Outlook and Risks for Japan’s Bond Markets

Raising Standards for Bond Issuance and Circulation

Despite a global economic downturn, demand remains strong among bondissuers to raise funds from the Japanese market. Daiwa Securities SMBC Senior
Executive Officer Takatoshi Wakabayashi and Executive Officer Hisato Oiwa
talk to Institutional Investor about recent trends in the Japanese bond market
and their company’s strategy for expansion throughout Asia.

Daiwa Securities SMBC is ranked number one in a variety ofleague tables, particularly in the Japanese domestic straightbond field. How do you account for your company’s current bondmarket capabilities?
Our company maintains the highest standard of capabilities
in both bond issuance and circulation markets domestically. Theleague tables and our award as IFR’s Yen Bond House of theYear for 2008 reflect this. Bond issuance and bond circulation
are sort of two wheels of one cart. One wheel cannot be strong
without the other. Due to our alliance with Sumitomo Mitsui
Financial Group, we have a vast coverage of client network andalong with the strong distribution network of Daiwa Securities,
we have a great balance of the two wheels.
Thus, although the league tables and IFR award make thestrength of our bond issuance more visible, our distribution
network to a broad range of investor classes is actually behind
it. This does not apply only to bonds. Through our strong ties
and trust from our investors, we are poised to provide all sortsof services based on the needs of our clients.
With the investment environment becoming all the more severe,
more companies are facing difficulties in market-making withinvestors. But our position has steadily improved. This is possible
because we have deep and close ties with large financial firms,
local banks, credit unions and smaller corporate investors, etc.
Amid the current financial turmoil, how will risk reduction
among investors affect the Japanese straight bond market?
And how will you cope with that?
It is impossible to drastically change this major downturn trend. Last
September, we first saw a decrease in the amount of bond issuanceand since October we have seen a further significant decline.
In such an environment, it’s very important that investors fullyunderstand the risks of investing in each bond. Of course, wehave been actively engaged in investor relations so far. But this isbecoming more and more important. We will step up those efforts.
On the other hand, there is still strong demand amongbond issuers to raise funds from the Japanese market.
But the situation has changed a lot. We need to work
hard to make sure our clients understand the obstacles toraising capital in the current circumstances. More stringent
requirements are needed to issue bonds.
Why should foreign issuers consider a Samurai bond in thisrisk-averse environment?
The samurai bond market has been closed
since September, with Daimler AG’s issue thelast success. Unfortunately, issuances ceased
amid defaults on samurai bonds.
But overseas financial institutions still havestrong appetites for Samurai bonds. To restart
the market, it would be best to lead off withissues from the highest-rated entities. Indeed,
there are signs now that some overseas
issuers are planning to issue their first-evergovernment-backed samurai bonds in Tokyo. We hope to leadmanage several of those issues.
What trends do you see in Japanese government bondissuance?
Japanese government bonds have been bought very
aggressively recently as investors sought risk-free assets. Thishas pushed 10-year yields to around 1.2 percent from about
1.5 percent, despite concerns increases in bond supply will
overwhelm investor appetite in the future. Investors have beenvery sensitive to risks. But those yields may rise by year-end.
The Japanese government has constructed a sound, thoroughly
tested framework to sell government bonds. So we’re notexpecting high market volatility. The government will increase bondsupply by tailoring it to investors’ needs, in any case.
(Left) Takatoshi
Wakabayashi,Senior Executive
Officer, Head of
Global Investment Banking;(Right) HisatoOiwa, Executive
Officer, Head of
Capital Markets
and Syndicate

Market players say the Asian bond markets have not grownas much as expected in recent years. What is the future of
the Asian bond markets and what is your strategy to expand
your business in them?
The idea of the Asian Bond Market Initiative (ABMI) has
been floated and discussed for the past several years by suchorganizations as the Asian Development Bank and the Japan
Bank for International Cooperation, for instance. The concept ofthe ABMI has two objectives. One is to establish and develop
a local currency bond market in each nation. The other is toestablish the bond markets by attracting Asia-based money
denominated in the dollar, euro and yen. Those efforts are being
made simultaneously, but it takes time to achieve them.
Those initiatives have been taken by each nation in thepast few years, and our company has also tried to contributeto them. This will just take time.
Asian corporate bond markets such as China’s are also
expected to grow rapidly. Having Hong Kong and Singapore as
our main hubs in Asia, we plan to expand our partnership networkin the region. One of the initiatives was our alliance with Saigon
Securities last year. We are expecting the privatization of stateowned enterprises to proceed and with a keen focus on such area,
we hope to gain positioning in those business opportunities.
Contact Information
Daiwa Securities SMBC (Tokyo) Public Relations, Corporate PlanningPhone:：03-5555-3053 Email: publicrelations@daiwasmbc.co.jp
Web:：www.daiwasmbc.co.jp/english/

February 2009 • Institutional Investor Sponsored Statement