Structured-Note Buyers Bet Japan to Revive as BOJ Mulls Stimulus

Banks sold the most U.S. structured notes tied to Japanese stocks for any January since at least 2010 after unprecedented central bank stimulus contributed to soaring indexes and the yen’s slide against the dollar.

Issuance of securities linked to indexes or funds of Japanese companies has totaled $64.6 million so far this month, almost four times as much as all of January last year, according to data compiled by Bloomberg. The securities were tied to the Topix index, the Nikkei 225 Stock Average, or the WisdomTree Japan Hedged Equity Fund.

Investors are betting on further advances in 2014 after Japan’s stock market rose the most among developed markets last year, with the Nikkei index climbing 57 percent. The Bank of Japan has buoyed companies’ values with a stimulus program that swelled its balance sheet by 50.3 trillion yen ($481.6 billion) in the nine months through Dec. 31.

“We’ll probably see another year of above-average gains,” Christopher Dodson, Japan capital markets specialist at Auerbach Grayson & Co. in New York, said in a telephone interview. The country’s stock indexes may increase as much as 20 percent in 2014, he said.

Bank of Japan Governor Haruhiko Kuroda’s board isn’t changing its pledge to expand the monetary base by an annual 60 trillion to 70 trillion yen after a two-day meeting in Tokyo yesterday. The number of analysts forecasting the central bank will add to its easing in July or later doubled to 48 percent from three months ago, according to a Bloomberg survey conducted Jan. 10-15.

Prime Minister Shinzo Abe’s stimulus program is intended to reverse 15 years of deflation and lead to increased wages.

Topix Leads

Banks sold $539 million of the Japan-tied notes in the U.S. last year, 86 percent more than in 2012, Bloomberg data show. Securities linked to the Topix, as the Tokyo Stock Price Index is known, were most popular, with $373.7 million of issuance in 30 offerings.

The biggest deal this year, issued by Goldman Sachs Group Inc., was $50 million of three-month notes tied to the Topix Index, Bloomberg data show. The Topix increased 45 percent to 1,287.52 through the year ending today.

The securities, sold Jan. 6, yield the gains and losses of the benchmark, according to a prospectus filed with the U.S. Securities and Exchange Commission. The return isn’t adjusted for changes in the yen-dollar exchange rate.

Tiffany Galvin, a spokeswoman for Goldman Sachs in New York, declined to comment on the notes.

The securities mature on April 10, nine days after Japan is scheduled to raise its national sales tax to 8 percent from 5 percent.

‘Negligible’ Effect

The tax increase will probably have a “negligible” effect on Japanese stock markets since investors are expecting it, Dodson said. It will cause the economy to contract 4.1 percent in the three months to June though, according to economists surveyed by Bloomberg News.

One note this month has been linked to the WisdomTree exchange-traded fund, which includes companies such as the world’s largest automaker, Toyota Motor Corp. (7203) The fund seeks to hedge against price swings in the value of the U.S. dollar against the yen, according to the fund’s website. Its value increased 32 percent to $50.43 in the year through yesterday.

The yen performed second-worst against the dollar among major currencies last year, sliding 18 percent.

Bloomberg started collecting comprehensive data on structured notes in 2010.

Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts with values derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

To contact the reporter on this story: Kevin Dugan in New York at kdugan4@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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