What Are Samurai Bonds? And How do Samurai Bonds Work?

Large companies and financial institutes often need to hedge currency exchange risks, invest in foreign markets, and settle payments abroad. One way of entering an overseas market is to issue bonds in that country’s local market.

Samurai bonds are Japanese Yen denominated bonds that are issued in Tokyo by foreign entities. Samurai bonds are regulated by Japanese regulation as these are Yen denominated bonds. Japanese companies and financial institutes do also issue Yen denominated bonds in foreign markets such as EuroYen Bond.

Important: Foreign Bond issuers may offer bonds in other currencies than Yen, for example, Shogun Bonds are issued in foreign currencies.

Why Foreign Institutes Issue Samurai Bonds In Japan?

Bond issuers’ prime reason for issuing bonds is raising finance in any market not just in Japan. Financial institutes or Governments Treasuries from around the world seek diversification and risk hedging against currency exchange and interest rates. Likewise, many important factors attract foreign bond issuers to the Japanese market.

  • Foreign companies issue Samurai bonds to take advantage of low-interest rates in Japan financial market
  • Foreign entities may want to issue these bonds to hedge against currency exchange and interest rate risks
  • Exposure and access to the local investor market also plays an important attraction role
  • Samurai bonds also attract local investors as they do not face currency exchange risk with Yen denominated investment

How do Samurai Bonds Work?

Entry to foreign financial markets is subject to currency exchange and interest rate risks. Samurai bonds offer a hedge against both risks to foreign issuers. The same hedge attracts the local investors as they do not face any currency translation risks, and receive gains in Yen.

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Large corporations and financial institutes need to fund their foreign operations, make profits, and hedge against currency exchange risks. They issue Samurai bonds to take advantage of a stable Japanese local market with stable interest rates. They can then use the borrowed funds to hedge against currency swaps or fund the local expansion in the Japanese market.

In simpler terms, foreign borrowers seek investment from local Japanese investors in the local market. Samurai bonds offer a liquid and currency exchange risk-free investment option to local investors.

 Local investors may be attracted to Samurai bonds with an intention of capital gains on maturity or selling the bonds in the market above par value. The secondary market plays an important role in bond demand, where investors often look to make quick gains.

Benefits of Samurai Bonds for Investors and Issuers:

Bond issuers’ prime objective with Samurai bonds can be raising capital in a foreign market. Investors as usual look for steady coupon and yield on maturity with these bonds. Both parties look to capitalize gains on these foreign issuers’ local currency bonds.

  • Issuers look to capitalize on stable Japanese economic markets with low-interest rates
  • Issuers look to diversify borrowings with foreign bonds
  • Access to the local market and hedge against interest rate or currency exchange rate also attract the foreign issuers
  • Investors look to make investments in Samurai bonds offering regular coupon payments and make capital gains on the sale of bonds in the secondary market
  • Investors face no currency exchange rate risks as bonds are issued in Yen
  • Investors also feel the investment secure as the bonds are regulated with Japanese local regulation and compliance
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Bond issuers also look for quick currency swap contracts benefiting from lower costs with Samurai bonds. The cost of raising capital may be higher in the local market such as in the US or European markets for the borrowers.

Risks with Samurai Bonds for Investors and Issuers:

Few risks are common for Samurai bonds such as issuer default risk or interest rate risk. However, as the issuers are foreign and bonds are denominated in the local currency, these bonds also some other risk factors.

  • Investors may be subject to higher tax rates with investments in the Samurai bond market
  • Local bond regulations may not offer easy access to foreign issuers in the first place
  • Samurai bonds may also face currency exchange risk due to changes in Japanese economic conditions
  • Lack of flexibility in Samurai bonds may hold investors back from investing in these bonds

The traditional Samurai bond market is considered a liquid and flexible bond market. New entrants with European and US currency-denominated bonds are changing the perceptions.

Economic recessions also play an important role in bond demand-supply market. With lower demand for Samurai bonds, local investors may find it difficult to sell the bonds in secondary or over-the-counter markets.