Samurai Bonds : What is the Risk?

It was announced last year during the tabling of Budget 2019, that Japan has agreed on the issuance of JPY 200billion (about RM7.4b) Yen – denominated bonds for Malaysia, to settle partially over 1MDB debts.
      

You’re probably wondering what Samurai bonds are.  This the nickname for bonds issued by a non-Japanese party using the Yen as the denomination. They are usually issued in Tokyo and the issuing parties have to follow Japanese rules and regulations. These bonds give issuers like Malaysia access to Japanese capital for investments or funding operations locally.  This I-O-U is over a 10 year tenure guaranteed by the Japan Bank of International Cooperation. 

One of the perks of this bond is that the coupon rate is only 0.65% compared to the dollar coupon rate of 5.99% for 1MDB. So we pay less in terms of coupon rate. The other comforting fact is that, the Japanese market is not heavily affected by the volatility of the European or United States markets. This provides stability for issuers during an economic downturn. But the key question is the currency exchange rate: is it fixed for the duration of the bond? This was not mentioned at the Budget tabling. Otherwise we could run an exposure risk which is detrimental to Malaysia in a worst case scenario.

The new debt (replacing an earlier debt) will improve cashflow and retain our good record in meeting debt obligations. We are not the only ones tapping into the Samurai bond market. From 1970, several countries in Asia and Australasia such as Singapore, South Korea, China, Thailand, Hong Kong, India, Philippines and New Zealand have done the same.

References: Samurai Bond, by James Chen, Investopedia.

Samurai Bond, Financial Dictionary, Investing Answers.

“What is a Samurai Bond and Why It May Be the Only Way to save Malaysia”, Caitlyn Ng, Loanstreet.

“Asian bond structures in Tokyo : History, Structure and Prospects”, by Fumiaki Nishi and Alexander Vergus.