Think Samurai over JGBs

Last year, we suggested that Abenomics might be more beneficial for small cap Japanese companies than large caps. Sure enough, the JASDAQ easily outperformed the Nikkei. In fact, the JASDAQ is still doing better than the Nikkei. This year, the JASDAQ is up 3%, while the Nikkei is off almost 8%.

Even though Japanese interest rates are extremely low, there does seem to be some foreign demand for Japanese bonds. In the week through January 24, the MOF reported earlier today, that foreign investors bought JPY623 bln of Japanese bonds. This is the most in six months.

For those foreign investors that want to buy Japanese bonds and for Japanese investors who are investing in government bonds, there is an alternative worth considering: Samurais. These are yen-denominated bonds sold in Japan by foreign entities.

Some investors do not like the samurai vehicle because on has to take credit risk. But this is not necessarily true. Japan's Bank for International Cooperation (JBIC) is a government institution and is planning on expanding a 4-5 year old program under which it guarantees 95% of the principle and interest on samurai bonds issued by emerging markets. Most recently Panama, Tunisia and Mongolia have participated in the program. 

In essence, Japan is sharing its higher credit rating with lower rated emerging market countries...for a price.  That price is a higher yield than the Japanese government offers.  For example, on Christmas, Mongolia issued a 10-year yen bond, guaranteed by JBIC.  It was offered at a 1.52% yield.  That is twice the yield that the Japanese government bond was yielding on that day.  It is not completely free lunch in the sense that there is likely a liquidity premium embedded in it.  That said, as one might expect, the samurai held in better than other emerging market debt.  At the end of last week, indicative prices suggested Mongolia's samurai was yielding 1.45%.