It has been argued that Japan is the world’s largest emerging market. Some of its recent afflictions certainly carry the whiff of developing markets: from February’s stock market crash to the potential unwinding of the yen carry trade, and the decline of prime minister Shinzo Abe’s approval ratings amid concerns he is not economy-focused.
Despite these misgivings, however, there are strong indications that the country’s influence on the world’s capital markets is increasing. Foreign investment banks in Tokyo are jockeying for position as they seek to persuade clients to make use of the rapidly expanding array of products imported from the US and Europe. Last year saw hybrid securities issued by retailer Aeon, a hostile takeover attempt by Oji Paper and the country’s largest ever management buyout. Morgan Stanley promptly poached the man who worked on that $3 billion deal for restaurant chain Skylark, Tsunehiro Watabe, from UBS. Meanwhile the Bank of Japan raised interest rates to 0.5%, their highest level in a decade, crucially ending the "free money" era and paving the way for normal money markets.
Watch for more of the same in 2007. Japan is considering a 40-year bond in response to international investor demand, and the authorities know there is work to be done in developing the secondary markets, particularly for the under-traded inflation-linked notes.