What is a samurai bond?

A Samurai bond is a yen-denominated bond that a non-Japanese company issues in Tokyo and is subject to Japanese regulations.

Euroyens are another term for bonds denominated in yen that are issued outside of Japan, usually in London.

How a Samurai Bond Works

If a business needs foreign cash or thinks it could get favorable borrowing rates elsewhere, it may decide to join a foreign market. A corporation that wishes to enter a foreign market may do so by issuing bonds designated for that market, which are bonds valued in the target country’s currency.

Simply put, a foreign issuer issues a foreign bond in the home country’s currency on the local market. The primary purpose of foreign bonds is to provide corporate or sovereign issuers access to a capital market that is separate from their home market so they can raise money.

An outside issuer seeking entry into the Japanese debt market would issue Samurai bonds. Samurai bonds provide issuers with access to Japanese investment money. Non-Japanese businesses may enter the Japanese market using the revenues from the issue of Samurai bonds, or they can be exchanged for the issuing firm’s local currency and used for ongoing activities.

Issuers may change the proceeds from the offering into a different currency at the same time in order to take advantage of lower costs that may come up because investors’ preferences change in different segments of the market or because of temporary market conditions that have different effects on the swaps and bond markets. You may also use samurai bonds to hedge against foreign currency rate risk. Companies that issue bonds and operate in shaky local economies may choose to do so on the Japanese market, known for its steadiness.

Samurai bonds shield Japanese investors against exchange risks associated with buying bonds denominated in foreign currencies.

The Advantages of Samurai Bonds

The Japanese yen is used to represent samurai bond values. Because Samurai bonds are issued in yen, a business or government may use them to enter the Japanese market without worrying about the currency risks of making a foreign investment.

The bonds attract Japanese investors and provide international issuers access to financing since Japanese bond laws govern them. Samurai bonds are appealing investment options for Japanese investors since there is no currency risk associated with owning these bonds.

Illustration of a Samurai Bond

The Indonesian government issued 40 billion yen, 50 billion yen, and 10 billion yen in three-, five-, and seven-year Samurai bs in 2017 to expedite the country’s infrastructure development plans.

As of 2017, almost one-third of all outstanding Samurai issuers were U.S.-based. U.S. issuers cannot deduct their interest expenses for freshly issued bonds, and investors’ coupon payments are subject to a 30% withholding tax.

Shogun Bonds against Samurai Bonds

The Shogun bond, issued in Japan by a non-Japanese issuing firm and not denominated in yen, should be distinct from the Samurai bond.

Conclusion

• Foreign corporations issue samurai bonds in Japan with yen denominations governed by Japanese laws.
• Businesses may choose to issue yen bonds to take advantage of Japan’s low-interest rates or to become more visible to investors and markets in Japan.
• Currency futures and cross-currency swaps are often used to reduce the risks of obtaining funds in the Japanese yen.
• Similar to Samurai bonds, foreign companies also issue shogun bonds in Japan. However, they are not valued in yen.