Japan to Help California ?

Japan finds itself in a bind. Although Japanese portfolio capital outflows have been strong in recent weeks, they have not been sufficient to offset the purchases of yen. Japan needs the yen to be sold. On the other hand, some US states need funds. One way to square the circle emerged late yesterday. The Japan Bank for International Cooperation offered to lend the state of California money to help pay for a high-speed train that is expected to cost as much as $40 bln.

Recall that JBIC has another ongoing program to promote the samurai bond market. Samurai bonds are yen denominated bonds issued by foreign corporations or sovereigns. The yen raised is often converted to the issuers functional currency. JBIC has offered a program of insuring some of the samurai issued by developing countries.

Earlier today, Mexico announced it will sell about JPY150 bln of yen bonds backed by JBIC in October. At the end of last week, France's biggest bank raised JPY59.3 bln in its first samurai bond sales in three years.

The issuance of samurai bonds is likely too small to make much of a difference to the yen's exchange rate given the strength of the de-leveraging forces. However, for those investors that are required to have exposure to yen bonds, the samurai bonds from emerging markets, with JBIC guarantee have higher yields that JGBs without sacrificing much credit quality. For California and other distressed US states, Japanese funds could help on the margin, but are unlikely going to be the savior.