A samurai bond is a yen-denominated bond issued in

Tokyo Tokyo, officially the Tokyo Metropolis, is the capital of Japan, capital and List of cities in Japan, most populous city in Japan. With a population of over 14 million in the city proper in 2023, it is List of largest cities, one of the most ...

by non-Japanese companies, and is subject to Japanese regulations. These bonds provide the issuer with an access to Japanese capital, which can be used for local

investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

s or for

financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

operations outside

Japan Japan is an island country in East Asia. Located in the Pacific Ocean off the northeast coast of the Asia, Asian mainland, it is bordered on the west by the Sea of Japan and extends from the Sea of Okhotsk in the north to the East China Sea ...

. Foreign borrowers may want to issue in Samurai market to hedge against foreign currency exchange risk. Another intention may be simultaneously exchanging the issue into another currency, in order to take advantage of lower costs. Lower costs may result from

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of pr ...

preferences that differ across segmented markets or from temporary market conditions that differentially affect the swaps and

bond market The bond market (also debt market or credit market) is a financial market in which participants can issue new debt, known as the primary market, or buy and sell debt security (finance), securities, known as the secondary market. This is usually in ...

History

Samurai Bond Market was opened in 1970 when the Japanese Ministry of Finance authorized supranational and highly rated foreign government entities to issue Samurai bonds within certain size and maturity restrictions. The market opened due to growing Japanese foreign currency reserves during late 60's. The exchange rate of the yen at that time was fixed at 360 yen per

US dollar The United States dollar (symbol: $; currency code: USD) is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it int ...

. It was revalued to 308 yen in 1971 and moved to a floating rate system in February 1973. To discourage foreign exchange pressure, the

Japanese government The Government of Japan is the central government of Japan. It consists of legislative, executive and judiciary branches and functions under the framework established by the Constitution of Japan. Japan is a unitary state, containing forty- ...

decided to open

capital market A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers ...

allowing foreign entities to issue yen-denominated bonds. However, at the time the market opened, only governmental entities could issue bonds. The Blue chip corporations were allowed to issue Samurai bond later in 1978. The

Asian Development Bank The Asian Development Bank (ADB) is a regional development bank to promote social and economic development in Asia. The bank is headquartered in Metro Manila, Philippines and maintains 31 field offices around the world. The bank was establishe ...

issued the first Samurai bond in November 1970. The issue amount was 6 billion yen with a 7-year maturity, and the bond was accepted very well in the market. At first, Asian Development Bank and other high credit supranational issuers were given an access priority to the market. To control stream of issuance, these special criteria were established. Those who were unable to meet eligibility criteria could finance yen through yen-denominated private placement bonds. They were permitted to target a restricted number of institutional investments, and terms and

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...

were under close control. In 1972 the first non-Japanese 10 billion yen bond was issued by

Australia Australia, officially the Commonwealth of Australia, is a country comprising mainland Australia, the mainland of the Australia (continent), Australian continent, the island of Tasmania and list of islands of Australia, numerous smaller isl ...

. In 1979,

Sears Sears, Roebuck and Co., commonly known as Sears ( ), is an American chain of department stores and online retailer founded in 1892 by Richard Warren Sears and Alvah Curtis Roebuck and reincorporated in 1906 by Richard Sears and Julius Rosen ...

made the first corporate Samurai bond issue for 20 billion yen. At that time, Samurai market gradually became accessible to more issuers through the alleviation of eligibility criteria, which now required minimum credit ratings, and through liberalization of new kinds of bonds. In addition, Samurai bonds provided an opportunity of issuing in two different currencies, as well as

interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...

and principal were paid in either of these currencies.

Liquidation of rating requirement

In 1984, a

liberalization Liberalization or liberalisation (British English) is a broad term that refers to the practice of making laws, systems, or opinions less severe, usually in the sense of eliminating certain government regulations or restrictions. The term is used ...

step was taken to reduce the required minimum credit

rating A rating is an evaluation or assessment of something, in terms of a metric (e.g. quality, quantity, a combination of both,...). Rating or rating system may also refer to: Business and economics * Credit rating, estimating the credit worthiness ...

from double A to single A. In 1991, the minimum rating requirement for foreign governments,

central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

s, and foreign government-guaranteed institutions was lowered to triple-B. In January 1996, Samurai market eliminated the minimum requirement for credit rating, increasing

private sector The private sector is the part of the economy which is owned by private groups, usually as a means of establishment for profit or non profit, rather than being owned by the government. Employment The private sector employs most of the workfo ...

Share of the Samurai bond market.

Required standards

The eligibility criteria for issuing Samurai bonds were not loosened until April 1985. When examining applications from potential samurai issuers, the Ministry of Finance considered the tendency of the Japanese capital account balance and the liquidity in the country's economy. For the actual issuance of Samurai bonds, the Japanese Ministry of Finance set a quota per quarter year, and employed a queue system.

Borrower A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of thi ...

s, if they agreed upon the terms of underwriting, entered the quota by rotation from the top of the queue. In 1998, the Ministry of Finance's close regulatory control was annulled.

Deregulation of Samurai market

Advantages and disadvantages of Samurai bonds for investors

Advantages

*Samurai bonds provide access to a diversified and deep pool of capital. *Samurai bonds have relatively lower

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

s. *Japanese institutional investors can easily invest in Samurai bonds because they are issued in Japan. *Samurai bonds do not have to be left in the custody of securities companies or other institutions. *As for Japanese institutional investors, foreign firms are very popular because of their high name recognition and good investment rating; as many of these funds are very conservative, they prefer to invest in larger companies with international presence. *Japanese market is not subject to the same variations and market swings as the U.S. and European markets, giving companies an alternative financing source during economic downturns.

Disadvantages

*Samurai bond market has high

tax rate In a tax system, the tax rate is the ratio (usually expressed as a percentage) at which a business or person is taxed. The tax rate that is applied to an individual's or corporation's income is determined by tax laws of the country and can be in ...

s and an unclear fiscal environment. *Lack of a constant policy remains a serious concern of US-based companies. *Lack of flexibility of issuance terms and conditions that create restrictions to use bonds. *Companies that have issued samurai bonds have found high administrative burdens placed upon issuing companies. *Complicated issuing procedures and high taxes have made Samurai bond market less attractive than European markets, and experience slow growth.