Japan: Export insurer to offer dollar-denominated trade cover
Source: Asia Insurance Review | Jun 2017
Japan Trade Credit
Nippon Export and Investment Insurance (NEXI) is gearing up to offer dollar-denominated trade insurance to Japanese banks and trading houses, to better protect them from foreign exchange swings and thereby boost infrastructure-related exports.
To date, trade insurance offered by NEXI is available only in the yen.
The government-owned export insurer is negotiating dollar-denominated insurance with some companies, with the first contracts likely to be signed as early as October. Premiums as a percentage of payouts in the event of losses will remain the same under the new arrangement, reported The Nikkei.
Bulk of loans denominated in the dollar
The bulk of Japan’s international loan contracts are denominated in the dollar. More than JPY900 billion (US$8 billion) of the roughly JPY1 trillion in lending insured by NEXI in the fiscal year ended 31 March 2017 were in dollars.
When loans abroad turn insolvent, due to a conflict, terrorist attack or other special circumstances, the insured business gets compensated for damage as long as qualifying conditions are met. Yen-denominated payouts, however, could fall short of losses in the dollar depending on exchange rates.
Banks have been asking for a system that suits the reality that many loans are denominated in the US greenback.
Existing mechanisms for yen-based insurance do cushion some of the impact, but may be not enough under sharp exchange rate fluctuations.
NEXI hopes the new dollar-denominated offering will allay concerns by financial institutions and hence increase lending abroad – in line with the government’s push to boost exports of infrastructure like railways and power plants. A