Analysis

Israel’s Secret Japanese Investor

The Finance Ministry isn’t saying who bought its $140m bond placement

Shibuya crossing, Tokyo, Japan, May 30, 2018.
\ MasaPhoto / Shutterstock.com

The Finance Ministry raised $140 million from a Japanese strategic institutional investor in a private bond placement this week. The amount isn’t particularly large, but the treasury’s decision to call the investor “strategic” is intriguing.

It’s customary to distinguish between financial investors, whose aim is to turn a quick profit and move on, and strategic investors, who bring added value. That can be knowledge, connections in the industry, the ability to develop the company’s business and introduce it to new markets. Hence, our curiosity to discover the identity the strategic investor who is investing in the State of Israel.

Is it an investor with special knowledge about how to manage a country as complicated as Israel? Someone who, if we let him manage the country for two or three years, will bring us to new heights? It sounds tempting. If that’s what it is, let’s bring him over here. Israel needs strategic investors who know how to manage such a complicated business.

Who knows, if they’re really strategic, then maybe they will bring their people along, buy large chunks of the country and bring about a revolution in education, infrastructure and bureaucracy. Alas, not so fast.

Accountant general of the Israeli Finance Ministry, Roni Hizkiyahu.
Emil Salman

The accountant general of the Finance Ministry, Roni Hizkiyahu, champions a strategy of widening the Israeli government’s investor base in Asia in general and in Japan in particular.

The state issues an external debt bond generally once a year, at the beginning of the year. In between the bond placements, the state tries to accomplish additional goals as well, including diversifying its investors.

Last month Hizkiyahu visited Japan and held a round of meetings with investors in a bid to interest them in buying Israeli bonds.

Israel has no trouble raising capital, due to its strong credit rating, but does so mainly in the American and European markets.

The obstacle was low familiarity on the part of the big institutional investors in Asia with the Israeli economy, and perhaps Israel’s small size and distance from the Asian financial markets.

Israel’s positive macro data (the deviation from the deficit target is worrisome, but so far it hasn’t diminished Israel’s sovereign debt rating) made Hizkiyahu confident that this was an auspicious time to diversify the mix of investors in Israel and bring in Asian players.

The latest bond placement was the second in an Asian market, after a 250 million euro placement last year with Singapore’s sovereign wealth fund. The current placement, to a large Japanese institutional investor, is of seven-year bonds that will pay fixed interest of 0.15%. Both cases involve relatively small sums, which raise the question as to whether it’s worth the trouble.

Hizkiyahu believes it is. “We haven’t succeeded thus far in penetrating Japan. Through bond placements with these entities we are exposing such countries to Israel. We are doing this under two conditions: that the investor is a highly rated one, that will be followed by other investors; and that the deal pays off financially.”

Beyond the goal of expanding Israel’s investor base, Japan is attractive due to its low interest rates — the Bank of Japan has a negative interest rate. This is also the advantage of borrowing money in Europe, as opposed to the United States, and this is evidenced by the interest rates in recent bond placements, both public and private.

But when it comes to Japan, it also involves a certain degree of exposure to the yen. Israel has no yen-based assets or debt, and therefore the debt that was financed by the strategic Japanese investor will be converted to euros.

So who is this strategic investor? This is a detail the Finance Ministry isn’t willing to divulge, nor the details of the private investors participating in other bond issues of the state. That is the result of confidentiality agreements the Finance Ministry has signed. It seems that these high-quality, strategic institutional investors do not report where they invest their clients’ money, and maintain trade secrecy.