Japan’s Input on Session 4

～ Institutional and Legal Frameworks for Public

Debt Management ～

Debt Management Policy Division, Financial Bureau

Ministry of Finance, Japan
MOF Organization
Ministry of Finance
Debt Management Policy Division (33)

・ Planning of debt management policies

Minister’s Secretariat ・ Research and planning of management system for
government bonds
・ Investor Relations
・ Management of GDCF
・ Budget and closing of Special Account for GDCF
Budget Bureau ※ GDCF is Government Debt Consolidation Fund.

Market Finance Division (31)

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

Fiscal Investment and Loan Program

Division
Financial Bureau
National Property Policy Planning
and Legal Division
International Bureau

････
National Tax Agency Others

2
Legal Framework for Debt
Management
Constitution
Art.85 No money shall be expended,
nor shall the State obligate itself,
except as authorized by the Diet.

Fiscal Act
Based on the bitter experience of
war-time inflation, the Government
limited itself in terms of issuance of Act on Special
bond, namely by Article 4 of Public Account (Art.38-49)
Finance Act. For the same reason, Set-up of National Debt Consolidation
underwriting by BOJ is now also Fund for redemption.
prohibited by Article 5.

Act on National
Government Bonds
Procedural rules on issuance,
redemption etc.
Other Law, Regulation,
Ordinances etc

3
Categories of JGB:
Based on
Purposes
○New Financial Resource Bonds
　 Construction Bonds
Special Deficit Financial Bonds

　 -- To finance annual fiscal needs General Bonds

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

○ FILP (Fiscal Investment and Loan Program) Bonds

　　The
The Fiscal
Fiscal Investment
Investment and
and Loan
Loan Program
Program (FILP)
(FILP) is
is an
an investment
investment and and loan
loan
activity which
activity which
provides
provides essential
essential long-term
long-term and
and low-interest
low-interest funds
funds forfor policy,
policy, which
which areare difficult
difficult
to be
to be
provided
provided through
through private
private funding.
funding. FILP FILP enables
enables the
the execution
execution of of large-scale
large-scale and and
very long-
very long-
term
term public
public projects
projects with
with the
the capital
capital procured
procured by
by issuing
issuing FILP
FILP bonds
bonds or or aa kind
kind ofof
government
government bonds.
bonds. Specifically,
Specifically, itit provides
provides long-term,
long-term, fixed
fixed and
and low-interest
low-interest
capital
capital in the areas pertaining to small and medium-sized enterprises, and
in the areas pertaining to small and medium-sized enterprises, and also
also 4
invests in the fields related to exploration or research and development, of
FILP Structure

5
Historical Changes in JGB
Issuance Plan

（trillion yen）
200
New Financial Resource

160.1

150
6
Categories of JGB:
Based on Terms and
Conditions

before 1997 1998 1999 2000 2001 2002 200

Sep. 1999- 30
20
7
10-Year Inflation-Indexed
Bonds (JGBi)
< assumption >
・ Face value: 10 billion yen; coupon rate: 3% year10

・ CPI: 2% p.a.

Purchas year1 year9

year ½ year 1
e ½ ½ \ 2billion of
1
\151.5 \153 million \154.5 million redemption
million of of interest of interest +
interest \ 80 million of
1
interest
（（inflation-adjusted

（ inflation-adjusted

（ inflation-adjusted principal)
（inflation-adjusted principal
inflation-adjusted principal

（ inflation-adjusted principal)
（ inflation-adjusted principal)
(× 3% × ½ ） (× 3% × ½ ） (× 3% × ½ ） (× 3% × ½ ） (× 3% × ½ ）
\10 billion
face value
principal)

principal)
）

CPI: 100 (\10.1

(\10.2
billion) (\10.3
CPI: 101 billion)
CPI: 102 billion)
CPI: 103
　 (\12
(interest calculating formula) billion)
　×coupon rate × ½
Semi-annual interest= face value × CPI @ payment / CPI @ Issue
　 CPI: 120
tio
fla
In –ip
ld
ac
rn
te
s
ju

(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 8
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
Image of Coupon
bonds – αFloating
）.
(%) Coupon
2.50
α
10- year yeild
1.85 1.90 1.95
2.00 1.80 1.75
1.70 1.65 1.70
1.55 1.60 1.60 1.60 1.65 1.60 1.60
1.45 1.50 1.50 1.50
1.40 1.40 1.40 1.35 1.40
1.50 1.30 1.25 1.30 1.30
1.20
1.10 1.45
1.35 1.30 1.40 1.25
1.00 1.05 1.10 0.90 0.95 1.10 1.20 1.00 1.10 1.15 1.10 1.00 1.10 1.00 1.15
1.20
0.80 0.70 0.75 0.80 0.90 0.80 0.90 0.85 0.90
0.60

0.50
α =0.5
0.00
2.5

3.5

7.0

8.0

9.5

10.5

14.0

15.0
0.5

1.0

1.5

2.0

3.0

4.0

4.5

5.0

5.5

6.0

6.5

7.5

8.5

9.0

10.0

11.0

11.5

12.0

12.5

13.0

13.5

14.5
Yield Curve Sensitivity (year)
- Price associated with yield curve change
-

Yeild curve change P

9
Historical Changes in Market
Issuance Plan by JGB Types

（trillion yen）
180
Short- term M
160
(Treasury Bills) (2

140
10
 60 Year Redemption Rule

New Issue Refunding Bonds

(Revenues from New (Finances through Government Debt Consolidation Fund Special Account to appropriate for red
Financial Resource
Bonds)
Redemption
600 I
　ssuance of Refunding Bonds
Redemption
Issuance and Redemption

500
of General Bonds

Redemption
500 400
New
Redemption
Issue
400 300
Redemption
300 200
600 Redemption
200 100

100
after 10 years after 20 years after 30 years after 40 years after 50 years after 60 years

Outstanding 600 500 400 300 200 100 0

11
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.

 Flexibility
Responding 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 12
Dialogue with the Markets
◇ The Meeting of
JGB Market Special
Participants
Share ideas with major
banks and securities
companies (Primary
Dealers)
Promotion of JGB
holdings
◇The Meeting of JGB
Investors
Dialogue with institutional
investors such as insurance
companies, pension funds,
banks and foreign investors
Debt
Management
Office
◇Overseas IR
Explain the current status
and future direction of the
Japanese economy, debt
management policies, etc
directly to foreign investors
◇The Advisory Council
on Government Debt
Management
Obtain opinions and advices
on the government debt
management policy from
intellectuals in the private
sector
◇The Meeting of JGB
Top Retailers
Dialogue with financial
institutions involving
actively in promotion for
retail JGB holdings
13
Regular Business Cycle
【 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

【 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

【 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

JGB Issuance
14
Syndicate Underwriting System
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.

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

Fixed-share underwriting (100%)

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

Fixed-share underwriting (80%) Auction on an underwriting basis

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

Fixed-share underwriting Competitive price auction (90%)

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

Competitive price auction (100%)

15
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
16
Auction Mechanism
≪Example≫

Offering Amount :1,500 bln yen

Bid Price Bid Amount

① 100.10 100 bln yen

②
【 Important Concepts 】
　・ Bid to cover ratio 100.05 200 bln yen
Amounts of competitive bids / amounts of bids accepted. In this example, 1.7 (2,600 /
1,500).

　・ Tale
③ 100.00 400 bln yen
　 Weighted average price － lowest accepted price. In this example, tail is 0.08 (99.98 - 17
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.

Auction Issuance
Auction
Announcement

WI Transaction

18
Development of Secondary
Market

Market Participation
Apr.1977
Starting of secondary market transa

Apr.1983
Starting of retail trading by fina
19
Liquidity Control Measures

Buy-Back Operation
Absorb less transacted issues.

Regular Redemption
Debt
発行当局
Management Market
Office
Regular Issuance

Auction for Enhanced-Liquidity

Expand the volumes of issues with
liquidity constraints.
20
Expansion of Tax Exemption
for Foreign Investors

1999
Foreign Corporations

21
 Expansion of Non-Taxable
Investment Trusts
Before Japan Overseas
Tax-exempt

Interest Foreign Securities Distribution Non-resident

JGB Investment Trust Investors

Public offering

After
Japan Overseas Japan Overseas

Tax-exempt
Tax-exempt
Interest
Distribution Master Fund
Interest JGB
Foreign Securities Non-resident
JGB Investment Trust Investors

Public offering Feeder Fund Ａ Feeder Fund B

（ Qualified Foreign Securities （ Qualified Foreign Securities
Distribution Investment Trust ） Investment Trust ）
Domestic
Securities Company
Distribution Distribution
Distribution
Non-resident Non-resident
Resident Investors Investors
Investors
Public offering Public offering
Public offering

22