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July 20, 2023updated 22 Jul 2023 7:53am

Why a weak yen is buoying sustainable bond issuance

As the sustainable bond market matures, Samurai bonds have become a focal point for issuers thanks to low interest rates and weak yen.

By Adrian Murdoch

Samurai bond, Japan, yen, sustainable bond, green bond
Look East. Sustainable bond issuers are seeking to lower risk by raising debt in yen. The Japanese government are supportive. (Image by Total Art via ShutterStock)
  • Non-Japanese issuers made up 7% of yen-denominated sustainable bonds issued in Japan last year.
  • The Bank of Japan’s key interest rate has remained at 0.1% since 2016, while that of the US Federal Reserve is expected to hit 5.5% by the end of the year.
  • Notable Samurai issuers this year include development bank Fonplata, which sold a private placement, and Indonesia, which became the first Asian sovereign to sell a blue bond.

A sign the international green bond markets are maturing can be found in how issuers are taking advantage of traditional market-related opportunities. Rather than worry whether their sustainable visions will cut the mustard with investors, they’re heading straight to where they can lower financial risk.

Front and centre has been the Japanese yen, according to a report from Sustainable Fitch published last week. Non-Japanese issuers made up 7% of yen-denominated sustainable bonds issued in Japan last year, a sizeable hike from 1% in 2021.

“Sustainable bond issuers are increasingly turning to the Japanese market in light of ongoing interest rate volatility in the US and Europe and the yen’s depreciation against the US dollar and euro,” notes Nneka Chike-Obi, head of APAC ESG ratings and research in Hong Kong for Sustainable Fitch.

It was Hungary that took the lead in September 2020 with a ¥62.7bn ($590m) four-part Samurai bond of which the two longer tranches – a ¥15.5bn 1.03% seven-year and a ¥4.5bn 1.29% 10-year – were green.

The Central European sovereign stood alone until last year when a flood of sovereign issuers took advantage of the format. Samurai bonds are yen-denominated bonds issued in Tokyo by non-Japanese companies.

As well as Hungary again, Bolivia, Chile, Honduras, Mexico, Indonesia, the Netherlands, the Philippines and South Korea all joined the fray.

Low interest rates

The move to the Japanese market has been driven by low interest rates and a weak yen.

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“Emerging markets economies can be particularly sensitive to a strong US dollar, which affects trade balances, inflation and debt servicing costs for dollar-denominated borrowings,” writes Chike-Obi.

To put it into perspective, the yen slumped 19.8% against the US dollar last year and is down a further 9% this year.

More to the point, interest rates between the two economies have diverged massively. The key interest rate in Japan has remained at 0.1% since 2016 and Haruhiko Kuroda, governor of the Bank of Japan, has repeatedly said that the economy is too weak to handle higher interest rates.

In the US, on the other hand, the Federal Reserve’s benchmark rate was stood at 5-5.25% in June. It has raised interest rates ten times since March last year and expectations are that they will be 5.5% by the end of the year as the central bank tries to combat inflation in the US.

This has made the yen an attractive currency in which to issue debt. In April last year, the Philippines sold a ¥6bn 1.83% 20-year sustainability bond tranche as part of its ¥70.1bn Samurai issuance, for example.

National Treasurer Rosalia De Leon made it clear that her reason for turning to yen was cost. She said that she had looked specifically at the currency because she could “price tighter than current secondary levels” as well as the ability to extend her borrowing to the long end of the curve.

Growing sophistication

The Japanese government has encouraged Samurai issuance directly through a facility operated by the Japan Bank for International Cooperation (JBIC). The public financial institution and export credit agency has both been supportive and has bought into the bonds.

“JBIC will continue to support the issuance of Samurai bonds by foreign governments and their agencies in the Tokyo bond market,” it has said repeatedly, specifically “maintaining and increasing” those “with an ESG focus”.

There has been a distinct pick up in investor and issuer interest in sustainability domestically, too. This was triggered in May 2021 when Japan’s ministry of economy, trade and industry established a framework for transition finance to help reach the government’s 2030 and 2050 carbon-reduction targets.

According to the Japan Times, sustainable investments in Japan now make up almost a quarter (24%) of total managed assets in the country and are growing.

But while the Samurai green issuance in 2022 was comparatively plain vanilla structurally, what has shifted this year is the growing sophistication and confidence of issuers.

Notable, is the Financial Fund for the Development of the River Plate Basin (Fonplata) which raised ¥7.2bn from a dual-tranche sustainability Samurai bond in mid-March.

It sold a ¥3bn 1.21% five-year tranche and a ¥4.2bn 1.3% 6.5-year tranche to Japanese institutional investors in the private markets. This was a shift for the development bank – its first issue not in Swiss francs.

What made bigger waves was Indonesia, which sold its first blue bond – indeed it was the first Asian sovereign to do so – in mid-May to finance ocean-related conservation projects. As part of a four-tranche deal, the ¥14.7bn 1.20% seven-year and ¥6bn 1.43% 10-year pieces were blue.

“We…hope that the issuance of blue bonds will open other blue financing alternatives for Indonesia,” said Suminto, the director general of budget financing and risk management at the ministry of finance.

This level of issuance is not expected to slow down. Romania, for example, is likely to join the fray soon. “We expect this trend to continue, particularly from emerging markets-based issuers, until market conditions for US dollar and euro issuance improve,” writes Chike-Obi.

What is most significant about this trend is that it shows more normalisation within the international capital markets. It seems a lifetime ago – even if it was only a couple of years – that green bond issuances were still the preserve of specialist investors. Now they are being structured with all of the sophistication and drivers of conventional bonds.

[Read more: Why Japan embraces transition bonds]

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