Japan Focus

TAKAHIRO SEKIDO Chief Strategist JPY Cross-asset – Weak Samurai JPY Strategy Global Markets Research, Tokyo launches amidst shrinking JPY basis, T: + 81 (0)3 6214 4150 E: takahiro_sekido @mufg.jp

room for more JPY financing in FY21 TOMOKI HIRAMATSU Global Markets Research, Tokyo 22 APRIL 2021 T:+81 (0)3 6214 4152 E:[email protected]

JPY Samurai bond launches: Domestic launches strong during COVID but

cross-currency issuances weak on tighter JPY basis

MUFG Bank Domestic JPY corporate bond launches totaled JPY7.4184 trillion in 2H FY20 A member of MUFG, a global financial group (Bloomberg data). Issuances dipped slightly from JPY8.0317 trillion in 1H but were up on-year from JPY6.7869 trillion in 2H FY19. Volume was still substantial in 2H FY20, despite dipping in 2H FY20.

1H FY20 was roiled by the COVID-19 pandemic and domestic primary bond issuances were active on (i) rising Japanese companies’ funding demand as well as (ii) Japanese investors’ strong demand supported with an abundance of JPY funds in the domestic corporate . Another supporting factor was the Bank of Japan (BoJ)’s corporate bond buying operations. 2H FY20 issuances are likely to maintain the trend from 1H, so we expect domestic corporate bond primary market issuances to stay robust.

JPY-denominated Samurai bond primary market issuances stood at JPY144.6 billion in 2H FY20 (versus JPY322.0 billion in 1H FY20 and JPY314.1 billion in 2H FY19). This was the lowest level in 10 years. 2H FY20 issuances inevitably fell even despite issuers that continued to issue as in normal years, because of (i) zero issuances by Asian sovereign issuing names (like Malaysia) that have been issuing more every year over the past few years, as well as Australian financial institution issuers; and (ii) only small issuances of Samurai bonds by European financial institutions (See page 3).

On the overseas issuer side, cross-currency JPY bond issuances cooled because of (i) an abundance of funds supplied to overseas investors in their own currencies by their central banks; (ii) improved confidence about USD financing because of international collaboration to supply USD funds that reduced demand to diversify and stabilize cross-currency financing.

On the Japanese side, even despite the abundance of private sector funds as a result of the measures against COVID-19, JPY bond issuances fell because of (i) the stance toward risk taking among cross-currency issuers; and (ii) the ineligibility of such bonds for arbitrage trading by the Bank of Japan. As a result, we tentatively surmise that there was lack of momentum for Samurai issuances.

Samurai bond attributes: BBB zone, longer durations and room for reversal

While Samurai bond issuances on the primary market have been weak, our JPY samurai financing data (Pages 3) shows some attributes of issuances: (i) relatively low-rated issuers (BBB zone) have a higher market share; and (ii) weighted average durations have grown slightly longer, to 6.0 years, from 5.5 years in 1H.

Moreover, (iii) it should be remembered that Samurai bond issuances have fallen significantly vis-à-vis USDJPY basis swaps (1Yr-5Yr spread). We think there is potential in FY21 for Samurai bond issuances to pick up among BBB-rated issuers as they seek longer-duration cross-border financing, based on low and stable USDJPY basis costs.

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Overseas investor JPY bond flow attributes: Internationalization of JPY (overseas investors buying Samurai bonds) amidst diversification of JPY bonds for yield

Japan Securities Dealers Association (JSDA) data (page 4) shows that Japanese financial institutions were net sellers in 2H FY20, but lifers showed sizeable appetite for buying in a French issuance in December while JPY continued to internationalize as overseas investors bought Samurai bonds.

TDB issuances grew during the COVID-19 crisis, and while many are nearing redemption, Ministry of overseas securities investing data has shown considerable unloading among overseas investors, primarily because of redemptions. However, JSDA data shows that overseas investors have continued to buy TDBs and still have strong appetite for JPY bonds. While they have sold 10Yr JGBs, they have been actively buying medium-term JGBs.

Overseas investors have also been buying more government guaranteed JPY debt and FILP bonds, and their trading to balance both higher yield and higher liquidity has resembled Japanese investors’ positions with foreign bonds.

Samurai JPY financing catalysts: USDJPY basis and US-Japan credit spread gap could contribute to reversal in JPY Samurai financing

FY20 was a challenging year for Samurai bond underwriting. However, nearing the last day of FY20, a Philippine JPY issuance was announced, while an offshore JPY issuance has been held by a US company already in FY21.

Japanese direct investors fell by half in FY20, and overseas investors limited their JPY-denominated financing. Own-country currency financing dominated over cross- border financing in 2020, during the COVID-19 pandemic. JPY Samurai issuances will be concentrated in June, before the end of 1H, and whether overseas issuers will return to continue issuing Samurai bonds, as in usual years, will bear watching.

At the same time, overseas investors have been showing appetite for JPY Samurai bonds, and Japanese and overseas investor moves could be mixed, showing a stronger preference for yield. Samurai bond issuances could be absorbed right away.

JPY bond yields are fairly high in USD terms (Page 5), and JPY Samurai bond issuers and Non-Japanese investors could meet halfway in the Tokyo markets, depending on credit spreads. JPY basis widened in early March but has shrunk again since late March on overseas investors’ JPY bond flows. If JPY basis normalizes ahead of the post-COVID phase, then Samurai issuances could rebound from FY20.

In FY21, the market for Samurai Yen bonds—which are ineligible for the BoJ’s corporate bond buying operations—has begun to recover as global financial markets have started to prepare for the post-COVID phase.

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JPY SAMURAI BOND ISSUANCES BY SECTOR JPY SAMURAI BOND ISSUANCES BY ISSUER REGION

（JPY Trillion） （JPY Trillion） 1.8 1.8

1.6 1.6

1.4 1.4

1.2 1.2

1.0 1.0

0.8 0.8

0.6 0.6

0.4 0.4

0.2 0.2

0.0 0.0 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Financial Government Other industries （FY） Asia Europe Oceania Other regions （FY） Source: Bloomberg, MUFG Source: Bloomberg, MUFG

JPY SAMURAI BOND ISSUANCES BY CREDIT RATING JPY SAMURAI BOND ISSUANCES (SHARE OF TOTAL) BY ISSUER COUNTRY IN FY20

20 18 18 18 17 17 11.5% 16

14 13.4% FRANCE 12 10 10 INDONESIA 8 8 7 53.7% HUNGARY 6 6 6 6 6 5 OTHERS

4 3 3 21.4% 2 2 2 2 2 2 1 1 0 0 0 0 AA Rating A Rating BBB Rating 2017H1 2017H2 2018H1 2018H2 2019H1 2019H2 2020H1 2020H2 （FY） Source: Bloomberg, MUFG Source: Bloomberg, MUFG

JPY SAMURAI BOND ISSUANCES – OVERALL WEIGHTED JPY SAMURAI BOND ISSUANCES AND JPY BASIS AVERAGE DURATION

（Y） （bp） 8.0 （JPY billion） 0.0 100 7.2 7.2

7.0 200 6.5 6.5 -10.0 6.1 6.0 6.0 300 5.6 5.5 -20.0 5.5 6.0 5.4 5.2 5.2 5.9 5.6 5.0 5.2 400 5.0 5.2 -30.0 500 4.7 4.2 4.0 -40.0 3.9 4.0 600

3.0 -50.0 700

2.0 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 -60.0 800 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 USDJPY basis spread (5Y-1Y) Samurai Bonds issuarance (RHS, reverse scale) （FY） Source: Bloomberg, MUFG Source: Bloomberg, MUFG

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JPY SAMURAI BOND FLOWS (-: BUYING, +: SELLING) JPY SAMURAI BOND FLOWS (-: BUYING, +: SELLING)

（JPY billion） （JPY billion） -250 -300

-15 -200 -250 -57 -16 -24 -71 -16 -57 -150 -23 -30 -200 -42 -25 -33 -45-12 -12 -13 -19 -59 -46 -100 -33 -150 -38 -8 -14 -15 -3 -35 -20 -0 -3 -19 -32 -3 -29 -137 -117 -10 -50 -7 -97 -5 -17 -100 -85 -80 -18 -8 -3 -73 -11 -170 -63 -15 -34 -54 -13 -51 -2 -29 -47 -9 -5 -19 -17 -14 -0 -82 -3 -15 -4 -28-14-11 -2 -18 -132 -22 -23 -12 -1 -15 -1 -4 -14 -25 -10-12 -8 -30 -127 -12 -16 0 -8 -13 -17-13 -9 -10 -7 -3 -81 -9 -71 -4 0 4 -8 -8 -2 -2 0 -3 -53 0 2 -33 -35 -5 -2 -3 0 -10 -5 -50 -88 -35 -103 13 12 9 16 7 10 8 26 10 7 -9 6 1 0 23 1 30 26 1 -51 0 0 1 0 36 -14 52 0 -11 -14 -31 -19 1 -20 -21 -13 -11 -9 50 0 -6 4 -47 -5 21 27 21 20 22 1 2

100 50 18/5 18/8 18/11 19/2 19/5 19/8 19/11 20/2 20/5 20/8 20/11 21/2 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2020 （Y/M ）

Fiinancial institutes Business & Other Corporations Foreigners Others Fiinancial institutes Business & Other Corporations Foreigners Others

Source: JSDA, MUFG Source: JSDA, MUFG

JPY SAMURAI BOND FLOWS (-: BUYING, +: SELLING) FOREIGNERS’ JPY BOND FLOWS (-: BUYING, +: SELLING)

（JPY billion） （JPY billion） -200 -250

-6 -15 -150 -200 -9 -14 -10 -15 -40 -14 -3 -14 -16 -12 -10 -100 -150 -32 -24 -28 -7 -7 -59 0 -5 -2 -18 -16 -13 -6 -3 -4 -9 -13 -6 -83 -28 -36 -104 -21 -100 -4 -15 -11 -6 -134 -50 -36 -20 -30 -15 -11 -32 -13 -17 -21 -7 -37 -6 -7 -2 -7 -5 -7 -34 -9 -13 -5 -17 -10 -11 -25 -11 -12 -10 -21 -2 -1 -4 -24 -129 -8 -117- 10 -47 -17 -19 -54 -3 -13 -11 -21 -28 -8 -2 -5 -21 -6 -2 -4 -8 -17 -2 -3 -8 -10 -6 -97 -116 -113 -27 -20 -7 -1 -10 -17 -15 -15 -19 -9 -2 -5 -4 -23 -10 -1 -1 -7 -33 -8 -92 -109 -6 -20 0 -6 -3 0 3 -6 -2 -2 -01 -1 -03 -3 -6 -12 -013 -014 -1 -02 -01 -021 -12 -201 2 -50 -4 -34 -95 -9 -12 7 10 6 -8 5 11 10 10 12 25 5 26 9 410 -70 -12 -15 -2 -10 -74 -4 -46 1 20 5 3 0 16 -42 -57 -12 -16 -3 1 17 22 6 4 -1 2 4 1 28 -3 -14 -60 -11 -3 -58 -16 -15 -57 -14 14 41 -4 -5 -14 -46 -28 -30 48 2 1 -30 -3 -7 -13 -21 -30 -5 -5 -21 -6 -12 1 -17 -25 -13 -34 -8 -6 1 -3 -12 -14 -19 -4 -9 -2 -16 -18 -13 4 -5 -16 -7 -4 6 -11 -12 -12 -6 -10 -6 -4 -6 -241 -11 -3 -10 -10 -11 -3 -11 50 0 6 1 5 -1 -1 7 -21 5 2 1 13 13 10 31 32 26 2 0

50 100 18/5 18/8 18/11 19/2 19/5 19/8 19/11 20/2 20/5 20/8 20/11 21/2 18/5 18/8 18/11 19/2 19/5 19/8 19/11 20/2 20/5 20/8 20/11 21/2 （Y/M） （Y/M） Regional Banks Trust Banks Fin.Insts. for Agr. & Forestry Shinkin Banks Other Fin.Insts. Life & Non-Life Insurance Companies Public Offering Municipal Govt. Guaranteed FILP-Agency Bonds Samurai Bonds Corporate Bond Others Investment Trusts Source: JSDA, MUFG Source: JSDA, MUFG

FOREIGNERS’ TDB FLOWS (-: BUYING, +: SELLING) FOREIGNERS’ JGB FLOWS (-: BUYING, +: SELLING)

（JPY trillion） （JPY trillion） -35 -5

-4 -30 -2.1 -3 -1.4 -25 -1.2 -2.1- 2.6 -2 -1.1 -2.1 -0.7 -1.3 -1.2 -0.9 -1.1 -0.4 -2.0 -0.4 -20 -0.5- 0.4- 1.5 -1 -1.0 -1.4- 1.5 -0.3 -1.0 -1.0 -0.9 -0.8 -0.8 -1.2 -0.8- 0.8 -1.1 -0.7 -1.2 -0.6 -0.7 -0.3- 0.9- 0.5 -1.0 -0.7 -1.1 -0.4 -0.8 -0.3 -0.2 -0.1 -0.7 -0.1 -0.2 -0.8 -0.6- 0.4 -0.2 -0.3 -0.4 -0.3- 0.4- 0.3- 0.2 -0.4- 0.3 -0.3- 0.3- 0.5- 0.3- 0.4 -0.3 -0.4 -0.4- 0.4- 0.3 -0.5- 0.4- 0.5- 0.3 -0.3 0 -0.2 0.0 0.0 -0.1 -0.2 -0.1 -0.1 0.0 0.0 -0.00.2 - 0.2 -15 -30 0.2 0.1 0.1 0.1 0.1 0.1 0.2 0.3 0.3 0.2 0.4 0.7 -26 0.9 0.5 0.9 -25 0.6 -23 -23 -23 1 1.9 -21 -21 -22 -21 -20 -20 -21 -21 -21 -20 -10 -20 -19 -20 -20 -19 -18 -19 -18 -19 -18 -18 -16 -17 -16 -17 -16 -15 2 -14 -13 -5 3 18/5 18/8 18/11 19/2 19/5 19/8 19/11 20/2 20/5 20/8 20/11 21/2

0 （Y/M） 18/5 18/8 18/11 19/2 19/5 19/8 19/11 20/2 20/5 20/8 20/11 21/2 Long-term (over 10-year) Long-term Medium-term （Y/M） Source: JSDA, MUFG Source: JSDA, MUFG

4 22 APRIL 2021

JPYUSD CROSS-CURRENCY MATRIX: USD DENOMINATED JGBS AND UST YIELDS (AS OF APRIL 22, 2021)

(％) 2Y 3Y 5Y 7Y 10Y 20Y 30Y

JGBs 0.40 0.55 1.04 1.50 1.90 2.55 2.77 in USD

Treasuries 0.14 0.26 0.75 1.18 1.50 2.08 2.20

Gap (bps) 26 29 29 32 40 47 57

Source: Bloomberg, MUFG

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