Companies in Japan are rushing to sell dollar-denominated bonds, marking one of the biggest increases in issuance this year among major economies, as investors brace for a divergence in monetary policy between the U.S. and Japan over differing economic conditions and the approaches of the two nations’ central banks.
Yes, the US Federal Reserve raised interest rates to fight inflation that has risen since the COVID-19 pandemic. This led to an increase in the cost of borrowing and a decrease in inflationary pressure.
Meanwhile, the Bank of Japan – BOJ – has long pursued a policy of negative interest rates and yield curve controls to stimulate an economy suffering from deflation and stagnation. However, the BOJ has recently begun to gradually move away from this policy, which could lead to higher rates.
These different approaches create divergences in monetary policy that affect investment strategies and bond markets.
What distinguishes Japanese companies from global counterparts in securing dollar financing
Japanese firms are increasing the issuance of dollar bonds, taking advantage of the different currency policies of the US and Japan. Last week, Kyushu Electric Power Co. became the latest Japanese issuer to sell dollar bonds, joining lenders such as Meiji Yasuda Life Insurance Co. and Marubeni Corp. The company aimed to attract a broader investor base that was not focused on the domestic market.
Japanese companies issued $32.6 billion in U.S.-denominated debt, a three-year high and up 60% in the fiscal year. which started in April. This is a faster growth rate than in other central issuing countries – the United Kingdom, Canada and Germany.
Increase sales highlights transformation, faced by issuers and investors as the US Federal Reserve embarked on an easing cycle and the Bank of Japan reversed course. This creates an attractive environment for Japanese companies to issue dollar bonds at a lower price.
Investors in dollar bonds can diversify their portfolios by buying debt obligations from Japanese companies that issue infrequently and have high quality. Borrowers can raise dollar-denominated funds at a discount, and if the yen strengthens, they will need less Japanese currency to repay dollar-denominated debt.
“When interest rates are low or stable, it will be easier for companies selling dollar bonds for the first time in a long time to do so,” – the head of the credit research department of Manulife Investment Management Japan – one of the largest insurance and investment companies in the world – commented on the trend.
The Fed’s 50-basis-point cut in interest rates partially contributed to a narrowing of corporate credit spreads, which is desirable for issuers around the world. September was the second busiest month of the year in Asia, with Kyushu Electric entering the dollar debt market for the first time in 27 years, according to Bloomberg data.
The spread on dollar bonds fell to 89 basis points, the lowest since mid-June, on expectations of further rate cuts by the Federal Reserve, according to a Bloomberg index.
Why Japanese companies need dollar bonds
By raising funds in dollars, Japanese companies can expand overseas, which is important given the shrinking domestic market due to an aging population. This strategy helps them diversify their sources of capital and reduce their dependence on the Japanese market. For example, Japan’s largest banks have sought to expand their operations in the United States, emphasizing sectors such as syndicated lending and capital markets.
A Manulife expert said companies can only survive in Japan, where the aging population is shrinking, if they invest overseas.
How it relates to US monetary policy
The US Federal Reserve affects global interest rates. When the Fed raises rates, the cost of borrowing in dollars rises, which can make dollar bonds less attractive to investors. Conversely, lower rates make borrowing cheaper, stimulating the issuance of dollar-denominated bonds.
The Fed’s quantitative easing or tightening policies affect the availability of dollar liquidity in global markets. Greater liquidity is fueling demand for dollar-denominated bonds as investors look for safe investment vehicles.
The monetary policy of the United States affects the exchange rate of the dollar. A strong dollar can make dollar bonds more attractive to foreign investors as they expect stability or growth in the value of their investments.
The Fed’s inflation control policies also affect bond markets. Low inflation contributes to the stability of income from bonds, which makes them more attractive to investors.
Impact of the trend on the Japanese yen
Magnification issuance of dollar bonds may lead to a strengthening of the yen. This is because companies that borrow dollars can exchange them for yen to finance their operations in Japan.
Sectors of the Japanese economy that benefit most from dollar financing
These are primarily energy, insurance and trade: companies such as Kyushu Electric Power use dollar bonds to finance their international projects. Insurer Meiji Yasuda Life Insurance is also actively attracting dollar funds to diversify its investments. Marubeni Corp. and other large trading companies use dollar bonds to finance its global operations.
Risks for Japanese companies associated with this strategy
If the yen weakens against the dollar, companies may face higher debt service costs. Attracting dollar funds can increase the dependence of companies on international financial markets, which can be risky in case of global economic shocks.
The relevance of this trend for the world economy
The relevance of this trend lies primarily in the opportunity for investors to diversify investments, reduce the cost of borrowing, expand into international markets and influence exchange rates. Thus, investors get the opportunity to diversify their portfolios by buying bonds of Japanese companies that rarely issue dollar bonds.
For Japanese companies, issuing dollar-denominated bonds may be more profitable due to lower borrowing costs, especially in an environment where the US Federal Reserve is cutting interest rates. Japanese businesses use the raised funds to expand their operations abroad, which is especially relevant against the background of a shrinking and aging population and limited growth potential in the domestic market.
A stronger yen could reduce the need for Japanese currency to repay dollar-denominated debt, affecting exchange rates and global financial markets.
Tatyana Morarash
