institutional and legal frameworks for public debt management
DESCRIPTION
Kohei NodaTRANSCRIPT
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
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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.
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○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.
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FILP Structure
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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)
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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-
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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
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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
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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)
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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
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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.
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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
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【 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
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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
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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
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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
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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
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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
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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
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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