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In Japan's negative rate environment, foreign firms see opportunity

Any opinionsexpressed in this piece are those of the author and do not represent the viewsof S&P Global Market Intelligence.

Even in the midst of a negative rate environment casting a damper oninvestment returns, some foreign players see opportunity in Japan.

These firms are looking to capitalize on negative domestic rates andoffer alternative options for Japanese investors, which have been grapplingwith a tough environment of ultralow rates in the country for decades and facethe prospect of even lower returns.

DBS Bank August commencedits securities business in Japan. The Singaporean bank is aiming to help Japaneseinstitutional investors tap Asian financial markets, where bonds generallycarry much higher yields than in Japan.

"Since the Asian region has grown in the past 20-30 years, thereare now many investment-grade countries and companies which Japanese institutionalinvestors can now buy," Mana Nabeshima, CEO of DBS Securities (Japan) Co.,told S&P Global Market Intelligence.

Singapore, for example, is rated AAA by S&P Global Ratings andFitch Ratings, while Malaysia is rated A- by both.

Highly rated bonds from emerging economies can be a good alternativeasset class for institutional investors to diversify their portfolios, thoughliquidity can be a problem, said Teruki Morinaga, director and insuranceindustry analyst at Fitch Ratings.

"But a majority of the assets held by Japanese life insurers areJapanese government bonds and U.S. government bonds, which have more thanenough liquidity. So there is space for them to increase holdings of lessliquid assets," he said.

Other companies are also looking to tap this opportunity. 's international arm, New York Life Investment Management AsiaLtd., opened aJapanese branch in July and is waiting for licenses to be issued by theJapanese government.

The branch aims to help Japanese investors find new investmentsolutions, said Tatsuo Mizutori, head of the Japanese office, in a July 19 newsrelease.

Julius Bär GruppeAG is another company looking to do something similar. The Swisscompany in December 2015 decided to enhance its Japanese operations andincreased its 60% stake in a Japan-focused subsidiary to 100% in April. Thesubsidiary is targeting high-net-worth individuals in Japan.

"Many investors are concerned because [the negative interest ratepolicy] is unusual. People don't know how to handle this kind of risk,"said Stefan Hofer, business development head at Julius Baer Wealth Managementin Japan.

"What comes of it is an opportunity to use a strong yen to buyinternational assets relatively cheaply, and get returns higher than generallyexpected here. We are sharing international opportunities with Japaneseinvestors," Hofer said in an interview.

But large institutional investors in Japan cannot rely on these newofferings as a cure-all yet, said Katsuyuki Hasegawa, chief market economist atMizuho Research Institute.

"Asian fixed-income markets are not yet mature enough to produceand trade a large number of highly rated bonds. Though there have been effortsto develop the markets further, the volume is limited now when it comes toinvestment for Japanese institutional investors," he said.

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