Structured - BNP Paribas

Japan Asia Japan VOLUMES & KEY PLAYERSToday, Nikkei-linked products sold through bank networksrepresent a market of more than ¥1tn, and we estimate that thebulk of cancellable products sold by security houses (i.e. cancellablereverse convertibles MTNs through private placements) is about¥500bn. On the other side of the fence, non-yen capital-guaranteedproducts sold by both banks and security houses on the domesticmarket in 2004 totalled roughly 200bn ¥-equivalent. We thereforehave an overall market of roughly ¥1,700bn (e12.5bn).Japan’s specifics in terms of its market players remain the same: amarket dominated by banks and somewhat shared with powerfulsecurity houses, leaving little room for an embryonic privatebanking sector. The largest distributors are mainly the so-calledmega-banks: Mizuho Bank, Bank of Tokyo-Mitsubishi - which is tomerge with UFJ Bank - SMBC and Resona Bank. On the securityhouses side, the bigger names are Daiwa Sec., Nikko Cordial Sec.,Mitsubishi Sec., Shinko Sec, UFJ Tsubasa, with the biggest securityhouse (Nomura) being much less active in the structured productsfield than its medium-sized counterparts.PRODUCTS & STRUCTURESLow volatility led to a decline in the popularity of Down-and-In-Put products, which were gradually replaced by multi-callablestructures with partial capital protection.Maturities usually range from 3 months to 5 years, although theyare generally over 3 years for classic multi-callable structures andcan reach up to12 years for complex products (especially fundlinked).As regards underlyings, most products are still linked to the Nikkei225 and to a lesser extent to single stocks, while baskets of stocksremain deeply unpopular in Japan. However, the sale of hedgefund-linked products in 2004 reflects growing interest fromJapanese investors in innovative underlyings. Commodity-linkedproducts and other kinds of hybrids, as well as Chinese/Indianindex-linked products, are also working their way up in the worldof Japanese structured products.Consistently low interest rates continue to be an obstacle forstructuring short- or medium-term capital guarantee products,forcing retailers to either curtail returns or switch to longer tenors.Another alternative to the interest rate issue is to use non-yendenominated products (particularly USD and AUD).PRIVATE BANKING MARKETIn the emerging world of Japanese private banks, some entities arestarting to break through, as in the case of the joint-venturebetween Tokyo-Mitsubishi Bank and Merrill Lynch. Other banks,such as Mizuho Bank, are planning to create their own subsidiariesdedicated to the private banking business. Still, for most Japanesehigh-net worth individuals, foreign private banks are the name ofthe game.Product-wise, Japanese private bankers tend to be more interestedin exotic underlyings, such as hedge fund index-linked productswhich cater to their need for asset diversification, than their retailcounterparts.26