Japan's structured products market has, for the first time in four years, registered greater sales than maturities in the structured products space in 2017, as a surge in non-protected issuance lifted sales volumes by more than half as compared with the previous year, SRP data shows.

The new flows helped the market edge back towards the recent peak of JPY66.87trn (US$621bn) in outstanding volume in structured products, registered in 2013.

The growing structured products market in Japan appears in stark contrast with the broader Asia-Pacific region, which experienced a 3% dip on an annual basis in the outstanding volume in 2017. Region-wide sales were also on the down, sliding 23% on an annual basis last year.

Notably, the surge in Japan, long-since gripped by negative interest rates amid deflationary pressure, was driven entirely by non-protected products, and in fact, despite a continued slide in protected volumes. Sales with no guaranteed return climbed 62% year-on-year to JPY 3.40tn in 2017, after a 41% slide the previous year. Meanwhile, fully protected volumes slid 15% on an annual basis to JPY 134bn, taking the cumulative slide since 2014 to 70%.

The drop in guaranteed returns products, a significantly smaller segment than the non-protected space, was not reflected in any major surge of conditional capital protection embedder in nominally 'non-protected' reverse convertibles and protected trackers. Still, these two payoff structures accounted for about 39% sales volumes in 2017, up from 36% for the previous year, according to SRP data.

Alongside the shift in payoffs, the market also witnessed a slight increase in issuance of products with a term between two and six years, which accounted for 35% of sales in 2017, up from 32% for 2016, but well below the 47% share seen in 2015.

In line with tradition, FX rates remained top of the underlying demand table, accounting for 42% of sales, down from 44% for 2016, while exposure to equity indices grew to 39% in 2017, up from 36% in 2016.

In terms of distribution, Mitsubishi UFJ significantly increased its lead on the market, accounting for about a quarter of sales distribution, followed by Mizuho Financial and Sumitomo Mitsui Financial. In terms of issuance, Nordic issuers remained ahead of the pack, with Svensk Exportkredit taking the lead from Kommunalbanken.

In addition to stronger sales, structured products again generated positive returns last year, after a slump in performance in 2016 had driven average returns to a negative 0.30%. The Japanese market saw sales-weighted average performance climb to 0.26% in 2017 (note: the most recent performance sample size for 2017 is half that of previous years). Notably, this falls significantly below the sales-weighted average of 3.75% seen in Europe last year, as well as well below the most recent peak of 1.87% in Japan in 2015.

So far in 2018, the market has continued adding volumes, with sales outpacing maturities by JPY 50bn in the year-to-date. This is well below the pace of growth registered during the same period of last year, when the gap was JPY170bn. However, this is largely due to a larger pool of maturities, as opposed to lower sales, with some JPY370bn sold YTD as of February 12, down just 4% on an annual basis, according to SRP data.

Click the link to view the full Japan market review for January 2018.

Picture credit: Pixabay

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