Record sales of dollar bonds by Japanese prefectures gather steam

Dollar bonds are becoming an increasingly hot way for Japan’s prefectures and cities to diversify their funding at attractive costs.

In the latest example, Kyushu's Saga Prefecture sold its first note in the U.S. currency on Tuesday, following last week’s issuance of such debt by neighboring Fukuoka Prefecture. The bond offerings came after a record $570 million of such securities from Japanese local governments were sold to local investors in the last three months of 2020.

The popularity is all the more striking considering that the first domestic sale of prefectural dollar notes came only in 2018 by Shizuoka Prefecture.

The increase in debt issuance by prefectures and cities comes as the pandemic puts pressure on local governments all over the world to pay for economic support steps even as tax revenues falter. In the U.S., some Wall Street banks are forecasting a massive surge in debt issuance by local governments this year to take advantage of low interest rates.

Japanese local governments also face pressure to secure funding as the internal affairs ministry expects their tax revenue to fall by 6.5% to ¥38.3 trillion ($369 billion) in the fiscal year starting April 1. That would be the first decline since the global financial crisis.

Most of the dollar bonds by local governments have targeted domestic investors so far, to avoid extra costs needed to sell securities abroad, such as for paperwork or for arranging conferences with foreign institutions.

"There isn’t much difference in the cost to sell dollar bonds and yen bonds in the domestic market,” said Joji Hatake, executive director of the syndicate department at Nomura Securities Co. in Tokyo.

Dollar borrowing costs have dropped in general amid unprecedented monetary stimulus to fight COVID-19, with yield premiums on U.S. currency debt in Asia touching the lowest this month since the pandemic worsened in March.

For Japanese prefectures and cities, the fact that their dollar securities offer slightly higher yield premiums than similar notes by issuers such as government-backed organizations helps to attract investors.

Fukuoka’s 10-year bonds priced at 38 basis points over the midswap rate last week and Saga’s five-year notes had a spread of 35 basis points. Those compare with a 25 basis-point spread on 10-year dollar notes offered overseas by the Japan Bank for International Cooperation this month, and a 22 basis-point premium on 2031 U.S. currency debt sold by Development Bank of Japan.