Caymans reeled in ¥15 trillion from Japanese investors in 2011

Kyodo

The Cayman Islands attracted ¥15.36 trillion in securities investments from Japanese in 2011, the bulk from individuals seeking high-yielding instruments in the well-known tax haven, Finance Ministry data said Sunday.

The amount represents a high level for Japan, although it is down from the ¥17.85 trillion invested in 2010, which was the highest since 2005, when the current computation method began.

The United States remained the top destination for securities investment in 2011, attracting around ¥94 trillion from Japan, reflecting large institutional investors.

Many investments sold in the British islands are complex products devised by European and American financial companies, who couple them with a vast assortment of debt and other financial vehicles. These are then sold by Japanese institutions in Japan, either directly or by incorporating them local investment funds.

The Cayman Islands often emerge as a destination for funds during reports on high-profile scandals, such as the massive pension fund meltdown at AIJ Investment Advisors Co. and the investment loss coverup at Olympus Corp.

The latest official data show that funds from not just corporate investors but also individuals are flowing into the Caribbean islands, which are known for having relaxed regulations on financial product development and lawyers and experts versed in financial affairs — two factors that allow for the swift development and launch of complex products.

With stock prices slumping and debt instruments generating paltry yields in Japan, individual investors are apparently being lured to funds set up in Caymans to invest chiefly in shares and bonds in emerging economies. They typically advertise higher returns than domestic instruments.

While the term “tax haven” has underworld associations, “we don’t have to raise eyebrows just because financial products are registered in the Caymans,” said Shingo Ide, a chief researcher at NLI Research Institute.

Nonetheless, high-yielding investments are usually accompanied by high risk. Overseas funds also have often complex structures that may make it difficult for individuals to ascertain the associated risks.

AIJ’s problem has in part been blamed on a lack of information provided to pension fund operators about how their money in the Cayman products was being managed.

Until 2005, major Japanese banks often issued Cayman-registered securities that were bought by such institutions as life insurance companies. But that activity dropped sharply in 2006 after they became less aggressive about issuing such securities ahead of anticipated changes in international capital adequacy regulations.

Individual Japanese then emerged as major buyers of Cayman products as domestic stock prices stagnated.

The Cayman Islands charges no taxes on corporate or individual income, capital gains, or asset transfers. It also imposes relatively lax obligations on registration and on disclosure of information about who owns corporate entities.

At least 24 publicly traded companies in Japan have subsidiaries in the Caymans, with many set up to reduce taxes, according to earnings and securities reports. Of the 24, 13 are financial businesses, with many of the Cayman units tasked with handling fundraising operations.

Sumitomo Mitsui Financial Group, for instance, is one of the banks that has set up companies to issue securities to raise capital. Insurance group T&D Holdings Inc. has a fund managing company that invests in assets in Japan and elsewhere. Nomura Holdings Inc. also has a “company for securities investments.”

Listed companies are not required to disclose all their overseas subsidiaries, and observers suspect there may be more than 24 companies with Cayman units.

Setting up a subsidiary in the Cayman Islands itself is not illegal, but Yukio Noguchi, adviser to Waseda University’s comprehensive finance research organization, said, “(Japanese) businesses should keep in mind that they have a responsibility to repatriate profits to the Japanese economy ultimately” by way of tax payments and other means.