Why a weak yen is buoying sustainable bond issuance

Look towards the East. Sustainable bond issuers are looking to reduce risk by borrowing money in yen. The Japanese government is supportive of this decision. (Picture by Total Art via ShutterStock) Non-Japanese entities accounted for 7% of sustainable bonds issued in Japan last year. The Bank of Japan has kept its key interest rate at 0.1% since 2016, while the US Federal Reserve is projected to raise its interest rate to 5.5% by the end of the year. Some notable issuers this year include Fonplata, a development bank, which sold a private placement, and Indonesia, which became the first Asian country to sell a blue bond.

An indication that the global green bond markets are growing and developing can be seen in how issuers are capitalizing on conventional market opportunities. Instead of being concerned about whether their environmentally friendly goals will appeal to investors, they are going directly to places where they can reduce the chances of financial losses.

The main focus of attention, as highlighted in a recent report by Sustainable Fitch, has been on the Japanese yen. The report revealed that non-Japanese organizations accounted for 7% of sustainable bonds denominated in yen, which was a significant increase from the previous year's 1%.

According to Nneka Chike-Obi, who is the head of APAC ESG ratings and research in Hong Kong for Sustainable Fitch, sustainable bond issuers are finding the Japanese market more appealing due to the unpredictable interest rates in the US and Europe and the depreciation of the yen against the US dollar and euro.

In September 2020, Hungary was the first to initiate a ¥62.7bn ($590m) four-part Samurai bond. Among these four parts, the two longer tranches were environmentally friendly. These tranches included a ¥15.5bn 1.03% seven-year bond and a ¥4.5bn 1.29% 10-year bond.

The Central European ruler remained solitary until recently when a multitude of sovereign authors seized the opportunity provided by the design. Samurai bonds refer to bonds issued in Tokyo by non-Japanese companies but denominated in yen.

In addition to Hungary once more, Bolivia, Chile, Honduras, Mexico, Indonesia, the Netherlands, the Philippines, and South Korea all entered the competition.

The decision to enter the Japanese market has been motivated by the prevailing conditions of low interest rates and a depreciated yen.

Chike-Obi states that developing economies can be highly responsive to the robust performance of the American currency. This has an impact on their trade surpluses and deficits, the rate of price increases, and the expenses incurred in repaying loans issued in US dollars.

To give you an idea, the yen experienced a significant decrease of 19.8% compared to the US dollar in the previous year and has continued to decline by an additional 9% this year.

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Furthermore, there has been a significant disparity in the interest rates of these two economies. The primary interest rate in Japan has steadfastly stayed at 0.1% since 2016, with Haruhiko Kuroda, the governor of the Bank of Japan, consistently asserting that the economy lacks the strength to manage heightened interest rates.

In contrast, the benchmark rate set by the Federal Reserve in the United States was maintained at 5-5.25% during the month of June. Over the past year, the Federal Reserve has increased interest rates on ten occasions, and there are predictions that they will reach 5.5% by the conclusion of this year. This effort by the central bank aims to address the issue of rising inflation within the United States.

This has made the yen a desirable currency for issuing debt. As an illustration, in April of the previous year, the Philippines offered a ¥6 billion sustainability bond tranche with a 1.83% interest rate for 20 years, which was part of their ¥70.1 billion Samurai issuance.

The National Treasurer, Rosalia De Leon, stated that the reason behind her decision to shift to yen was primarily due to financial considerations. She explained that she examined the currency extensively as it allowed her to obtain better pricing compared to the prevailing secondary levels. Additionally, she highlighted the advantage of extending her borrowing to the longer timeframe.

The Japanese administration has actively promoted the distribution of Samurai bonds through a platform managed by the Japan Bank for International Cooperation (JBIC). This governmental financial institution and export credit agency have displayed extensive support and invested in the bonds as well.

JBIC has consistently stated that it will persist in aiding foreign governments and their agencies in raising funds through the issuance of Samurai bonds in the Tokyo bond market. Furthermore, they are determined to not only sustain but also enhance the support for bonds with a particular emphasis on environmental, social, and governance (ESG) factors.

Investor and issuer enthusiasm for sustainability has noticeably increased within the country as well. This surge was initiated in May 2021, when the ministry of economy, trade, and industry in Japan introduced a structure for transition finance in order to achieve the government's carbon reduction goals for 2030 and 2050.

As per the report by the Japan Times, the proportion of sustainable investments in Japan has significantly increased and currently accounts for approximately 24% of the country's total managed assets. The trend of such investments is on the rise as well.

However, although the Samurai green offering in 2022 was relatively straightforward in its structure, what has changed this year is the increasing complexity and assurance displayed by issuers.

One remarkable example is the River Plate Basin Development Financial Fund (Fonplata), which obtained ¥7.2bn through a sustainability Samurai bond divided into two parts in the middle of March.

The development bank made a change by selling a ¥3bn 1.21% five-year sector and a ¥4.2bn 1.3% 6.5-year sector to Japanese institutional investors in the private markets. This marks a departure from the usual practice of issuing in Swiss francs for the bank.

Indonesia created quite a stir when it issued its inaugural blue bond. This made it the first Asian nation to do so. The bond, sold in mid-May, aims to raise funds for initiatives centered around the ocean conservation. Within a broader four-part arrangement, ¥14.7 billion worth of seven-year bonds and ¥6 billion worth of ten-year bonds were dedicated to this cause.

"We...anticipate that the introduction of blue bonds will pave the way for additional funding options pertaining to the ocean sector in Indonesia," expressed Suminto, the director general overseeing budget financing and risk management at the ministry of finance.

There is no anticipation for a decrease in this level of issuance. Romania, for instance, is expected to join the competition shortly. Chike-Obi mentions, "We anticipate this pattern to persist, especially among issuers from emerging markets, until the market conditions for issuing US dollars and euros get better."

The most important aspect of this trend is that it indicates a greater acceptance within the global financial markets. It feels like a long time ago - even though it was only a few years - when green bonds were only available to a specific group of investors. However, now they are being designed and managed in a manner similar to traditional bonds.

[Continue reading: Japan's willingness to adopt transition bonds]