the number of yen trades plummeted. Yen lost its spot at the top of the currency league table. Only $32.3 billion-worth were traded. On September 1 1999, issuance was still down from previous years at only $31.4 billion-worth. In the wake of Emu, yen has a new competitor in the euro. It has stolen the crown in 1999, over $36.8 billion-worth has been issued. If Japan is to recover its former glory as a Euro-MTN superpower it must combat the hurdles of market deregulation and reform in its banking sector. Difficulties in the Japanese economy last year led to the collapse of many domestic houses such as Yamaichi and Hokkaido Takushoku. Yamaichi's downfall culminated in an official of the bank crying on national television. Mergers occurred between others, including Daiwa and Sumitomo Bank and Mitsui Trust and Chuo Trust. And the merger of Fuji Bank, Industrial Bank of Japan and Dai-ichi Kangyo Bank, scheduled for autumn 2000, was announced in August, this year. Consolidation and the arrival of foreign banks in Tokyo has led to fiercer competition within a contracting sector. American house, Salomon Smith Barney, dramatically increased its distribution in Japan when it merged with Nikko Securities, in 1998. And when smaller domestic banks began to crumble, the new global bank seized the opportunity to step in. Cox, at NSSB, says: "We've seen a number of scandals within domestic banks which has affected their business. Some public sector accounts have been restricted from trading with institutions which have been reprimanded or fined. This has led to a general increase in the openness to deal with non-Japanese houses." But Sumiyoshi, at Daiwa, believes foreign banks don't have the necessary relationships to compete with local banks: "Competition within the banking sector is increasing but foreign houses still don't have the placing power, with the exception of those which have merged with Japanese banks." But he adds that some domestic houses are being left behind in a rapidly changing industry. He continues: "Some Japanese banks are late-comers and are having a hard time finding and opening accounts with investors now. If they haven't built up good relationships it is difficult for them to get a foot in the door with the real investors involved in private placement." The government's Big Bang initiative, begun two years ago, has been a positive step in cleaning-up Japan's ailing financial sector. The Ministry of Finance is hopeful that growth in the capital markets will be boosted through improved technology, the injection of public cash to pay off bad debts and deregulation. Koichiro Arai, chief economist and director at the Institute for International Monetary Affairs, emphasises that deregulation is essential for sustained progress in the markets. He says: "The Financial Supervisory Agency is working hard to streamline and restructure the financial system. Our economy moves very slowly compared to London, which has electronic trading. But over the next few years, with increased computerisation, we should see gradual but steady growth." And Clifford Dammers, secretary general at International Primary Markets Association, is confident that Japan will emerge from economic crisis battling again. He believes the nation has the necessary requirements to get itself back to the top. He says: "In the long run the Japanese economy will pull out of its malaise and resume its past strength. The Japanese have a good savings rate and are prepared to take a long-term view, these two things are essential for sustainable economic recovery."
August 04, 2000
