That meant the investors accepted the risk of no interest payments if the yen were to strengthen — as it did from late 2007 to late last year. The knockout clause capped upside.
Many of the bonds were issued in London’s unregulated offshore eurobond market. According to Thomson Reuters data, there are about ￥5.2 trillion (US$518 billion) of eurobonds with a complex coupon outstanding. A large share of those are PRDC bonds or similar derivatives. Others have yields linked to other volatile assets like the Nikkei share average.
The yen’s fall since Abe took office has eased the pain for investors, but many still have unrealized losses since the US dollar has not recovered to its levels of 2006 and 2007 when it traded above ￥110.
Koyasan is a case in point. The temple had a loss of about US$6.5 million in March, although that was half of what it faced in May last year, said Yasuo Wakita, an official in charge of accounting. The derivatives were sold to Koyasan by Nomura Securities and Daiwa Securities. Both declined to comment.
After 2008, Japan’s Financial Services Agency (FSA) took steps to tighten rules on marketing of complex derivatives to colleges and other non-profits. Regulators said they were not aware of any large losses from products that came after the tighter rules were in place.
The FSA has urged investors to be more aware of investment risks and for fund managers to adopt appropriate internal checks on investment decisions.
Yoshio Shima, a professor of business at Tamagawa University, says the Japanese government should go further, drawing an example from the British government. Last year, London’s financial watchdog, then the Financial Services Authority, forced four banks to compensate small and mediium-sized firms for some interest rate derivative losses, as well as tightening rules on the marketing of those products.