Capital-starved American and European banks have unleashed an unprecedented “gold rush” into Japan’s samurai debt market as their traditional sources of funding around the world run dry.

In what is already shaping-up as a record year for yen-denominated debt issuance in Japan by foreign banks, the likes of Royal Bank of Scotland and UBS have now made preparations for huge bond sales.

Citigroup is currently placing around Y187 billion of samurai debt, and documents have been lodged with the Tokyo authorities by several other institutions that could see as much as Y1.5 trillion raised raised from Japanese institutional and individual investors over the next few months.

UBS issued Y91.5 billion in a samurai debt offer which closes next week. Earlier this month the bank filed documents with the Kanto Finance Bureau that would allow UBS to raise a total of Y500 billion in Japan.

The logic of samurai issuance moves in waves, say analysts. But under the current crisis, the relatively low yen-denominated interbank lending rates in Japan mean that the debt issuance seems cheap for the foreign issuer.

And because the yields on Japanese government bonds (JGBs) are so low, the sort of returns offered by samurai debt issuers are currently very attractive for yield-thirsty Japanese investors.

The US and European banks’ ravenous hunger for funding, say credit analysts, suggests that the rush to issue yen debt will continue throughout the year.

The banks are now realising, said RBS’s managing director of syndicate Asia-Pacific, John Wade, what a valuable pool of liquidity is now on offer in Japan.

Everyone from large insurance companies to housewives' investment clubs are scrambling to buy high-quality investments with yields above the painfully low 1.0 per cent coupon they receive on JGBs.

Already in 2008, companies and emerging market governments have, between them, tapped the Japanese debt market to the tune of Y1.6 trillion – almost twice what had been issued in the first five months of 2007.

The sudden lurch towards the samurai debt market arises from an unexpected window of opportunity created by the sub-prime crisis itself.

Rising desperation among western banks to secure ready supplies of capital, said Tetsuo Ishihara, a senior credit analyst at Mizuho Securities, have driven some of the world’s most famous banking names into a market that their once copper-bottomed credit ratings kept them out of.

The battered state of some of the largest banks means that their debt suddenly comes with a high enough coupon to appeal to the notoriously conservative Japanese investor – prevailing interest rates in Japan mean that coupon is still cheap for the issuer.

The credit crunch and the heavy beating on US sub-prime assets taken by UBS and others has dramatically widened the potential spreads of any yen debt they might offer in Japan – where previously they might have offered investors 10 basis points above yen Libor, the market now demands they offer 100 basis points above Libor.

At those levels, Japanese institutions have a rare opportunity to buy the debt of famous names they could not previously invest in.

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