Indian borrowers take fancy to Japanese debt

This trend is playing out after the major Asian currency sharply depreciated against the Indian rupee over recent months, making it an attractive currency to leverage for loans and bonds. The rupee has appreciated 18% against the yen since the beginning of 2023. Currently, one yen equals ₹0.55.

“The advantage of borrowing in a currency that is expected to depreciate is that the borrower has to repay that much less," said Anindya Banerjee, vice-president of currency derivatives and interest rate derivatives at Kotak Securities.

At the same time, Banerjee warns that what matters is not how much that particular currency has moved in the past, but how it is expected to behave in the future.

Who is borrowing in yen

Among companies, JSW Steel, Rural Electrification Corporation (REC), Power Finance Corporation (PFC), and Housing and Urban Development Corporation (HUDCO) have cumulatively raised yen-denominated debt upwards of ¥200 billion (about ₹11,000 crore) in the past 11 months, according to publicly available company disclosures. 

These include loans as well as bonds. The largest amongst these was REC, which has raised about ¥153 billion ( ₹8,390 crore) since January over three separate debt facilities.

Among governments, this April, the Tamil Nadu government opted for a loan of $300 million in the Japanese yen from the World Bank for developing urban water and sanitation services, as per a World Bank disclosure.

According to a senior executive at a leading multilateral development bank, several other state governments, too, are in active discussions to raise new debt in yen or even swap their existing dollar-denominated loans to yen.

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Even the Indian government chose to raise a $250-million loan in yen from Asian Development Bank (ADB) last December, according a release from the Press Information Bureau. This was ADB's first yen-denominated sovereign loan to India. The funds are to be used to finance the construction of the 82-km Delhi-Meerut Regional Rapid Transit System (RRTS) corridor. 

When contacted, a spokesperson for REC said the public sector ‘Maharatna’ company always compares the landed cost of borrowings, whether raised domestically or internationally. It makes a similar comparison when deciding the currency in which to raise international debt. 

"The benchmark TONA in case of JPY is near to zero, and the hedging cost of the principal through the permitted option structures being reasonable, the landed cost is cheaper in case of JPY as compared to USD and Euro," the REC spokesperson said. “Accordingly, JPY is presently turning out to be the preferred currency." JPY refers to the Japanese yen.

TONA, or the Tokyo Overnight Average Rate, is Japan’s benchmark interest rate.

JSW Steel refinanced some of its debt with yen-denominated loans last year. The refinancing in yen helped narrow the company’s weighted average cost of borrowing from 7.3% in Q3 FY24 to 7.15% in Q4 FY24, according to Jayant Acharya, the steelmaker’s joint managing director.

“We will continue to watch the currencies as they work and look for opportunities. If there is a currency advantage then (we will) take a call accordingly as we raise capital," Acharya told Mint in a recent post-earnings interview.

The accelerating yen rush

The trend has emboldened more entities to explore yen-denominated funding. The multilateral development bank executive mentioned above said that many of the bank’s borrowers, including state governments and public sector undertakings, have requested to swap their existing loans to yen denomination. 

Meanwhile, requests for fresh yen-based loans from India have also risen, the executive cited above said, requesting not to be named as the person is not designated to speak to the media.  

“We have seen a lot of depreciation of the rupee against the dollar, so other currencies are becoming much more palatable for clients in India," this person said.  

“Requests from various existing borrowers have started to come to explore if the dollar-to-yen currency conversion is possible. We are working very closely with the government to explore if that kind of option can be made available," the executive added. 

Indian entities are not alone in leveraging the benefits of yen-based debt. Bangladesh government this month raised about $700 million from the World Bank in yen instead of dollars to reduce the interest cost, according to a report in The Business Standard, a Bangladesh-based daily.  

Watch your step

However, experts warn that the gravy train may not always be running and there is a risk of sharp rise in costs for unhedged loans in case of policy shifts by the Bank of Japan (BoJ). 

Kotak's Banerjee said that when someone borrows in yen, that company may just take an interest rate outlook and expect that rates in Japan would not rise over the tenor of the loan by any significant amount to offset that advantage. 

In fact, Banerjee expects the yen to appreciate over the near term due to hopes of a US Fed rate cut, RBI intervention in the dollar market, and rate hike possibilities by the Bank of Japan. “We could see 56/57 levels," he said. 

Borrowers will have to weigh the risk of interest rate hikes by the BoJ with the benefits of current low interest rates and hedge their foreign exchange exposure accordingly, experts said. While borrowers may choose to hedge their entire loan amount, it could eat into the interest-rate arbitrage and no longer make a good business case to borrow in yen, they said.

This March, the BoJ ended its era of negative interest rates after eight years. A Reuters report from Thursday said the Japanese central bank is likely to debate whether to raise interest rates when it meets next week and unveil a plan to roughly halve bond purchases in coming years.