Development of the Japanese Bond Market - Case Study Example

Topic: Development of Japanese Bond Japanese Bond Executive Summary: A bond is a formof loan or security loan under different terminologies. Number of people is interested in investing in bonds. Japanese bonds have faced a lot ups and downs in its development period including war effects on bond and asset pricing. Japanese bonds have a very high risk of decreasing value as the market is a place where people sell and buy their security debts in order to earn money. This market has faced a number of challenges in past few years but now it has gained popularity and is competitive with United States market. Table of contents: Introduction --------------------------------------------------------------------------------------- 3 Japanese Bond------------------------------------------------------------------------------------ 3 Wars and Markets ----------------------------------------------------------------------------- ----4 Bond Market----------------- ------------------------------------------------------------------- - 5 Japanese Bond Market------- ------------------------------------------------------------------- 6 Japanese Bond Prices --------------------------------------------------------------------------- 7 Japanese Equity Warrants------------------------------------------------------------------------- 8 Japanese Management Theory------------------------------------------------------------------- 9 Japanese Capital Market----------------------------------------------------------------------- 10 Economy and future of capitalism ------------------------------------------------------------- 11 References ---------------------------------------------------------------------------------------- 13 Discuss the Development of the Japanese Bond Market Introduction: The world is growing so fast and every body needs to achieve high goals, money and fame in limited time. For being on top, every person does their best - hard work, efforts and sincerity can only lead a person towards the top. Every field requires day to day changes and updating. The investment industry is not as high profile as it used to be following the global economic crisis but some industries are still up on their feet. There are number of features of bonds, some of them are briefly discussed below: nominal amount, issue price, maturity date, coupon, coupon dates, indentures and covenants sinking fund, options. There are different types of bonds available in market, each of which has its own features and requirements. Bond by foreign entities brings new and wide ways of earning money. Japanese bonds are sold by the Japanese government which offers a number of bonds including revenue bond and subsidy bonds. Japanese bonds are much similar to treasury bonds which are widely sold in United States under the provision of government. Japan has faced lots of problem in the market including a numbers of risks. Bonds sold by foreign markets always have a great scope and region for earnings. There are always low credit spreads on Japanese bonds especially BBB related bonds. CAPM is an additional risk factor in market faced by Japanese bond. Under Y-CAPM -risk and -risk can be determined (Bank of Japan, 2000). The estimated Wright of -risk was 2.6 % in Japan and on the other hand, it is compared with 12.5 % in United States. The big difference between lower degrees of relative risk reflects the risk aversion in Japan. The key problem of Japanese bond is always the policies of Japanese government. Rate of bonds in international markets reflects a lot in economy of country. In case of Japanese bond deficiency it highly affects the economy of Japan and it shows the competitiveness and performance of Japanese firms (Paul, 2001). This change highly reflects the generally priced risk in Japan. Basically in Japanese market two models are applied i.e. conditional model and unconditional model. The major issue is asset pricing in an international context is exchange risk is priced in capital market. Wars and Markets World wars and other local wars highly affect a market and it gives a bad impact on currency of a particular country and its asset pricing. During the Second World War it has been observed that bond prices of Australia, Japan were badly affected. Other historical events also have a great significance on bonds and other assets including political events A good example of this statement is downfall of dollar in United States. Important events urging U.S civil war has also showed a great impact on bond pricing and asset pricing. Wars highly affect markets and capitals as a result of which bond pricing and assets pricing faces downfall. There are number of models developed for the benefits and implementation in markets in order to achieve best pricing of currency and gold dollar. Apart from the currency and bond markets, wars also affect Japanese consumer products. During the phase of development of Japanese bond, it faced a lot of problems due to wars. In such cases high risk is always involved and there is always a strong need of dealing this risk with the aid of strong preventive measures. Japanese Bond has always high risk when there is any change in international market. Users avoid investing their money in Japan because of crises. Japan governments need to deal with such situations seriously and effectively. Conditional and unconditional model is specially designed keeping in mind the needs and requirements of today's market and costumers. These two models suggest a comparison and observation on ups and downs of international market. Bond Market A bond market is place where financials buy and sell their security debts. In 2006 the size of the international bond market is about $45 trillion and the debt size was about $25.2 trillion. In a number of countries, the structure of bond market remained destabilized and face lack of common changes like stock changes, commodity changes etc. The New York central exchange is one of the largest bond markets in the world and its number of traded issues increased from 1000 to 6000 (Dow Jones,1999). There are different types of bond markets, some of them are: Corporate, Government & agency, Municipal, Mortgage backed, asset backed, and collateralized debt obligation, Funding. Investing companies allow individuals to participate in form of investment in bonds, security debts etc. In 2006 the total net fund market did very well and thousands of investors earned enormous amounts. Investors allow individuals to increase trading size and investment. The bond market index is helpful in maintaining portfolios of all companies in order to measure their performance in the last years (James, (2005). Bond market is full of instabilities and risk. It changes minute to minute and investors need to be very careful at the time of investment. Consensus generally affects bond prices and its position. In 2006 total bond fund was 97% from $30.8 billion to 60.8 billion. In world markets the reputation of a company and political crises affect a lot on bond marketing and investment. Any country facing different political crises cannot meet the target in international markets until and unless country becomes stable. Japanese Market: The Japanese market was destabilized, decontrolled and increasingly open for international market in 1970. The fixed income market expanded to finance in 1975. 1997 was one of the best years for the Japanese market history and in 1997, growth in non government side of market for Japan was increased a lot. These markets are now competitive in the United States and dominate issuance markets in Asia. Nowadays, Japan has gained a lot of popularity and now is second only to the United States in debt and in recent years has had one of the largest government bond and interest rates. This trend is not static; they keep changing time to time and are highly based on a number of factors. In 1997 there was a large growth in the non governmental sector of Japanese markets which led Japan among one of the most effective and competitive rivals. Researchers are widely focusing on credits of Japanese bonds and the Japanese market. Although Japanese markets have achieved their goals, there is still need of improvement and enhancement in Japan's markets as a whole. (Batten, 2006). Japanese bond prices: Japanese bonds are still successful in maintaining high interest rates. The Bank of Japan and the Ministry of Finance both show their presence in the market by keeping interest rates high. Different minds are present behind this strategy and on a second look this strategy has a great reason behind it. The basic theme behind this strategy involves keeping bond prices high and buoyant since a decline in bond prices is tantamount to an interest rate. The Bank of Japan keeps interest rates high in order to meet international market standards. By keeping interest rates high the Bank of Japan has achieved a desirable and stable position in market. This has been registered as one of the strongest rallies with yield following to 1.805 to 1.880. The number of healthier Japanese companies is now upgrading and emerging for whom acquisitions and mergers by foreign entities are no longer acts of desperation (John, 1999). Japanese investors always have an insight on number of facts while trading and investment. The Bank of Japan keeps interest rates high because of achieving targets in response to high interest rates. The Japan based NEC co-operation in now considering collaboration and tie ups with European internet service providers. A deal with AOL Europe has been finalized taking an equity stake in the company. In 2001, NEC hopes to list itself on the New York Stock Exchange (Lenders, 2000). The Bank of Japan is wining a battle by charging high interest rates on Japanese bond thereby having a great impact on the Ministry of Finance. Japanese Equity Warrants: Japanese bonds are priced in US dollars in the international market. They contain long maturity claims on Japanese stocks which pose as a sweetener by Japanese corporations. They require a number of securities in order to ensure the requirements and standards of international markets. Direct issues of equity in Japan have large securities as compared to the US dollar. The size of various markets differs a lot in international markets especially the size of European market (Hiroto, 1992). There is a huge difference between European and Japanese markets. The size of warrant market of Europe and Japan is interesting from the view point of its security design. There are a number of different models present in order to achieve targets by considering the size of Japanese and European markets. Japanese equity warrants are good to invest in but involve certain security issues. ARCH and EGARCH models are considered the best in volatility and compare their performance to the CEV model. Hopscotch warrant values differ from corresponding prices. The Regression Model is also used in some cases in order to find out the differences between warrant values and prices as a function of proxies for market impediments. Japanese warrant values differ from corresponding prices the main reason is interest rates from the Bank of Japan and the Ministry of Finance. Japanese bonds differ in maturity and credit limits. The Hopscotch Algorithm is used to calculate differences between warrants values and prices as a function of proxies for market impediments (Hiroto, 1992). Japanese Management Theory: In international markets, there are thousands of competitors running after the money these markets offer. Japan has shown great business performances over the last decades. Competitive hypothesis based on "Seven S" theory of Pascale and Athos about Japanese management styles helps a lot in providing a complete understanding of Japanese market to beginners. Japanese markets primarily focuse on long term operating results and human resource development. Number of researches showed that the main key point of Japanese success is best utilization of employee capabilities and skills. Another school of thoughts presents that Japanese bonds and market success is because of its best control over statically quality control applications. Different researches roved that the Japanese management system is highly effective and doing great business over the past decades because of its quality control management and effective utilization of employee's skills (Bernard, 1984). Japanese American relationship will continue to increase in upcoming years as Japanese liberalization trade begun I 1969. America and Japan have done many joint adventures in order to maintain position of Japanese bonds and its development in international markets. After the mergers Japanese bonds have faced lots of differences and problems of instability in international markets. The Japanese and American collaboration needs more efforts in order to maintain the position of currency in international market (Peter, 1978). Japanese Capital Market: Japanese capital markets were liberalized and decontrolled essentially. The dynamic role of a fixed market is to bring channel saving funds from surplus sectors of economy and to finance private economy adventures for the promotion of economic development and growth. The development of Japanese market is still not established and strong. There is a wide room for development of the Japanese market (Fjelstad, 2002). However, the Japanese market is still not strong enough to face the competitive markets of Europe. According to researchers, the development of Japanese markets is required in all fields in order to stand in international markets as a competitive candidate. Infrastructural enhancements include higher market liquidity, reduction in interest rates, reduction in price distortion and better disclosure and stretching of market surveillance. There is also a room for enhancements and improvements of corporate governance. Findings prove that Japanese bond markets exhibit direct casual relationships with UK and USA. There is also a need of training of neural network system. In order to relive stress Japanese regulators have given the top priority to the liberalization and development of capital markets and bond development. The bad structure of economy and development of Japanese bonds is due to the demand in market. Today, financial system of Japan is still in recovery and it needs little improvements in the concerning markets and its financial institutions. The on going weaknesses of Japanese markets are effectively captured by the flow of funds provided by the Bank of Japan (Batten, 2006). Case Study: The number of Japanese lenders got disturbed when Lehman Brothers (LEH) went bust. Major Banks, for instance, had been counting to get back money an estimated $2.7 billion in loans from Lehman Brothers, but they're likely to recoup only a fraction of their investment. On Sept. 15, when Lehman filed for bankruptcy, midsized regional banks, life insurers, and pension funds were left holding nearly all of the U.S. brokerage's $1.8 billion in yen-denominated section, or in form of bonds. With the first half of Japan's fiscal year ending in just two weeks, Japanese financial institutions are now facing the prospect of writing off losses about an estimated at $3.5 billion these estimation is based on Credit Suisse (CS) estimates. The biggest concern is a collapsing samurai bond market. Recent days Deutsche Bank (DB), Socit Gnrale, and a unit of British utility National Grid (NGG) shelved their plans to sell samurai bonds, and trading is at a standstill. Japanese investors closed the money tap; multinationals are deprived of a key source of affordable credit. According to Mizuho Securities "The financial sector is funded very short-term, and if you're funded short it could kill you, like Bear Stearns (JPM)." Economy and future of capitalism: In recent years the concept of investment and economy has changed a lot and brought different trends in the structures of the U.S market. Economic and organizational theories show that in comparison, trust, price and authority are relatively less effective in dealing with knowledge based assets. Knowledge is now becoming an essential part of the markets which every investor must have. Large organizations usually ignore the third basic element of trust in dealing with other parties. Trust and political factors affects a lot on market and bond pricing. Nowadays, relative trust is opposite to blind trust has become common and it leaves a good impact in bond markets and foreign entity bonds. Risk pricing helps a lot in currency exposure and its price. Informational and financial crises also have a great significance in these markets. All investors must focus on knowledge, pricing and other related factors in order to remain on top in international markets. Price mechanism is highly based on a number of factors which every investor should have knowledge in order to have an upper hand in international markets. References: Bank of Japan, Japan 2Bank for International Settlements, SwitzerlandISSN:1062-9769DOI:10.1016/j.qref.2007.05.001Accession Number: 34746351 Dow Jones & Company, Inc, 1999, the Asian Wall Street Journal Weekly, 0191-0132. Hiroto Kuwahara, 1992, The Pricing of Japanese Equity Warrants, INFORMS. J. Bernard Keys, 1984, The Japanese Management Theory Jungle, The Academy of Management Review agreement. Japanese fixed income markets: money, bond and interest rate derivatives / edited by J.A.Batten, T.A. Fetherston, and P.G. Szilagyi. Landers, 2000, The Asian Wall Street Journal Weekly Business, international, 0191-0132, Market, Hierarchy, and Trust: The Knowledge Economy and the Future of Capitalism, by Paul S. Adler Organization Science 2001 INFORMS. Richard B. Peterson, 1978, Sources of Management Problems in Japanese-American Joint Ventures. Mary Fjelstad, 2002, Modeling Active Management in the Japanese Bond Market Fox THE JOURNAL OF FIXED INCOME Areddy, James T, (2005). "Chinese Markets Take New Step with Panda Bond", the Wall Street Journal. Read More