It has been a mixed year for Japan with the country and its capital markets able to boast of significant achievements but also facing challenging obstacles. Overall, however, the tone remains positive.
Big picture-wise, the Japanese economy continues to grow at a steady 2% a year as it continues to reap the benefits of years of painful restructuring of its corporate and banking sectors. The growth is expected to continue but acceleration is unlikely because of the country’s ¥834.4trn debt. This is a major concern and a brake on stronger growth. There are doubts over whether new prime minister, Yasuo Fukuda, who is not a noted reformer, will implement the fiscal reform required to solve the problem. He is, however, making the right noises.
In the capital markets, Japan seemed to be able to find the answers, even as the questions posed got tougher and tougher. Both the equity and samurai markets have managed to come back in the face of serious obstacles.
On the face of it, it has been an abysmal year for Japanese equity markets. Volumes have slumped more than 50%, which was all the more painful given that 2006 was a record-breaking year. But the volumes tell only half the story because investment banks responded by bringing a string of complicated and highly structured deals to market.
Resona Holdings' ¥350bn preference offering, Liberty Global's ¥86.4bn block trade, Goodwill Group's ¥15bn warrant offering and Fujitsu's ¥200bn convertible are a sample of the types of deals being done. Highly tailored deals are, by definition, responses to unique situations so it is hard to say that this was a trend in the true sense of the word but it certainly saved banks from losing too much fee income in a stagnant market.
The offshore bond market, meanwhile, began the year sluggishly on concerns of possible interest rate rises. But the market took off in May when consensus began to emerge that the end of the rising interest rate cycle might have arrived or, at the very least, be near. Expectations are that the yen will rise due to the unwinding of carry trades makes the short-term outlook unclear, although almost everyone is bullish on a medium-term outlook.
Regulatory issues have also been in focus with hedge funds wondering what the new Financial Instruments and Exchange Law will mean for them. Hedge funds that play in Japan are usually located in Hong Kong and Singapore and the new law will, in theory, make it easier for them to operate in Japan by easing their registration requirements with the FSA. However, the law has the potential to increase the regulatory burden on hedge funds and, if applied too vigourously, could even drive some funds away.
The main story is that Japan is back. It may not be true boom and there are plenty of obstacles to overcome but the world’s second biggest economy is growing again and providing plenty of opportunity for investment bankers as it does so.