South Korea launches samurai bond in Japan as bilateral relations improve

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The South Korean government sold its first yen bond, worth ¥70bn ($474mn), on Thursday in a sign of improving relations with Japan and as debt issuers from around the world flock to Tokyo this year to take advantage of low borrowing costs.

The samurai bond sale was announced in June after Seoul agreed with Tokyo to restore a $10bn foreign currency swap deal for the first time in eight years, in a demonstration of economic co-operation.

The multi-tranche offering of yen-denominated bonds, with maturities of three to 10 years, had an average yield of 0.7 per cent due to South Korea’s relatively high credit ratings among emerging Asian economies.

South Korean government officials held a roadshow last month for Japanese institutional investors to spur interest in the sale. Finance minister Choo Kyung-ho said on Thursday the successful offering would help revitalise economic co-operation and financial investments between South Korea and Japan.

“We have focused on reducing our funding costs and diversifying our foreign reserves by issuing yen-denominated bonds with lower rates despite high interest rates globally,” Seoul’s finance ministry said, adding that the offering had attracted strong interest globally — including from financial institutions in the Middle East, as well as Japanese investors.

Sales of samurai bond — yen-denominated debt issued in Tokyo by companies or governments from outside Japan — have surged nearly 30 per cent to $5.3bn since the start of the Japanese fiscal year in April. This is the highest in four years over the same period, according to Dealogic, with the rise attributed to the world’s lowest borrowing costs in Japan’s debt markets.

The Bank of Japan has maintained negative interest rates, while most other advanced economies have raised rates rapidly to fight surging inflation following pandemic-driven stimulus.

Average yields of 1.25 per cent have attracted global issuers such as Warren Buffett’s Berkshire Hathaway. They compare with 8.87 per cent for global high-yield dollar bonds this year, according to Dealogic.

The South Korean government’s bond sale is the latest example of sovereign funding in the samurai bond market. Indonesia issued yen notes this year, following yen bond sales from the Philippines and Mexico last year.

The move by Seoul underlines improving relations between South Korea and Japan since President Yoon Suk Yeol took office last year, with both sides trying to move beyond their longstanding historical disputes as they forge a stronger alliance with the US.

Yen bond issuance by South Korean companies had been almost frozen from 2020 to late 2022, as bilateral relations worsened due to disputes over forced labour during Japan’s colonisation of South Korea in the first half of the 20th century.

With diplomatic tensions thawing, samurai bond sales are picking up. Shinhan Bank and Hyundai Capital issued ¥32bn and ¥20bn samurai bonds, respectively, last October. More South Korean companies followed suit this year, with Korean Air and brokerage Korea Investment & Securities issuing ¥20bn yen bonds each in June and July.

“The yen bond sales are mainly due to Japanese interest rate merits while Korean companies also need to diversify funding currencies,” said Hwang Se-woon, a researcher at Korea Capital Market Institute. “More Korean companies are expected to join the trend, considering the favourable political environment.”

Analysts cautioned that the yen’s likely appreciation in the coming years could increase companies’ financing burden when their yen bonds mature, though the BoJ is seen as unlikely to shift its loose monetary policy any time soon.

“The funding conditions for yen bonds have been very favourable so far, but no one knows how long the weak yen will continue,” said Yoon Yeo-sam, an analyst at Meritz Securities.

“Some caution is needed for being exposed to currency risks as the yen is likely to gradually go up, helped by the improving Japanese economy and inflation, although its rapid appreciation is unlikely.”