More on the Samurais ...

Well, isn't this just the way of efficient capital markets or what? A couple of days ago I did a piece on the rise of sovereign wealth funds and Japanese bond buyers (the real Samurais perhaps?) and how they acted as effective lenders of last resort, or more aptly lenders of 'ask no questions', as the former aided crumbling investment banks to shore up their balance sheets on the back of the subprime fallout and the latter providing relatively cheap debt financing. This time around we are talking about the samurais as Reuters report yet again on the rising trend ...

While banks such as Citigroup Inc and Merrill Lynch have had their credit ratings cut after multibillion dollar write-downs from the credit crunch, Goldman's ratings have a stable outlook. Samurais from U.S. financial firms have typically been particularly popular among Japanese investors and have been used as a way for the institutions to make their names better known in the world's second-largest economy. Japan has also proved to be fertile ground for institutions needing to raise cash as its banking system has not suffered much from the credit crunch and its cash-rich investors are eager to put money to work.

Goldman and Westpac sold a combined 225.5 billion yen ($2.1 billion) of Samurai bonds, both with dual fixed- and floating-rate tranches. That followed 150 billion yen of sales last week from Morgan Stanley, French automaker Renault . and South Korea's Hyundai Capital

As always when we have transactions like this there is a both a supply and demand side (which tend to be a bit difficult to discern in this present context since both parties could represent both sides of the scissors depending on the way you look at it). I choose to denote the Japanese Samurais who are buying the debt as suppliers of capital and as I have argued I see three fundamental reasons to why they are willing to lend a helping hands to the children of the City and WS and thus why the companies are turning to Japan in the first place ...

• The relatively high overall stock of capital in Japan.
  

• An immediate and concrete market consideration in the form of the relatively favorable lending conditions compared to the interbank rate in Europe and the US.

• The low yield environment in Japan and the increasing decline in home bias amongst Japanese investors.
  

Now, it should not be so difficult to see why the banks and others are looking to Japan in the first place but what about the supply of capital. I mean, why would Japanese investors be interested in providing capital at all or as Scott Peterson points out in a comment to my recent post on this topic ...

I can see the logic from the US investment bank point of view in that Japanese savings has been neglected; but I would question the wisdom of Japanese investors purchasing these issues when US investment banks are having difficulty getting dollar buyers to bite and the investments that have been pitched by the investment banks in recent years have to a great extent been poor risks. Which is why there is a credit crunch occurring at the moment.

Well, this is great question in all of this and why we need to watch carefully since the current trend is as much a sign that Japanese investors are hungry for yield which they cannot find at home (remember that this income moves right in on the income balance pushing up the external surplus and thus stock of savings in Japan) that it is a sign of how banks and other companies are scouring the world for capital. That does not mean that Scott does not have a point but this is all a question of the risk you are willing to take on relative to the return and how Japanese investors might just be changing or not. As always we will see as we move forward.