Shogun Bond

What is Shogun Bond?

Shogun bond is a type of bond that is issued in Japan by foreign entities, including corporations, financial institutions and governments, and denominated in a currency other than yen.

Understanding Shogun Bond

Shogun bonds were named after the Japanese word for the traditional military leader of the Japanese army. A Samurai bond is similar to a Shogun bond, but samurai bonds are denominated in yen, while Shogun bonds are issued in foreign currency. An example of a Shogun bond would be a Chinese company issuing a renminbi-denominated bond in Japan. Foreign currency Shogun bonds issued in Japan are available to both Japanese and foreign investors.

The first Shogun bond was issued in 1985 by the World Bank, in consideration of the Japanese government’s effort to broadly internationalize the Japanese yen and liberalize the nation’s capital markets. The bond was denominated in U.S. dollars (USD). Southern California Edison became the first U.S. corporation to sell dollar-denominated Shogun bonds, also in 1985.

Early in its history, the Shogun bond market was restricted to supranational organizations and to foreign governments. Tax revisions by the U.S. in 1986 incited some early interest in the bond, as the subsequent easing of rules relating to the bonds gave greater flexibility to private companies in the Shogun bond market.

Early Challenges for Shogun Bonds

After peaking in 1996, Shogun bonds struggled to gain traction in Japan for a number of reasons, such as:

• Japan wanted to focus on high-quality yen-denominated bonds instead of those issued in a foreign country.
• Japanese investors at the time had little knowledge of how international markets worked and were particularly risk averse, and thus shied away from an investment they didn’t yet understand.
• Registration period for issuing Shogun bonds was extremely long and the documentation requirements were extremely difficult, especially in comparison to Samurai bonds.

As a result, Shogun bond issuance hovered at near-zero levels for many years, before reaching a new high in 2010.

Motivations for Shogun Bond Issuance

Corporations, governments, and institutions cite multiple reasons for issuing Shogun bonds. Here are four recent historical examples that describe their specific reasons for using Shogun bonds as a borrowing resource:

• In 2011, Daewoo issued Korea’s first Shogun bonds, drawn by lower borrowing costs in Japan amid market turmoil in Europe and the U.S. The company also stated that the Shogun issuance would help diversify its sources of funding. Daewoo also planned to use the proceeds for investment in resources exploration projects and for general corporate purposes.
• In 2012, Hitachi Capital issued the first Hong Kong-dollar (HKD) Shogun bond. The company used the sale to finance its business expansion, including mortgage loans, as well as for general corporate purposes.
• In 2016, the World Bank issued the first Shogun Green Bond, using the funds to support lending for eligible projects that seek to mitigate climate change or help affected nations adapt to it.
• In 2017, South Korean credit card company Woori raised $50 million via its sale of Shogun bonds, using the proceeds from the sale to repay its maturing debt, among other reasons.