What Is a Euroyen Bond?
Euroyen bond—a form of Eurobond—is a type of debt security that is denominated in Japanese yen but held outside of Japan. A Euroyen is issued by a non-Japanese company (outside of Japan) in order to attract non-Japanese investors who want exposure to the Japanese currency. Note that the Euro- prefix does not necessarily mean that the bond is held in Europe.
- A Euroyen bond is a type of debt security that is denominated in Japanese yen.
- It is a type of Eurobond, where a Euroyen simply refers to Yen-denominated assets held outside of Japan.
- Euroyen bonds are issued by non-Japanese companies (outside of Japan) to attract non-Japanese investors who want exposure to the Japanese currency.
- A Euroyen bond allows companies to benefit from better interest rates abroad than what is available in their own country, and their small par values make them accessible to more investors.
- Euroyen bonds are usually issued in bearer form, meaning they are unregistered and not subject to automatic withholding tax—it is up to the investor to declare any income earned.
How a Euroyen Bond Works
Euroyen bonds gained prominence around 1984 and in the years following when Japan’s financial markets opened up to foreign investment. Today, these bonds are an efficient way for a non-Japanese company to acquire funding from investors looking for exposure to the Japanese yen—without having to operate in Japan.
Euroyen bonds are issued in the Eurobond market. The Eurobond market consists of bonds that companies issue—outside of their own countries—in foreign currencies. In the case of Euroyen bonds, non-Japanese companies issue bonds in Japanese yen primarily to appeal to investors who desire exposure to the Japanese currency (JPY). Despite the inclusion of "euro" in their names, neither Euroyen bonds nor Eurobonds need to be traded in Europe, by European companies, or with the use of the euro.
Also known as offshore yen, the establishment of Euroyen allowed Japan to liberalize its capital markets and grow its position in international trade.
Benefits of Euroyen Bonds
Foreign companies may choose to issue Euroyen bonds to avoid regulations when issuing bonds registered with the Tokyo Stock Exchange (TSE). They can also avoid regulation by the Bank of Japan (BOJ), Japan’s central bank. However, Japanese law can limit the number of investors that a Euroyen bond can target.
As with Eurobonds, issuing this type of bond allows companies to benefit from better interest rates abroad than what is available in their own country. Meanwhile, they can appeal to investors because they are often not subject to automatic withholding of tax—Euroyen bonds are usually issued in bearer form, meaning they are unregistered and the Internal Revenue Service (IRS) is not notified about any income earned on them. Euroyen bonds also tend to have small par values, making them accessible to more investors.
Their high levels of liquidity mean that the investor has the confidence that they can actively trade these instruments. The trader is not required to hold a long-term investment, should they want to sell and reinvest. Euroyen bonds and Eurobonds can also be great ways for investors to protect their money if their own country’s currency loses value.
Euroyen Bonds vs. Samurai Bonds
Euroyen bonds are not the only way for foreign companies to issue bonds in the Japanese currency. Samurai bonds also allow foreign issuers to raise funds in Japanese yen. However, the samurai bonds are subject to typical Japanese regulations.
If a company is only looking for a short-term financing strategy, Euroyen bonds can be more streamlined and easier to set up than Samurai bonds. For example, bonds registered with the TSE must have all documentation printed in Japanese. Euroyen bonds are not bound by this regulation, saving issuers from a potentially laborious and costly translation process.
Another variation is called a Shogun bond, which is issued in Japan by a non-Japanese entity, but is not yen-denominated.
Euroyen bonds may be more appealing to companies looking to deepen their relationship with Japanese investors.
Example of a Euroyen Bond
Say that an international carmaker based in the United States also sells a large number of cars to Japanese consumers. In order to hedge against some of their JPY currency exposure, and also to potentially attract Japanese investors and deepen ties with the Japanese investing public, the company decides to issue JPY ¥1.15 billion (approx. USD $10 million) in yen-denominated Euroyen Bonds.
Because they are issued by and registered to an American company, they are also able to offer higher interest rates to investors than corporate bonds issued domestically by Japanese firms within their own country.
What Are the Main Risks of Owning a Euroyen Bond?
Aside from the traditional risks of bonds related to interest rates and the creditworthiness of the issuer, Euroyen bonds also carry currency risk, since they are denominated in JPY. This means that even if the bond gains in value, if the Yen falls relative to (e.g.,) the dollar, you can still lose money as an American investor. There is also a level of geopolitical risk exposure to Japan and the Asia-Pacific region not found in domestic bonds.
What Is an International Bond?
In general, an international bond refers to bonds that are issued outside of the United States and denominated in their own local currency. These may be corporate bonds issued by companies or government bonds.
How Do I Invest in Foreign Bonds?
If your broker has access to international bond markets, you may be able to buy foreign bonds directly. If not, there are several mutual funds and ETFs that provide more diversified access to international bond markets, such as the Vanguard Total International Bond ETF (BNDX).
How Does a Samurai Bond Work?
A Samurai bond allows non-Japanese entities to issue Yen-denominated debt in Japan. Companies might issue these bonds to take advantage of Japan's historically low interest rates, or to gain direct exposure to Japanese markets and investors.