Foreign companies have raised funds in the Japanese bond market by issuing Samurai bonds. But primary offerings of Samurai bonds by US corporations have essentially stopped since March 2006. This is said to have resulted from US tax concerns arising from Japan's adoption of a new book-entry transfer system.
Samurai bonds are yen-denominated bonds offered by foreign issuers in the Japanese bond market and generally both the interest and principal are paid in Japanese yen. However, Samurai bonds also include dual currency bonds, where the interest is paid in Japanese yen and the principal is redeemed in foreign currency, and reverse dual currency bonds, where the interest is paid in foreign currency and the principal is redeemed in Japanese yen. Against the backdrop of a high rising external surplus and an increase in foreign exchange reserves in Japan, Samurai bonds were issued in Japan for the first time in 1970, which is said to be the beginning of the internationalization of capital markets in Tokyo. On January 1 1996, the issuer standards, which were the standards an issuer must meet to make a public offering of bonds, were abolished, and thereafter, as a general rule, an issuer was able to offer bonds regardless of its rating. The removal of these issuer standards helped increase the popularity of Samurai bonds over the next decade.
Despite this rising popularity, the introduction of a new book-entry transfer system for corporate bonds has raised some concerns among foreign issuers. The Law for Development of the Securities Market, which took effect on January 6 2003, introduced the new book-entry transfer system and also provides that the old recorded bond system will be abolished by January 5 2008, meaning that Japan is converting its old fashioned recorded bond system to a truly paperless book-entry transfer system for bonds. The new book-entry transfer system, operated by Japan Securities Depository Center (also known as JASDEC), began to generally cover corporate bonds in addition to short-term corporate bonds (CPs) on January 10 2006, and is available both to domestic and foreign issuers.
Recorded bonds have been treated as bearer bonds for US tax purposes, but it is feared that book-entry bonds will be considered to be in registered form because, among other things, their transfer may only be made through a book-entry transfer system. Under US law, if they are in registered form, issuers will be obliged to confirm non-US ownership of the bonds each time interest payments are made. In the case of bearer bonds, the tax rules require confirmation to be made once, at or around the time the bond certificates are initially delivered or interest is first paid, whichever is earlier. If non-US ownership is not confirmed, issuers will be subject to 30% US tax withholding requirements. Due to the uncertain US tax consequences of this new book-entry transfer system, US issuers have temporarily stopped issuing Samurai bonds.
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