* JFM and DBJ consider euro-denominated bond issues
* Move comes as cost to convert euros to yen drops
* Further ECB monetary stimulus may increase the appeal
By Frances Yoon
HONG KONG, May 28 (IFR) - Japanese borrowers will pay close
close attention to the European Central Bank's interest rate
decision next week as they consider forays into the
euro-denominated debt market.
The ECB is expected to cut rates among other policy measures
to support the eurozone economy when it meets June 5. The moves
could continue to make euro-denominated debt cheaper than US
dollar debt to Japanese state-owned entities, and may spur
borrowers like the Japan Finance Organization for Municipalities
(JFM) and the Development Bank of Japan (DBJ) to sell bonds in
JFM, for one, is examining the possibility of issuing a
non-guaranteed benchmark global bond in euros for the first
time. The agency's last four bond issues have been five-year US
"We are looking to further diversify our investor base and
are looking at benchmarks in longer tenors," Atsuhito Tanaka,
the director-general of JFM's finance department, said. "In the
euro market, seven and 10-year tenors are benchmark tenors."
Tanaka indicated, however, that its first bond of the fiscal
year, which JFM expects to sell around July, may still be issued
in US dollars. But the issuer is keen to discover different
markets to tap new investors. If JFM moves to euros, other
agencies may follow suit.
The top motivation for Japan's agencies is cost. The price
of selling a euro-denominated bond is cheaper now than selling a
US dollar bond if the proceeds are swapped to yen.
That is because the cross currency basis swap between the
euro and yen dropped below the swap between the US dollar and
the yen in mid-April for the first time in several years.
The move in the basis swap is the result of investment flows
moving out of Europe amid expectations the central bank will
lower interest rates.
Because more money has fled euros for dollars, the five-year
cross-currency basis swap between the yen and US dollar fell to
-47.6 on May 22 from -58bp at the end of last year. The closer
the swap is to zero, the more expensive it is for Japan's bond
issuers to swap US dollar proceeds to yen.
The swap contract between the euro and yen has been stuck at
-45bp for most of this year.
While the appetite of global investors for European assets
seems to be simmering down, judging by the move in the basis
swap, it remains unchanged for Japan.
Until recently, that was not the case. Since last May, when
the Federal Reserve first hinted it would scale back its efforts
to stimulate the US economy, the yen and euro moved in similar
directions against the dollar.
That correlation has shifted since March, when the euro hit
its highest level since October 2011 and the yen remained in a
range of ¥101 to ¥103 per US dollar.
The shift is making it cheaper for Japanese companies to
sell euro-denominated bonds.
Besides the lower cost of converting debt proceeds back to
yen, yields in Europe also have continued to drop, making
overall funding costs lower. In May Germany issued 10-year bonds
with a 1.37% coupon, one of its lowest ever.
JFM has not been the only one to notice the cheaper funding
costs in Europe. Some of Asia's most frequent issuers such as
the Export-Import Bank of Korea and Korea Development Bank also
are expected to sell euro-denominated bonds after the Republic
of Korea issues a sovereign bond in June that could come in
euros, according to sources.
Korea National Oil Corp already made it official, mandating
Barclays, BNP Paribas, Citigroup, Deutsche Bank and Societe
Generale to lead a euro-denominated bond earlier this week.
European investors are likely to welcome new borrowers to
the market, yet a bond from JFM will test commonwealth attitudes
towards Abenomics and the future of Japan.
Standard & Poor's has a negative credit outlook on Japan
amid warnings of ballooning government debt, already one of the
highest among developed nations. Fitch, which slashed the
sovereign's rating in May 2012 from AA-, also has warned of the
possibility of further downgrades unless Japan's public finances
Moody's has a stable outlook on Japan, but said its
macroeconomic future will depend on the implementation of
structural growth policies. Japan is rated Aa3/AA-/A+ by
Moody's, S&P and Fitch respectively.
Japanese issuers have expressed confidence that despite
rating agency views they will be able to attract investors.
"Some investors have mentioned the risk from the government,
however, I don't see that as a negative point right now and we
expect the investor stance not to be affected," said Yasuhiro
Matsui, director of the DBJ's treasury department.
"The direction of the economy is on a positive track, and we
see macro fundamentals improving," said JFM's Tanaka. "The raise
in the consumption tax will also help improve the financial
conditions," he said, referring to an April 1 increase in
Japan's sales tax to 8% from 5%.
The DBJ, which is government owned, is among borrowers that
may tap the euro-denominated market.
The bank is planning two benchmark deals in the offshore
markets this fiscal year worth the equivalent of US$1.5bn. It is
looking into bonds that meet socially responsible investing
criteria, such as green bonds, as well as covered bonds. Both
kinds of securities are more common in Europe.
"US monetary policy has been affecting the basis swap, which
had been preferable for nearly two years," the DBJ's Matsui
said. "However, that is recently shrinking gradually. It could
shrink even further."
(Reporting By Frances Yoon; editing by Christopher Langner and