Japan: Agency borrowers go their own way

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By:
Lawrence White
Published on:

Yo Takeuchi, DBJ

"We’re going to have a new business model focusing on investment and lending under one roof"
Yo Takeuchi, DBJ

Japan’s agencies have long been dependable if staid issuers, with their government backing and tendency towards regular benchmark issuance providing a steady source of bonds yielding 15 to 20 basis points more than Japanese treasuries. Now they face change: in a series of reforms aimed at reducing government involvement in public finance, Development Bank of Japan (DBJ) is to be privatized and Japan Bank for International Cooperation (JBIC) is merging with a group of other government finance institutions to form a new firm called Japan Finance Corp. Their paths will diverge dramatically: JBIC will continue to enjoy government backing and is thinking only of tinkering with its borrowing routines by offering more benchmarks. DBJ is striking out on its own as an investment bank, and aiming rather high if management are to be believed.

DBJ, a regular benchmark yen issuer in the international markets since 1960, is to begin to be privatized in October and will gradually reduce issuance of government guaranteed bonds from the present ¥190 billion ($1.9 billion) to a projected maximum of ¥160 billion in financial year 2008.

"We’re going to have a new business model," says Yo Takeuchi, CFO of DBJ, "focusing on investment and lending under one roof, which should be a significant advantage."

This business model sounds familiar. When his attention is drawn to the picture of Lloyd Blankfein on the cover of Euromoney July’s edition, Takeuchi gets the reference and chuckles knowingly.

Strong institution

"I certainly want to build a strong institution like Goldman Sachs," he says, "and now that we’re able to expand overseas we have a good opportunity to grow. First, we have to develop our risk management infrastructure."

Takeuchi says that DBJ has more than 3,500 top clients in Japan and an unimpeachable brand name from its 60 years of development activities in the country. The goal is to diversify the bank’s portfolio by reducing total asset volume from ¥12.5 trillion to between ¥8 trillion and ¥10 trillion while increasing investment in mezzanine finance and other nonstandard loans. The bank also plans to combine loans with investments with the aim of doubling net operating income from its present level of ¥69 billion by the time full privatization is complete in 2015.

The mischievous Takeuchi used to be a director of the ministry of finance’s debt division, unashamedly describing himself as "Mr JGB" for his tireless promotion of government bonds. He tells an engaging anecdote about meeting Blankfein that ends with the Goldman Sachs chief executive joking that DBJ should buy the US broker if it wants to become like it, and while there’s a twinkle in his eye during all this talk of Blankfein and Goldman it’s clear that he’s serious about his ambitions for DBJ. Transforming it from a staid, if successful, development bank into a copy of the world’s top investment bank is a tall order to say the least, and Takeuchi acknowledges that the real challenge will be developing the bank’s risk management operations and continuing to train and hire top-quality professionals.

"I’m not saying I want a full-page advertisement in Euromoney asking for trained risk management professionals," he says, "but if any want to apply to us they’d be very welcome."

Reassuring investors

Meanwhile management at JBIC is working to reassure investors that it will continue to issue with government backing. JFC will be the sole governmental financial institution in charge of policy-based financing, and JBIC will continue to issue under its own brand name as the international wing of JFC. Tatsuhiko Takesada, senior adviser in the firm’s treasury department, says that funding before the integration this October is complete but that a maximum of ¥360 billion will be raised by the end of the fiscal year. The firm has already issued several domestic bonds towards that total as well as a large international benchmark, the likes of which might become more frequent in response to investor demand.

"The $1.5 billion global five-year deal we launched in June was the largest-ever Japanese government-guaranteed dollar bond," he says, "and we were pleased with its success. But many investors have been asking us for more liquidity, so to respond to their demands we are hoping to become a more frequent issuer of liquid benchmark bonds."