Japan’s Input on Session 4 ～ Institutional and Legal Frameworks for Public Debt Management ～

Debt Management Policy Division, Financial Bureau Ministry of Finance, Japan

2

MOF Organization

Ministry of Finance

Minister’s Secretariat

Budget Bureau

Tax Bureau

Customs and Tariff Bureau

Financial Bureau

International Bureau

Debt Management Policy Division (33)

Market Finance Division (31)

Fiscal Investment and Loan ProgramDivision

National Property Policy Planning and Legal Division

Others

････

National Tax Agency

・ Planning of debt management policies・ Research and planning of management system for government bonds・ Investor Relations・ Management of GDCF・ Budget and closing of Special Account for GDCF※ GDCF is Government Debt Consolidation Fund.

・ Issue (including auction), redemption and interest payment of JGBs, Financing Bills and Borrowings・ Government guarantee operation・ Conducting interest rate swap transactions・ Dialogue with primary dealers and investors

3

Legal Framework for Debt Management

Other Law, Regulation,

Ordinances etc

Act on National Government BondsProcedural rules on issuance, redemption etc.

Act on Special Account (Art.38-49)

Set-up of National Debt Consolidation Fund for redemption.

Fiscal ActBased on the bitter experience of war-time inflation, the Government limited itself in terms of issuance of bond, namely by Article 4 of Public Finance Act. For the same reason, underwriting by BOJ is now also prohibited by Article 5.

Constitution

Art.85 No money shall be expended, nor shall the State obligate itself, except as authorized by the Diet.

4

○New Financial Resource Bonds　

　 -- To finance annual fiscal needs

○ Refunding Bonds　 -- To raise funds to redeem matured bonds

○ FILP (Fiscal Investment and Loan Program) Bonds

Categories of JGB: Based on Purposes

Construction BondsSpecial Deficit Financial Bonds

General Bonds

　 The　Fiscal　Investment　and　Loan　Program　(FILP)　is　an　investment　and　loan　activity　which　provides　essential　long-term　and　low-interest　funds　for　policy,　which　are　difficult　to　be　provided　through　private　funding.　　FILP　enables　the　execution　of　large-scale　and　very　long-term　public　projects　with　the　capital　procured　by　issuing　FILP　bonds　or　a　kind　of　government　bonds.　Specifically,　it　provides　long-term,　fixed　and　low-interest　capital　in　the　areas　pertaining　to　small　and　medium-sized　enterprises,　and　also　invests　in　the　fields　related　to　exploration　or　research　and　development,　of　natural　resources.

　 The　Fiscal　Investment　and　Loan　Program　(FILP)　is　an　investment　and　loan　activity　which　provides　essential　long-term　and　low-interest　funds　for　policy,　which　are　difficult　to　be　provided　through　private　funding.　　FILP　enables　the　execution　of　large-scale　and　very　long-term　public　projects　with　the　capital　procured　by　issuing　FILP　bonds　or　a　kind　of　government　bonds.　Specifically,　it　provides　long-term,　fixed　and　low-interest　capital　in　the　areas　pertaining　to　small　and　medium-sized　enterprises,　and　also　invests　in　the　fields　related　to　exploration　or　research　and　development,　of　natural　resources.

5

FILP Structure

6

Historical Changes in JGB Issuance Plan

44.3

102.6

31.8 28.5

40.1

28.2

44.352.0

25.427.531.335.535.0 35.3 33.2

111.390.5

99.2108.1105.5

84.574.969.6

93.9

14.0

9.4

16.8

25.6

8.6

15.5

169.6

151.8161.2160.1

136.4

165.0 162.4

138.8 135.7141.3

0

50

100

150

200

02 03 04 05 06 07 08 09 10 11

trillion　yen（ ）

New　Financial　Resource　Bonds Refunding　Bonds FILP　Bonds

(note)　 FY2002 FY2009　:　Actual～FY（ ）

（Ｉｎｉｔｉａｌ） （Ｉｎｉｔｉａｌ）

7

Categories of JGB: Based on Terms and Conditions

(trillion　yen)

before　1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (FY)

40-year 1.6 2.9

　　　　　　　　　　　　　　　 30-year 5.6 28.1

20-year 13.2 113.4

　　　　　　　　　 15-yearFloating- rate - 　　 39.8

10-year 26.4 297.7

　　　　　 10-yearInflation- Indexed - 　　 4.6

　　　　　 5-year 28.8 135.5

2-year 31.2 60.4

　　　　　　　　　　　　 TBs(1-year) 30.0

TBs(6-month) 0.9

　　　　　 10-year　J GBfor　Retail　Investors - 　　 15.0

5-year　J GBfor　Retail　Investors - 　　 12.0

3-year　J GBfor　Retail　Investors - 　　 0.2　　　　　　　

MarketIssuance　Plan(FY2011)

DebtOutstanding(as　of　Dec.31

2010)

39.8

40

3020

15

10

５

２

Nov.　2007-

Sep.　1999-

J un.　2000-

Mar.　2004-

Feb.　2000-

Apr.　1999-

Mar.　2003-

J an.　2006-

J ul.　2010-

8

10-Year Inflation-Indexed Bonds (JGBi)

（inflation- adjusted principal）

\154.5　million　of　interest

（inflation- adjusted principal）

（inflatio

n-adjuste

d　prin

cipal)

year10

year9　½

(×　3%　×　½　 ）

　　

CPI:　100

CPI:　101CPI:　102

CPI:　103

CPI:　120

(Note1)　　The　above　CPI　increase　ratio　and　coupon　rate　are　purely　hypothetical.(Note2)　　CPI　is　seasonally-unadjusted　core　CPI　which　excludes　perishables　such　as　fresh　foods　and　fish,　but　not　rice　or　energy.

　 (\12　billion)

　　

（inflatio

n-adjuste

d　prin

cipal)

(×　3%　×　½　 ）

（inflatio

n-adjuste

d　prin

cipal)

(\10.3　billion)

(×　3%　×　½　 ）

year1　½

year　1year　½

\153　million　of　interest

\151.5　million　of　interest

（inflatio

n-adjuste

d　prin

cipal)

(\10.2　billion)

(×　3%　×　½　 ）

(\10.1　billion)

（inflatio

n-adjuste

d　prin

cipal)

(×　3%　×　½　 ）\10　billion　face　value

Purchase

(interest　calculating　formula)Semi-annual　interest=　face　value　×　CPI　@　payment　/　CPI　@　Issue　×coupon　rate　×　½　

Inflation　–　adjusted　principal

<　assumption　>・ Face　value:　10　billion　yen;　coupon　rate:　3%・ CPI:　2%　p.a.

¥154.5　million　of　interest

¥153　million　of　interest

¥151.5　million　of　interest

\12billion　of　redemption

+\180　million　of　interest

9

15-Year Floating-Rate Bonds　Reference　rate　used　for　15-year　floating-rate　bonds　is　linked　to　the　interest　　　　　on　10-year　fixed-rate　bonds （ interest　on　10-year　fixed-rate　bonds　–　α ） .

Yield Curve Sensitivity

- Price associated with yield curve change -

Image of Coupon Floating

1.05 1.100.90 0.80 0.70 0.75 0.80

0.95 1.10 1.20 1.35

0.90 0.800.60

0.90 1.00 1.10 1.151.30 1.40 1.45

1.251.10 1.00 1.10

0.85 0.90 1.00 1.15 1.20

1.55 1.601.40

1.301.20 1.25 1.30

1.451.60

1.701.85

1.401.30

1.10

1.401.50

1.60 1.651.80

1.90 1.951.75

1.601.50

1.60

1.35 1.401.50

1.65 1.70

0.00

0.50

1.00

1.50

2.00

2.50

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

(%)

(year)

Couponα10- year　yeild

α =0.5

Parallel Steep Flat Parallel Steep Flat

15-year　floating-rate　bonds　

Fixed-rate　bond

Yeild　curve　change

Interest　rate　change

Price

Rise Drop

10

Historical Changes in Market Issuance Plan by JGB Types

31.0 34.2 30.932.9 30.921.022.824.829.933.4

43.842.4

60.060.055.6

44.544.444.444.444.4

21.622.8

26.426.425.0

22.822.822.822.822.8

11.910.49.27.0

5.1

20.419.217.7

13.612.05.5

6.1 8.09.1

10.8

7.27.8

4.4

6.3

7.6106.3109.6113.0

118.3117.8113.9

105.6

0

20

40

60

80

100

120

140

160

180

02 03 04 05 06 07 08 09 10 11

Short- term(Treasury　Bills)

Middle- term(2 6-year)～

Long- term(10-year)

Super　long- term(20,　30,　40-year)

Others

（ＦＹ）note 　 FY2002 FY2009　:　Actual（ ） ～

trillion　yen（ ）

137.5144.3 144.9

（Ｉｎｉｔｉａｌ） （Ｉｎｉｔｉａｌ）

11

60 Year Redemption Rule

Refunding　Bonds　(Finances　through　Government　Debt　Consolidation　Fund　Special　Account　to　appropriate　for　redeeming)

Redemption600 　 Issuance　of　Refunding　Bonds

Redemption500

Redemption400

Redemption300

Redemption200

600 Redemption100

　after　10　years 　after　20　years 　after　30　years 　after　40　years 　after　50　years 　after　60　years

600 500 400 300 200 100 0Outstanding

New　Issue(Revenues　from　NewFinancial　Resource

Bonds)

NewIssue

Issuance　and　Redem

ption

of　General　Bonds

500

400

300

100

200

12

Guiding Principles Predictability

　The　JGB　issuance　plan　for　the　fiscal　year　is　to　be　formulated　and　　announced　at　the　end　of　the　previous　year,　which　

provides　market　participants　with　the　predictability　for　the　market　issuance.

Transparency The　JGB　issuance　plan　is　to　be　formulated　in　consultation　

with　the　 　market　participants,　including　primary　dealers　and　investors,　so　that　 　the　plan　reflects　market　needs　properly.　The　record　of　such　consultation　is　made　public　on　the　JGB　web-pages.

　FlexibilityResponding　to　the　change　of　the　market　conditions　after　

the　formulation　of　annual　issuance　plan,　the　issuance　authority　flexibly　reviews　and　revises　the　annual　plan　based　on　close　consultations　with　the　market　participants.

13

Dialogue with the Markets

Obtain　opinions　and　advices　on　the　government　debt　management　policy　from　intellectuals　in　the　private　sector

Dialogue　with　institutional　investors　such　as　insurance　companies,　pension　funds,　banks　and　foreign　investors

◇The　Advisory　Council　on　Government　Debt　

Management

◇The　Meeting　of　JGB　

Investors◇Overseas　IR

Dialogue　with　financial　institutions　involving　actively　　　in　promotion　for　retail　JGB　holdings

Promotion of JGB holdings

DebtManagement

Office

Share　ideas　with　major　banks　and　securities　companies　(Primary　Dealers)

◇　The Meeting　of　JGB　Market　Special　

Participants

Explain　the　current　status　and　future　direction　of　the　Japanese　economy,　debt　management　policies,　etc　directly　to　foreign　investors　　

◇The　Meeting　of　JGB　

Top　Retailers

14

【 End of Dec. 】Cabinet decision of next fiscal year’s budget → Formulation of JGB Issuance Plan for the next fiscal year Announcing JGB total issuance amount (with breakdown figures by the fiscal needs, and by the financing methods) and JGB market Issuance by JGB Types

JGB Issuance

【 Nov.- Dec. 】Consultation with the market participants, including Primary Dealers and investors, for the purpose of formulating JGB Issuance Plan of the next fiscal year

Regular Business Cycle

【 End of Mar. 】Diet approval of the next fiscal year’s regular budget → Confirmation of JGB Issuance plan Throughout a fiscal year, consultation with the market participants takes place at least quarterly.

【 About 3 months before 】 Announcement of auction dates

【 About 1 week before 】 Announcement of auction dates, issuance dates, maturities and offering amounts

【 Day of Auction 】 10:30 Announcement of detail information (including coupon rates) 12:00 Closing of the auction 12:45 Announcement of the auction results 16:00 Official notification to bidders

15

Syndicate　underwriting　system　is　a　mechanism　wherein　a　group　of　selected　financial　institutions　underwrite　JGB　issuances　with　negotiated　terms.　

This　system　has　contributed　stable　consumption　of　JGBs　in　early　days.　However,　in　light　of　enhancing　market　price　mechanism,　the　share　of　syndicate　underwriting　has　been　reduced　over　time,　and　eventually　abolished.　

　　　　　　　

Fixed-share underwriting (100%)

Fixed-share underwriting (80%)

Competitive　price　auction　(100%)

Competitive price auction (90%)

Auction on an underwriting basis

Fixed-share underwriting

○100%　fixed-share　underwriting　(Jan.1966-Oct.1987)

○Auction　on　an　underwriting　basis　(Nov.1987-March1989)

○Expansion　of　auction　share　(Apr.2005-Mar.2006)

○Abolishment　of　the　syndicate　underwriting　(at　the　end　of　Mar.2006)

Syndicate Underwriting System

16

JGB Market Special Participants

MOF　grants　privileges　to　qualified　auction　participants　in　return　for　fulfilling　responsibilities.　

Privileges(1)Participation　in　regular　meetings(2)Participation　in　buy-back　auctions(3)Stripping　and　reconstruction　

operations　of　STRIPS(4)Participation　in　Non-Price　Competitive　　

　　Auction(5)Participation　in　Auction　for　Enhanced-　　

　　　Liquidity(6)Preferred　participation　in　interest　rate　

　　　　　swap　transactions

Responsibilities(1)Bidding　obligation　(min.　3%　in　every　auction)(2)Successful　bids　target　(target　min.　1%*　per　quarter　in　each　category)

＊ 0.5%　for　short-term　instruments

(1)Improving　and　maintaining　liquidity　in　the　secondary　market(2)Information　sharing

17

Auction Mechanism≪Example≫

【 Important Concepts 】　・ Bid to cover ratio　　　　Amounts　of　competitive　bids　/　amounts　of　bids　accepted.　　In　this　example,　1.7　(2,600　/　1,500).

　・ Tale　 Weighted　average　price　 － lowest　accepted　price.　In　this　example,　tail　is　0.08　(99.98　-　99.90).

Offering Amount : 1,500 bln yen

Conventional Dutch

① 100.10 100 bln　yen 100 100.10 99.90

② 100.05 200 bln　yen 300 100.05 99.90

③ 100.00 400 bln　yen 700 100.00 99.90

④ 99.95 600 bln　yen 1,300 99.95 99.90

⑤ 99.90 400 bln　yen 1,700 99.90 99.90

⑥ 99.85 350 bln　yen 2,050 - -

⑦ 99.80 300 bln　yen 2,350 - -

⑧ 99.75 200 bln　yen 2,550 - -

⑨ 99.70 50 bln　yen 2,600 - -

※1. Applied　in　40-year　and　JGBi

※2. The　lowest　bids　are　alloted　on　pro-rata　basis　among　the　relevant　bidders.

Bids　AcceptedBid　Price Bid　Amount Subtotal

※2

※1

18

WI (When Issued) Transaction

Publication of all necessary information enabled the market to further extend WI transactions prior to the days of auction (since February, 2004).

WI transaction allows both market participants and the issuing authority to grasp market trends in a more timely fashion.

WI Transaction

Auction Announcement Auction Issuance

19

Market Participation Market DiversifyingApr.1977Starting　of　secondary　market　transactions

Apr.1983Starting　of　retail　trading　by　financial　institutions(34　banks　;　CityBanks　etc)

【Expansion】Oct.1984　:　foreign　banksJul. 1985　:　regional　banksJul. 1986　:　credit　union　(Shinkin　bank)Apr.1988　:　postal　office

Oct.1985Starting　of　futures　contracts

Apr.1996Starting　of　repo　contracts

May.1990Starting　of　futures　option　contracts

Apr.1989Starting　of　option　contracts

Development of Secondary Market

20

Market発行当局

Liquidity Control Measures

Regular　Issuance

Regular　Redemption

Auction for Enhanced-Liquidity

Buy-Back Operation

Debt　Management　

Office

Absorb less transacted issues.

Expand the volumes of issues withliquidity constraints.

21

Expansion of Tax Exemption for Foreign Investors

2001Foreign Individuals

2011LPS

2010Expansion of Scope(※)

2011Pension Funds

1999Foreign Corporations

2002Investment Trusts

22

Expansion of Non-Taxable Investment Trusts

Distribution

Tax-exempt

Foreign SecuritiesInvestment TrustJGB

JGB

Before

Distribution

Domestic Securities Company

ResidentInvestors

Distribution

InterestDistribution Master Fund

Distribution

After

① ②

Foreign SecuritiesInvestment Trust

Interest

Feeder Fund Ａ（ Qualified Foreign Securities

Investment Trust ）

Feeder Fund B（ Qualified Foreign Securities

Investment Trust ）

JGB

Non-residentInvestors

Japan

JapanJapan

Overseas

Overseas Overseas

Tax-exempt

Tax-exempt

Interest

Non-residentInvestors

Non-residentInvestors

Public offering

Non-residentInvestors

Public offering

Public offering

Public offering Public offering

Distribution