The issuance of power reverse dual currency notes in Japan has increased since the end of 2014, sparked by rollovers triggered by further monetary easing in October 2014 and the depreciation of the yen leading to knockouts, according to bankers. “The trend for power reverse dual currency will probably continue given the low interest rate globally,” said a senior source at a local securities company. “The demand for earning higher yields favours currencies with higher interest rates, which is the reason why the currency pair of Brazilian real and Japanese yen is so popular as the underlying.”

There were 17 power reverse dual currency products issued in Japan’s retail market in 2014, of which six were issued after October. There have been 12 corresponding products issued so far this year, nine of which were Brazilian real/Japan yen-linked, and the rest based on the Australian and US dollar to yen exchange rate. “If interest rates in the US are going to rise after the expected raising of federal fund rates, there is also the potential for the US dollar to be used more often as an underlying for power reverse dual currency products,” said the source.

“Usually for power reverse dual currency products, the underlyings will be currencies of developed countries such as Australian dollar and US dollar,” said a fixed income manager at a local securities firm. “But the fact that there are more people participating in investments related to emerging countries has contributed to the ease of hedging, even if they have long tenors of, usually, 10 or 20 years.”

But there are distributors that do not like these products, according to the fixed income manager. “It is difficult to explain to clients, and the tenor is long, while, if the underlying did not perform well, the coupon can be close to zero,” he said. “Also, the liquidity is low and these products are mostly held to maturity. It is a ‘heavy’ product to deal with.”

The six distributors of these products in 2015 are: BNP Paribas, Daiwa Securities, Deutsche Securities, Morgan Stanley MUFG Securities, Mitsubishi UFJ Merrill Lynch PB Securities and Societe Generale Securities, according to the SRP database.

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