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Two of the biggest government agencies, Japan Bank for International Cooperation (JBIC) and Development Bank of Japan (DBJ) have stayed out of the international markets so far this year. Others have been cautious. Akio Kamiko, director general of the loan department of the Japan Finance Corporation for Municipal Enterprises (JFM), which did raise $200 million in January, says that in the present market conditions he would find it hard to justify to the ministry of finance (MoF) the cost of raising money internationally.
So were last year's deal just a flash in the pan? No, foreign investment bankers in Tokyo suggest that Japan will be back and indeed will have to come to the international markets soon in a still bigger way, as a price of growing up globally. JBIC is planning to issue before the summer, even though its financial team grimaces when asked about market conditions. And corporates may come to the fore. Telecom giant Nippon Telegraph and Telephone Corporation (NTT) will have to find funds for its $5.5 billion purchase of Verio, the American website provider and high-speed data communications provider. Its mobile telephone offshoot, DoCoMo, will also be looking for money for its $4.5 billion ventures into the international big league.
Yet in spite of the renewed activity, Japan's different culture and traditions play a part and it still lags behind most of Europe, let alone the US, in its approach to capital and fund-raising. The years of recession have taken a toll on what is still a fragile economy, so that Toyota Motor Corporation remains the only triple-A rated company. Many others are licking their wounds from being downgraded and are unsure whether they are fit enough to take on the global markets. This nervousness is compounded by doubts about whether the economy is on the runway again for takeoff. There is little pressing demand for fresh investment that would push any of the traditional corporate giants to seek new money.
Tokyo's stock market has reflected many of these doubts: the Nikkei 225 index had recovered to almost 21,000 by April, but has since slid back towards 16,000, well below half of the peak 39,000 level way back in 1989. Japan's progress to the international markets is likely to be marked by similar hiccups, but it will be promoted by continuing restructurings and rationalization along with merger and acquisition activity as Japan Inc grapples to survive and flourish as a player in a more global market.
Last year's move back to the markets owed much to the Export-Import Bank of Japan's landmark $1 billion floating-rate note issue arranged by Paribas (see box). It caught the market by surprise, but what was thought to be a gamble proved to be a well-researched and well timed re-entry of Japan Inc. It certainly encouraged other borrowers, and the good reception for the issue helped set up a virtuous cycle that saw other Japanese names come to the market and international investors look again at the virtues of Japanese paper with its small risk at a time when there was less European sovereign paper available.
The market last year was also propelled by a spurt in M&A activity. On the inbound side, the biggest deal was by Renault of France, which took 37% of Japan's number two car maker Nissan. But Japanese companies also showed themselves alive to the need to become global players or perish. Japan Tobacco's $7.8 billion acquisition of the international tobacco business of RJ Reynolds led to a landmark $1 billion bridge financing deal.
Toyota, through its various subsidiaries abroad, was the most active Japanese body in the international markets, raising almost $3.6 billion through 24 issues in the period from the start of 1999 to early May 2000. This was almost 14% of the total raised by Japanese concerns in the international markets. However, there is a cautionary tale. In its annual results for the year to March 2000, Toyota announced improved net profits of ¥406.7 billion, up by 14.2% but the company also admitted losses on foreign exchange fluctuations of a record ¥430 billion, more than $4 billion, higher than the profits and higher than the total international market borrowings of the Toyota group. It's not clear how foreign currency liabilities affected these results.
One of the main reasons for reluctance among Japanese issuers to tap the international markets is that cheap finance is still available in Japan itself, obviously at lower cost as well as less effort. Shigehito Katsuki, senior manager in NTT's finance office, says that his company had made more than 80 international issues over 40 years, so its name was well known to investors, but "in the Japanese market, credit spreads are really tight, so it is rational for us to tap the domestic market. On the other hand, fund-raising in foreign currencies is very expensive: the credit spread in the US dollar market is wider and wider and the market is very volatile; and in the Euromarket we have seen a lot of telecommunications companies in recent years and the spread is wide in relation to other sectors because of the oversupply and overall sentiment in the market is very bearish."
But the era of cheap domestic funding may be coming to an end. The Bank of Japan in May said that it might be time to revise the policy of near zero interest rates. There are plenty of signs that Japan's heavy savers are fed up with poor returns on their postal savings and beginning to look around for better. Goldman Sachs produced a valuable paper last year entitled "Mrs Watanabe: from saver to investor", which points out that in the current fiscal year an estimated ¥106 trillion of 10-year fixed-rate postal savings deposits will reach maturity. Ten years ago the fixed deposit rates offered by the post office were between 5% and 6%, against a meagre 0.15% today. The ministry of posts and telecommunications expects that ¥49 trillion ($460 billion) could flow out of the system before the end of the 2001 fiscal year - much of it presumably into equities.
Another thrust to the domestic shake-up will come from changes in pension accounting that will force companies to disclose and amortize the amount of underfunding in their defined-benefit pension schemes. The government is introducing a defined contributions scheme, the Japanese equivalent of 401K pension schemes in the US. The upshot of all of this activity is that Japan is beginning to realise it is subject to normal laws of economics and it is a waste to have the world's largest pool of savings not earning decent interest rates. Japan's household savings total more than ¥1,300 trillion ($12.3 trillion), but 55% are in bank and postal deposits, 28% in insurance and only 10% in equities.
Government guarantees in doubt
Questioning of the traditional ways is also being directed to the low interest rate funds called zaito, which the government has traditionally lent through the MoF to a large number of institutions. The best known internationally include JBIC, the Development Bank of Japan (DBJ) and JFM, but the beneficiaries also include less creditworthy bodies. A number of members of Japan's legislature, the Diet, claim the system is wasteful and inefficient and would like to see a mass stripping of guarantees from the Japan government guaranteed institutions or JGGIs as they are known. The intensely political move has got even the biggest and strongest JGGIs worried. Of course, they question whether it would create a more efficient market, and naturally they claim that it is not they who are wasteful but smaller bodies. Whether the MoF would agree to lose the considerable powers that granting a guarantee offers is one big open question; another is the chaos that might occur if less creditworthy JGGIs were denied government guarantees.
Development Bank of Japan another of the big government-owned JGGIs, like JBIC, has also undergone a name change. The Japan Development Bank, well known on the international markets, was put together last October with the Hokkaido-Tohoku Development Finance Corporation to become DBJ. It also went to the market late last year with a $750 million issue led by Goldman Sachs as a landmark issue to establish its new name in the international market.
Tadashi Aogai, deputy director of the office of financing and planning of DBJ's treasury department, says that the bank has chosen to pay slightly more for a 12-year issue rather than go for cheaper 10-year money. The 12-year issue was 50% larger than any previous JDB non-yen issue. Aogai said the bank could have got a Libor rate for 10 years but preferred to pay Libor plus 2bp for the 12 years. As a long-term development bank, the ideal maturity for its liabilities is from 10 to 30 years.
"We like to commit to the international market. Liquidity is important so we have to have a big enough issue to establish a benchmark," Aogai says. He admits that the bank's earnings had "not been so high because our loan rates are lower than for commercial banks, but our profits had been healthy and stable", certainly compared with those of Japanese city banks which have suffered a run of losses because of their high proportion of bad loans. DBJ has approval from the ministry of finance for $2 billion issues in the current fiscal year and has its eye on a global bond in the near future.
Over at JFM, which relies on domestic bond issues for most of its funding - ¥1.63 trillion in the current fiscal year for example, against ¥130 billion in external government guaranteed funding, according to the budget - there is concern that international markets are just too expensive at the moment. The MoF requires it to get funds that are cheaper than Libor plus the Japan premium, although the standard has not been set out explicitly. Last year it raised £150 million in 20-year bonds, taking advantage of the investor appetite for long-dated sterling. The international markets, says Kamiko, "offer us flexibility".
Corporate Japan is distinct from the government agencies. Japan's postwar "economic miracle" was built upon bank finance for industrial companies backed by strong cross-shareholdings and corporate relationships, which saw the development of keiretsu (business groups), almost all of which had a strong bank at their centre. Reliance on banks was reinforced by restrictions on direct corporate access to the market. It tied in well in a country where relationships have always been considered important along with the system of lifetime employment. Even today, after the banks have been thoroughly shaken up and written off billions of dollars in bad debts, Eiichi Tanabe of Mitsubishi Corporation points out that the outstanding balance of bank lending is "120% to 130% of GNP against less than 50% in the US - which symbolizes the domination of the banks in the Japanese economy."
The worst may be over
For corporate Japan as a whole, Daisuke Fukutomi, director in the corporate ratings group at Standard & Poor's, says that the worst may be over. He points out that a few years ago a medium rating for Japan's corporations was single-A, now it has dropped to triple-B. But he warns that Japanese companies are not likely to go up the credit curve as rapidly as US counterparts, not least because Japanese corporations have traditionally been structured differently with different value systems.
Thomas Keller, managing director of the ratings group at Moody's Japan, notes that historically credit was so widely available that it was not priced to reflect underlying risk. In addition the power of chief financial officers was limited so there was less of a check on investment decisions of companies. When the Bank of Japan decides to abandon its almost zero interest rates then there will be an increasingly important tussle between the drive for efficiency and market competitiveness against traditional demands of relationships and social stability.
At the same time successful Japanese companies are feeling the tensions of having to compete globally. Among the automobile manufacturers, only Toyota now has enough strength to be one of the global players. Honda has managed to maintain respect, but will have to fight for its niche. Nissan and Mitsubishi Motors have had to submit to finding a big international brother.
Funding global acquisitions
It remains to be seen how other large and as yet successful Japanese companies will cope with globalization and what impact it will have on their approach to the capital markets. NTT has made the plunge with its purchase of Verio, an expensive deal in the minds of some critics, but it still has not announced how it plans to pay for the acquisition.
NTT is a special case. Although nominally privatized, 53% of its shares are still held in the name of the MoF. This means that the option of issuing new shares to fund acquisitions is not so easy for it. NTT's finance team was not prepared to give any clues as to how to pay for Verio. Foreign investment bankers say that in other countries a company making such an acquisition would have the finance sorted out before now. Nevertheless, they express some admiration for the ability of NTT's finance department. Katsuki declares confidently that NTT had shrugged off its bureaucratic past as the monopoly telephone provider and could reach decisions quickly, so that the biggest delay was often getting stock exchange approvals for a deal.
DoCoMo is an even more interesting case, particularly because it is one of the few Japanese leaders in modern cutting-edge telecommunications. Japanese teenage girls, perhaps the last of the country's free spenders, have three essentials that they keep with them at all times - uncomfortable high platform shoes, bottles of hair dye, so they can change their colour to suit their mood, and their DoCoMo mobile telephone, used to send and receive e-mails as well as for conversations.
DoCoMo has dipped its toe in international waters with two purchases this year, including an expensive $4.6 billion 15% stake in the Dutch KPN Mobile group, but has not made the big splash that UK telecoms group Vodafone did with its aggressive purchases. DoCoMo has a two- or three-year lead in internet mobile telephony, but critics question whether it can maintain this without expanding beyond Japan.
Any expansion will have more than normal interest in the international capital markets, not least to see how the company would pay for it. One option would be to go for equity, but the question is whether parent NTT, with 67.1% of the mobile concern, would be prepared to see its holding diluted.
The tough lesson that Japanese companies are learning is that the world of global capitalism to which they are increasingly being exposed involves choices. Avoiding or evading market disciplines may look easier but can work out more expensive.
Jaybic: new life for an international borrower
A single organization did more than any other last year to breath new life into the market for Japanese international borrowings. It goes under the unfamiliar name of Japan Bank for International Cooperation or JBIC - pronounced Jaybic - as almost everyone who deals with it now calls it. JBIC made two landmark issues last year: the first in early February was an innovative $1 billion floating-rate note issue under its old name of Export-Import Bank of Japan (Jexim); then in October JBIC launched its new name with a 10-year $1 billion fixed-rate offering in the Eurodollar market.
JBIC was formed in October last year by bringing together Jexim and the Overseas Economic Cooperation Fund, responsible for much of Japan's aid programme. The new body, wholly government-owned like its two predecessor components, conducts Japan's external economic policy and economic cooperation. In fact the new body maintains two separate accounts, for international financial operations and overseas economic cooperation, corresponding to the two former bodies, so the old Jexim financial team under capital markets division director Yasuo Hirota remains in place.
The February 1999 issue was a first in several ways: the largest Japanese government-guaranteed bond ever and the first FRN by a Japanese government-guaranteed institution (JGGI). Jexim and its lead bank Paribas helped to break through the prevailing negative sentiment towards Japan, spotting that investors that had seen the supply of European sovereign paper drying up would be tempted by Japanese paper offering a spread of five basis points over Libor.
The market was initially surprised, but the issue was an outstanding success and "had the effect of pulling in spreads on all JGGI paper in the international markets and helped pave the way for the return of Japan Inc in force," Hirota says.
The second $1 billion issue was specifically intended to launch JBIC's name with investors, and priced at 91bp over treasuries. Hirota admits that the bank is not getting the small spreads as in "the good old days of early 1997" when the differential was in the single-digit range against benchmark issuers such as the EIB, compared with 15bp to 25bp now. But he consoles himself that "it is somewhat out of our hands while the country's rating is split and until Japan proves that it has turned the corner and government indebtedness begins to fall."
This year JBIC has not yet launched an issue, but is likely to do so soon. Hiromi Okada, who is Hirota's deputy, says that the government had given approval for JBIC to issue the equivalent of ¥241.5 billion or $2.3 billion in the international capital markets under government guarantee in the fiscal year that began in April 2000. This will be a record, although in the 1999 calendar year JBIC raised $2.5 billion, the remaining $500 million coming from a five-year issue in June.
"With respect to our international financial operations (previously performed by Jexim) about half of our loans are in yen and the others in foreign currencies, mostly US dollars," Okada explains. "For the yen fund, we borrow from the ministry of finance zaito fund. For the foreign currency, we issue bonds in the international market or we can swap our yen funds into US dollars. Usually summer time is not easy for launching an issue, and if we wait until after summer, that will leave too much to do [in the remainder of the fiscal year]. It is also more than half a year since our last issue [the October $1 billion bond under the new JBIC name]."
She adds that the main ambitions were to provide a series of liquid benchmark issues so that the JBIC name is firmly on the global map. One of the next targets is likely to be a Euro-denominated bond or a global issue: "It depends on our funding needs, market conditions and also the cost," Okada explains, giving nothing away."To tell the truth, the euro is not so attractive at the moment. It is more expensive than the US dollar because of the basis swap cost. Our main funding needs are in US dollars, so if we issue a euro bond, we have to swap it into dollars. We extend loans in euro and in pounds, but the amounts are very small, so so far we have swapped our US dollars into euro or sterling at the point that we make disbursement."
Leaders of last year's issues were Paribas and Goldman Sachs for the two $1 billion issues and Merrill Lynch for the $500 million. "We take into consideration many factors, including placement power, quality of proposals, commitment to the issue and also the relations and cooperation between their Tokyo offices and London and New York offices," Okada adds.
She draws a discreet veil over the relationship with the mandarins of the ministry of finance (MoF). Some Japanese working for foreign institutions complain that the ministry men aren't knowledgeable about the markets, yet MoF approval has to be obtained before an issue goes ahead. Exactly how the relationship works depends on the push and pull of personalities and bureaucratic politics.
Okada says: "Legally speaking, we seek approval for all our issues at the beginning of the fiscal year. But we have to ask them to issue the guarantee letter for the specific issue, so in that context we have to talk to the ministry of finance, but we expect the ministry of finance to have the greatest respect for our professional competence. If there is a big issuance, we talk and talk and talk, but if there is no issuance, we do not have regular meetings."
The upcoming issue is likely to test JBIC and its lead banks. Okada admits: "Markets at the moment are not easy, especially since we prefer long-term loans. The maturity of our loans are seven to eight years on the average, so we usually issue five or 10 years, sometimes seven years or 12 years. For the US dollar, the market has been very volatile and we have seen only short-term bonds or FRN, like two or three years, with no long maturity bonds. Fortunately, we have been able to wait for the market conditions to change. But we hope to see better conditions to provide us with a good window."
The big cloud on JBIC's horizon is whether the politicians get their way and manage to strip away government guarantees for borrowings by institutions like JBIC. Okada says it is not clear whether, if government guarantees were removed from the bodies receiving zaito funds, the removal would apply also to borrowings on the international markets. She points out that: "JBIC is the only institution that needs foreign funds. Other institutions are lending only in yen, but we have to lend in foreign currency, so we have to continue to access the international market. Issuing government guaranteed bonds in the global market is the most efficient way for JBIC, the government and the Japanese taxpayer. So we believe that the government should continue to give us guarantees for international borrowings."
Learning to live with low ratings
Eiichi Tanabe, acting general manager of Mitsubishi Corporation's finance department, declares that the trading company has not accessed the Eurobond markets since 1989 when it issued $1.5 billion of bonds with warrants. It is something of a trick answer - technically correct because the corporation itself has stayed away, but its London financial offshoot and other subsidiaries have remained active, with Mitsubishi Corporation Finance in London having a $12 billion programme of medium-term notes and Eurocommercial paper.
Tanabe describes the last three years as "hectic" with an accompanying sigh that suggests it has been a particularly tough time. But he brightens, declaring: "It has become much easier since March last year. Financial markets have become stabilized, mostly by the government's decision to provide a capital infusion to aid banks. Japanese investors, and those from overseas, were reassured by the government money. This changed the mood drastically."
But he concedes that Japan is not yet out of the woods: "The real problem is that the Japanese economy is still sluggish. Although we see good signs of recovery, it is still limited to certain sectors, such as semi-conductors and mobile phones, so it is not really straight up. There is a lot of money here in Japan. We have about ¥1,300 trillion yen in financial assets owned by individuals, but there are few good investments in Japan. The catch phrase for corporate treasurers is cashflow management. We should have free cashflow. That makes them compare with capital investment. Consumption is still low, so there is not such a good prospect for capital investment growth. People are still buying government bonds, even with historically low interest rates"
Tanabe and his deputy, Izumi Nemoto, have to live with the fact that Mitsubishi suffered double downgrades in its credit rating in July 1998 and February 1999 from AA- to A- by Standard & Poor's and to A2 by Moody's. (Mitsubishi's short-term paper is still graded P1 and A1.) Nemoto points out that the downgrades came not only at a time of recession but other turmoil, such as the collapse of Long-Term Credit Bank at home and the Russian crisis, all of which highlighted the particular problems of the Japanese trading companies. Tanabe adds: "The rating agencies took a very cautious view of the soga shosha [trading companies] and what they are going to do in the new era of the internet and inevitable disintermediation. At a time of a sluggish Japanese economy, the trading companies are always a kind of index of the economy."
This meant that "spreads on our long-term bonds were hiked to 50 to 60 basis points above Libor. We did not issue. That is too much to pay since we have been issuing under Libor for years. So we went to other institutions, like life insurance companies and regional banks, which had money to invest and knew better that Mitsubishi Corporation was a stable, creditworthy company." Nemoto chips in that "there is a difference between heaven and hell [between the old and the new rating]".
Tanabe says that although spreads in the Japanese market are almost zero, things are still tougher in the global markets. Nevertheless, Mitsubishi is looking again at the Eurobond markets, but is very aware of the millstone of the low rating, and may hold back and rely on domestic money at Libor.
"We wonder if European investors have some appetite for just straight corporate bonds. We know that convertible bonds are a very popular product, but that involves us in questions about issuing equity," says Tanabe "A few years ago, even with a double-A, it would have been difficult [for us] because of the attitudes of European investors towards Japan and soga shosha, But now I think it is getting better." Mitsubishi is watching to see the success of the upcoming global IPO by Lawson, the convenience store chain in which the trading company has bought a 20% stake.
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