What is a Samurai Bond
A samurai bond is a yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations. Other types of yen-denominated bonds are Euroyens issued in countries other than Japan, typically in London.
BREAKING DOWN Samurai Bond
A company may choose to enter a foreign market if it believes that it would get attractive interest rates in this market or if it has need for the foreign currency. When a company decides to tap into a foreign market, it can do so by issuing foreign bonds, which are bonds denominated in the currency of the intended market. Simply put, a foreign bond is issued in a domestic market by a foreign issuer in the currency of the domestic country. Foreign bonds are mainly used to provide corporate or sovereign issuers with access to another capital market outside their domestic market to raise capital.
A foreign issuer that wants access to the Japanese debt market would issue a bond referred to as a Samurai bond. Samurai bonds give issuers the ability to access investment capital available in Japan. The proceeds from the issuance of Samurai bonds can be used by non-Japanese companies to break into the Japanese market, or it can be converted into the issuing company's local currency to be used on existing operations. Issuers may simultaneously convert proceeds from the issue into another currency, in order to take advantage of lower costs that may result from investor preferences that differ across segmented markets or from temporary market conditions that differentially affect the swaps and bond markets. Samurai bonds can also be used to hedge against foreign exchange rate risk. Issuing companies that operate in an unstable domestic economy, might opt to issue bonds in the Japanese market which is largely defined by its stability.
Samurai bonds are denominated in Japanese yen. Thus, Samurai bonds give a company or government an opportunity to expand into the Japanese market without the currency risks normally associated with a foreign investment since the bonds are issued in yen. The bonds are subject to Japanese bond regulations, attracting investors from Japan and providing capital to foreign issuers. Since investor bear no currency risk from holding these bonds, Samurai bonds are an attractive investment security for Japanese investors.
Let's look at an example of a recent issue - In 2017, to accelerate Indonesia’s infrastructure development program, the Indonesian government issued three-, five-, and seven-year Samurai bonds worth 40 billion yen, 50 billion yen, and 10 billion yen, respectively.
U.S. issuers make up about a third of outstanding Samurai issuers, as of 2017. U.S. issuers cannot deduct their interest costs for newly issued bonds, and investors are subject to a 30 percent withholding tax on their coupon payments.
The Samurai bond is not to be confused with the Shogun bond, which is issued in Japan by a non-Japanese issuing entity, but denominated in a currency other than the yen. Other foreign bonds include Kangaroo bonds, Maple bonds, Matador bonds, Yankee bonds, and Bulldog bonds.