Surge in Corporate Bond Sales Among Japanese Retail Investors Amid Rising Inflation and Interest Rates

Japanese Retail Investors Flock to Corporate Bonds Amid Inflation Concerns

Tokyo, Japan — Sales of corporate bonds to individual investors in Japan are surging, with projections indicating a record-breaking year as savers seek refuge from rising inflation. The trend has seen notable companies, including railway operator Keio Corp. and supermarket giant Aeon Co., tapping into the retail bond market, with Aeon recently launching its first retail bond.

The allure of corporate bonds is evident, with yields reaching as high as 3.34% on five-year notes from SoftBank Group Corp., significantly outpacing government bonds of the same maturity, which offer much lower returns. In the first five months of the fiscal year starting April 1, corporate bond sales have already hit approximately ¥1.5 trillion, following a record ¥2.4 trillion sold to individual investors last fiscal year, according to Bloomberg data.

The shift in investor sentiment comes amid expectations that the Bank of Japan may raise interest rates in response to persistent inflation, marking a departure from years of sub-zero policies. While Japan’s major stock indexes have reached record highs, the volatility in equities has made the stability of regular income payments from bonds increasingly appealing.

“Bonds offer interest income and return the principal as long as there’s no default, so they’re more attractive than just leaving money in the bank,” said Koji Ota, a 37-year-old transportation worker in Osaka who has been investing in corporate debt for three years.

For instance, an investor who purchased ¥1 million of two-year retail notes from e-commerce giant Rakuten Group Inc. in February 2023 at a 3.3% coupon would see a total return of about ¥1.07 million, including both interest payments and principal at maturity. In contrast, two-year time deposits at Mizuho Bank Ltd. yield only 0.325%, while comparable government notes offer around 0.87%.

Despite the Topix index rallying about 30% since last year, the market has experienced sharp sell-offs, prompting many to reconsider their investment strategies. “Jumping into stocks felt too risky,” said Kyoko Takahata, a 37-year-old housewife from Okayama, who shifted a portion of her savings into corporate bonds for their higher yields and predictable income.

To attract more retail investors, some issuers have introduced themed bonds and non-monetary incentives. For example, the ‘Rakuten Cardman Bond’ features a superhero character, while a bond from Fukui Prefecture offered a lottery for dinosaur-themed goods. Keio’s first retail bond in 31 years included a lottery for luxury hotel stays and high-end dining experiences.

“We see this as a way to build stronger ties with retail investors,” said Yuki Iimuro from Keio’s treasury department.

However, experts caution that the promotional perks associated with many bond offerings may distract investors from understanding the inherent risks. The Japan Securities Dealers Association has raised concerns about potential irregularities in bond selling practices, including overstating demand to issuers.

“As rates climb, retail investors are paying more attention to yields,” noted Toshiyasu Ohashi, a visiting professor at Chiba University of Commerce. “Yet higher yields usually mean higher risk. We need to enhance financial literacy and rethink how these bonds are structured, marketed, and regulated to protect individuals.”

Despite these challenges, the corporate bond market continues to thrive, with Aeon recently pricing ¥60 billion of notes at a 2.025% coupon, reflecting the growing appetite for fixed-income investments among Japanese households.

As the landscape of investment evolves, retail investors are increasingly recognizing the potential of corporate bonds as a viable alternative to traditional savings methods, paving the way for a new era in Japan’s financial market.