Roundtable: Japan’s SSAs steer bond plans through Bank of Japan and Fed rates volatility

In late September, GlobalCapital held a virtual roundtable with two of Japan’s leading SSA issuers — the Development Bank of Japan and the Japan Finance Organization for Municipalities — to discuss the issuers’ fundraising plans, their views on ESG-labelled issuance, and share tips on navigating the choppy rates environment.

Masataka Ishikiriyama, JFM: The interest rate environment has been very volatile this year, with changes from the US Federal Reserve and the European Central Bank, and with the Bank of Japan making its first rate hike in 17 years in July. But despite this environment, JFM’s fundraising has been smooth and successfully conducted. Market volatility has been very high in this period, but for the size that we have been continuously issuing, investors have been putting in firm orders.

When it comes to JFM’s direct approach, investor relations meetings have been carried out. Through these meetings, we were able to have close communication with investors. For example, in the first half alone, including web meetings, we held 130 meetings with investors, of which 100 were with domestic investors and the remaining with global investors — and we have received robust interest from them in these meetings.

Keisuke Nakayama, DBJ: For this fiscal year, we planned to raise a total of ¥1tr ($6.7bn) through the domestic and overseas bond markets. Considering the risks of changes in monetary policies in various countries, political situations, such as the US presidential election, and geopolitical risks, we were aiming for early bond issuance. In the first half of this fiscal year beginning in April 2024, our bonds progressed smoothly both domestically and internationally, with demand strong and stable.

From late July to early August, the stock and the bond markets fluctuated significantly and volatility increased sharply. We had planned to issue transition bonds for the first time by a Japanese financial institution during this period. Although the market environment became challenging, with many investors taking a risk-off approach, we managed to accumulate steady demand, including from ESG [environmental, social and governance] investors. Thanks to careful marketing, we successfully issued a ¥10bn transition bond.

Nakayama, DBJ: There was no change in our currency split in the first half of this financial year. Things went as planned with DBJ raising ¥335.9bn-equivalent from foreign currency bonds and ¥295bn from the domestic yen market.

Ishikiriyama, JFM: In the first half of this financial year, we sold one $1.5bn benchmark bond in the dollar market as part of our total ¥1.1tr fundraising plan this year.

Nakayama, DBJ: We have not changed anything special. We have been selling deals with the same maturities as always and listening to the voices of investors in the market as much as possible. But we are trying to come up with the appropriate pricings and spreads, in line with meticulous dialogue with investors. Regarding timing, at the beginning of April, we sold government guaranteed bonds, and after that, non-government guaranteed sustainability bonds in the summer, when market and geopolitical risks were contained. Therefore, as much as possible, we have been exploring deal times when market risk is the least.

Ishikiriyama, JFM: The last time this roundtable was held, the weakening of the yen was mentioned as one of the challenges for our fundraising. But since March through today, the yen has actually been getting stronger, although the yen forex rates have been fluctuating significantly. For our funding outside of Japan, we convert them into Japanese yen to on-lend the funds raised so the FX fluctuations continue to be one of the concerns. We will closely watch how the yen is going to fare, and find the right windows to issue foreign currency bonds.

Nakayama, DBJ: For this fiscal year ending in March 2025, we plan to issue a total of ¥550bn in domestic bonds and ¥450bn-equivalent in international bonds. Domestically, we have plans to sell Fiscal Investment and Loan Program agency bonds in October and January 2025, and we also plan to continue selling government guaranteed bonds.

Internationally, we regularly issue government guaranteed bonds denominated in dollars or euros, and non-government guaranteed bonds in dollars, euros and sterling. There are no plans to tap other currencies for the moment.

In the second half, we plan to sell dollar denominated government guaranteed bonds and sterling denominated non-government guaranteed bonds.

Ishikiriyama, JFM: For the full financial year, JFM plans to raise ¥1.973tr from the bond market. We have already raised ¥1.1tr, and the remainder will be raised in the second half through the issuance of domestic and international bonds.

Our funding plans are determined based on the needs of Japan’s local municipal governments. So, this constrains how much bond issuance will account for under the local government finance plan. Towards the end of the year, we are going to formulate a plan based on the budget and estimate how much shall be funded from bonds in the next fiscal year, and coordinate with the relevant parties.

Ishikiriyama, JFM: Some investors asked us questions about the interest rate rise and the impact on our business and the risks it may bring. But when it comes to interest rate fluctuation, we have enough reserves in our hands, so there is no concern about the impact on the management of the business. So, when such questions were raised, this was our answer.

I also want to reiterate that as there is big interest rate volatility in Japan and overseas, through investor relations meetings, we kept close communication with investors so we can hear their voices and concerns carefully. We have held some 130 IR meetings in the past year so we continue keeping our communication channels open.

Nakayama, DBJ: Regarding the Bank of Japan’s interest rate hike, we have not received any direct questions from investors in the domestic market. But overseas market investors have asked about the impact of the rate hike in Japan, on our business and on the business of our clients. We are carefully addressing these questions. We have taken appropriate control measures in accordance with our bank’s policy, so we currently do not anticipate a particular market risk that may have a significant adverse impact on our financial performance or bond issuance plan. We will continue to monitor the outlook for interest rates.

Since the Covid-19 pandemic ended, we have been increasing our face-to-face investor activity, in addition to web and call meetings. We plan to continue engaging with investors through marketing activities, deal roadshows and non-deal roadshows.

Ishikiriyama, JFM: This fiscal year, we held overseas investor relations meetings about issuing ESG bonds. We received multiple questions which shows that overseas investors are strongly and increasingly interested in ESG themes. Against this backdrop, the Japanese government’s sale of the ESG bonds was really favourable. As a result, we expect the issuance amount related to ESG debt in Japan to grow.

Nakayama, DBJ: The overseas market appears to be gradually becoming more aware of the Japanese government’s Green Transformation (GX) Policy. At DBJ, we have implemented our GRIT strategy as part of our midterm management plan. ‘G’ is for green, ‘R’ is for resilience and recovery, ‘I’ is for innovation, and ‘T’ is for transition and transformation. Through this, we are focusing on supporting our clients’ green and transition journeys. Investors have started to ask us about the alignment between the Japanese government’s GX policy and our GRIT initiatives. We believe that both green and transition approaches are needed for achieving decarbonisation in society, and we expect an increase in these projects and an expansion of the ESG bond market that supports them. We will also continue to support such ESG initiatives.

Nakayama, DBJ: I am aware that investors have various views on the pathway to carbon neutrality undertaken by the government or through policies, and ways of thinking about transition. But even though the time horizon might be different, as I mentioned earlier, I believe that both green [policies] and transition are effective and realistic for achieving carbon neutrality. I hope that this understanding will spread to the market globally.

Ishikiriyama, JFM: It is difficult to comment on the policymaking or approaches of Japan as a whole, but at JFM we are committed to providing funding to local governments through the issuance of domestic and international green bonds, as well as promoting the initiatives of local governments related to ESG.

Ishikiriyama, JFM: For us, the plan is to raise ¥1.97tr from bonds this fiscal year. We started this fiscal year with a plan to raise domestic green bonds in the amount of ¥20bn. But in the first half, we have already exceeded that amount to reach ¥21bn. In the second half, we expect to see continued interest from investors, so we believe JFM will be able to issue another ¥10bn of green bonds. This is the magnitude we are considering now. Outside of Japan, we started printing green bonds in 2020. Last fiscal year, we issued €500m through international green bonds, and we plan to raise a similar amount through international green bonds this fiscal year as well.

Nakayama, DBJ: This fiscal year, in the domestic market, we issued a ¥10bn transition bond. We aim to contribute to decarbonisation as a whole and to invigorate the domestic transition finance market by expanding the funding capacity to meet the growing demand for transition projects. In the international market, we continue to issue sustainability bonds. As highlighted in our Policy on Sustainability, we aim to resolve the issues of our customers and the larger society and realize the sustainable development of Japan and the world. We believe that the issuance of sustainability bonds supports the advancement of sustainable businesses. From a funding perspective, the issuance of ESG bonds helps diversify and expand our investor base, including overseas and ESG investors.

Ishikiriyama, JFM: At our institution, we started selling ESG bonds in 2020, first in the international market. An Impact Report related to international green bonds has been published, and been well received by international investors. That is the feedback we have received so far. When it comes to the purpose or use of our green bonds, it has been limited to specific projects and has been very clear-cut, which investors also like. There has always been enough demand from investors for our ESG labelled bonds.

Nakayama, DBJ: DBJ sold the very first green bond by a Japanese issuer, and this is the 11th consecutive year for our ESG labelled issuance. Our support for the market has become well recognised among international investors and we have seen stable demand for each of our deals.

Ishikiriyama, JFM: One of the challenges for us is creating the impact report. How can we provide feedback that meets the needs of investors? This is one of the challenges, especially as our funds go to support Japan’s local municipalities. We conduct a questionnaire survey of the local governments, and based on that, we create our impact report. Thanks to the support from local municipalities as to the effect of their work on environmental improvements, we have been able to disclose our progress proactively. Moving forward, we have to increasingly address challenges around determining the size of our ESG issuance, and how we use the ESG bond proceeds appropriately.

Nakayama, DBJ: We have been issuing ESG bonds for 11 years. Over the years, we have engaged with international investors and seen the practices around ESG themes as they evolve. We are aware that different investors have different perspectives and areas of interest when it comes to ESG. Through our dialogue with them, we receive various questions, opinions and feedback. These include requests for more detailed reporting and expanded ESG disclosures. We also feel that the framework of ESG itself has evolved based on market changes. We hope to continue refining these efforts while maintaining appropriate communication with our investors and ratings agencies, considering the trends in ESG.

Ishikiriyama, JFM: JFM is also supported by municipalities as investors. The local government tax revenue has been favourable, so despite the fact that the market is volatile, we are supported by significant investment money from municipalities. We anticipate that to continue to a certain extent, so we expect to achieve stable funding going forward.

My concerns are about the global economic outlook. In March, there was a trend of depreciation of the yen, and the yen forex volatility directly impacts our procurement of foreign bonds, or the issuance of foreign bonds. We have to carefully watch the forex market to ensure we can have a stable issuance window.

Nakayama, DBJ: Looking forward to the next year, there is little to be optimistic about. In addition to the factors and risks around the economic outlook, monetary policy, political situation and geopolitical risks, we have also experienced risk scenarios materialising in the market environment from the end of July to early August. Internationally, we have had successful deals at favourable timing so far, so we hope to maintain this momentum. There are still a lot of unknowns around what’s going to happen to rates and the market environment. We aim to remain focused on monitoring those and continue our funding efforts.