What are Yen Bonds?

Yen bonds are any bond issued to represent Japanese yen currency. A Yen bond functions like a loan and is a document stating that the lender will repay — with interest — the purchaser of the bond after a certain amount of time. Japan's bond system is interesting, because it separates bonds into two distinct classes, depending on who is issuing and purchasing the loans.

The Japanese yen is the third most traded currency in the world, after the United States' dollar and the European euro. The yen currency first began being used in the country in 1871, the name roughly meaning, "a round object," most likely stemming from the fact that yen initially was a coin. Japan began aggressively trading its money in the 1980s when the Japanese market was slumping. The result was the Euroyen and the samurai yen, but not the shogun yen.

Euroyen bonds were started as a response to the 1980s financial recession. The bond allows for a country other than Japan to issue yen bonds outside of Japan. The French Government Housing Authority was the first to take advantage of these bonds in 1985. This meant the Housing Authority could issue a Euroyen bond to attract non-Japanese yen investors for its financing. Euroyen bonds are not controlled by the Japanese National Bank, so they have been considered the most volatile of all yen bonds.

Samurai bonds are yen bonds issued within Japan's borders by countries other than Japan. These are commonly used for a company to get into the Japanese market, but also can be used to reduce the risk of foreign exchange rate. These bonds are considered less volatile than Euroyen because they stay within the country's borders.

One different type of bond in Japan, not to be confused with yen bonds, are shogun bonds. These are issued by non-Japanese companies within Japan for a different currency. They frequently are mistakenly lumped with Euroyen and samurai bonds. An example would be a British company issuing pound bonds in Japan. This is not a popular method of bonding and has seldom been used since its creation.

Yen bonds have an interesting history with respect to the Japanese money market. Initially considered to be a way to build finances and get the country from its financial black hole, it has become a staple of money traders around the world. Its two distinct types of bonds help it fit different needs of the lender and the buyer.