Framework of Debt Management

Ⅱ

This part explains the fundamental frameworkof debt management.

Ⅱ Framework

40

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

　1　P rimary Market for Gov ernment BondsJGBs for financing fiscal expenditures are issued in various types, depending on their applicable

legal grounds and bond features. This section explains how JGBs are issued.

(1) J GBs by L egal Grounds of IssuanceJGBs can be divided into two m ain categories: general bonds, and F iscal I nvest m ent and

L oan P rogram Bonds ( F I L P Bonds) . W hile the governm ent m ainly relies on tax revenue to

redeem general bonds, the redem ption and the interest paym ents on F I L P Bonds are covered

through the recovery of loans to F I L P agencies. H owever, both general bonds and F I L P Bonds

are JGBs and are j ointly issued with the sam e interest rate and m aturity. They are the sam e

financial instrum ents and are treated in the sam e m anner on the m ark et as well.

F i g .2- 1 J G B s b y L e g a l G r o u n d s o f I s s u a n c e

JGBsGeneral Bonds

Construction Bonds

R econstruction Bonds

A. General Bonds

General bonds consist of C onstruction Bonds, S pecial Deficit- financing Bonds, R econstruction

Bonds and R ef unding Bonds. C onstruction Bonds and S pecial Deficit- financing Bonds are issued

under the General Account and the revenue f rom their issuance is reported as the governm ent

revenue of the General Account.

O n the other hand, R econstruction Bonds are issued under the S pecial Account f or

R econstruction f rom the Great E ast Japan E arthq uak e and R ef unding Bonds under the S pecial

Account of Govern m ent Debt C onsolidation F und and the revenue f rom their issuance is

reported as the governm ent revenue of each S pecial Account.

a. C onstruction Bonds

Article 4 ( 1 ) of the P ublic F inance Act prescribes that annual govern m ent expenditure

has to be covered in principle by annual governm ent revenue generated f rom other than

governm ent bonds or borrowings. But as an exception, a proviso of the Article allows the

governm ent to raise m oney through bond issuance or borrowings f or the purpose of public

work s, capital subscription or lending.

Bonds governed by this proviso of Article 4 ( 1 ) are called " C onstruction Bonds." The Article

prescribes that the governm ent can issue C onstruction Bonds within the am ount approved

by the Diet, and the ceiling am ount is provided under the general provisions of the General

Account budget ( ☞ ) ．

☞ When intending to get approval for this ceiling amount, the government is obliged to submit to the Diet a redemption plan that shows the redemption amount, the redemption method (redemp -tion at maturity or by annual installments) and the redemp-tion periods for each fiscal year for a reference.

C hap ter 1 Gov ernment Bonds (J GBs)

Ⅱ Framework

41

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

b. Sp ecial D eficit-Financing Bonds

W hen estim ating a shortage of governm ent revenue despite the issuance of C onstruction

Bonds, the governm ent can issue governm ent bonds based on a special act ( ☞① ) to raise

m oney f or the purpose of other than public work s and the lik e. These bonds are generally

called " S pecial Deficit- financing Bonds" , but given their nature, these bonds are also called

" Deficit- financing Bonds" .

As is the case with C onstruction Bonds, the governm ent can issue S pecial Deficit- financing

Bonds within the am ount approved by the Diet and the ceiling am ount is provided under the

general provisions of the General Account budget ( ☞② ) .

S pecial Deficit- financing Bond issuance m ust be m ade on exceptional cases. Theref ore, the

governm ent has to m inim ize the issuance am ount as m uch as possible within the am ount

approved by the Diet, while tak ing into account the state of tax and other revenues ( ☞③ ) .

c. Reconstruction Bonds

To recover f rom the Great E ast Japan E arthq uak e disasters, the governm ent is supposed

to issue R econstruction Bonds f rom F Y 2 0 1 1 to F Y 2 0 2 0 in accordance with “the Act on

S pecial M easures concerning the securing of f inancial resources to execute m easures

necessary f or recovery f rom the Great E ast Japan E arth q ua k e ( R econstruction F unding

Act) .” W hile necessary financial resources will be financed with revenues of S pecial Taxes

f or R econstruction, the governm ent will issue R econstruction Bonds as bridging f inance

until these revenues are receivable to the governm ent.

The govern m ent m ay issue these R econstruction Bonds within the a m ount as approved

by the Diet. The ceiling am ount is provided under the general provisions of the S pecial

Account budget f rom F Y 2 0 1 2 onwards.

d. Refunding Bonds

As f or General Bonds, R ef unding Bonds are issued in order to raise f unds f or ref unding

part of m atured JGBs. Am ong General Bonds, as f or C onstruction Bonds and S pecial

Deficit- financing Bonds, the issuance am ount of R ef unding Bonds is determ ined basically

in accordance with the 6 0 - year redem ption rule. As f or R econstruction Bonds, R ef unding

Bonds are issued depending on the a m ount of the revenue f rom S pecial Taxes f or

R econstruction and profit f rom sales of stock s in each year. ( ☞ )

R e f unding Bonds are the JGBs issued through the S pecial Account f or the Govern m ent

Debt C onsolidation F und ( GDC F ) . R evenues f rom R ef unding Bonds are directly posted to

the f und.

I n the issuance of R e f unding Bonds, the govern m ent is not re q uired to see k the Diet

approval f or the m axim um issuance am ount. This is because unlik e in the case of bonds

issued to secure new revenue resources, such as C onstruction Bonds and S pecial Deficit-

financing Bonds, issuing R ef unding Bonds does not lead to an increase in the total am ount

of outstanding debt.

(Reference) Front-loading issuance of Refunding Bonds

As m assive bonds rede m ption at m aturity is expected to continue, the govern m ent is

allowed to f ront- load the issuance of R ef unding Bonds in order to m itigate the im pact of

concentration of bonds rede m ption at m aturity, to control substantial volatility of JGB

☞①The Act on Special Pro-visions concerning Issuance of Public Bonds to Secure Financial Resources Required for Fiscal Management al -lows Special Deficit-financing Bonds to be issued for five years from FY2016 to 2020.

☞②The government is also required to submit a redemp-tion plan to the Diet for a refer-ence

☞③ In this context, it is al -lowed to issue Special Deficit-financing Bonds until the end of June in the next fiscal year. (deferred issuance in the ac -counting adjustment term)

Ref: II Chapter1 3 (1)“Redemption System” (P72)

☞ In line with tax revenues through the consumption tax increases in and after FY2014, Refunding Bonds are issued for Special Bonds for covering Public Pension Funding, which were issued in FY2012 and FY2013 as bridging finance until tax revenues are assured for the finance of increase of the Government s contribution to the basic national pension, based on the special law for Special Deficit-financing Bonds legislated in FY 2012.

Ⅱ Framework

42

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

m ark et issuance in each fiscal year and to enable flexible issuance of them in response to

financial conditions and so on.

I f we k now in advance that bonds rede m ption at m aturity will concentrate in a certain

fiscal year, leading to a sharp rise in R ef unding Bond issuance, then we are able to level

of f bond issuance on the yearly basis by issuing a certain portion of these bonds ahead of

schedule( “F Y 2 0 0 8 problem ” ( ☞① ) ) .

F ront- loading issuance of R ef unding Bonds can also serve to address a sharp fluctuation

of fiscal needs without bringing about additional im pacts on the m ark et. I f f ront- loading

issuance of R ef unding Bonds is already scheduled ( i.e., scheduled bond issuance am ount is

larger than the necessary f und- raising am ount) , and the necessary f und- raising am ount has

increased, we are able to address the situation without changing the JGB M ark et I ssuance

( C alendar Base) by issuing the scheduled f ront- loading issuance am ount as necessary JGBs

f or that fiscal year ( ☞② ) .

F ront- loading issuance of R ef unding Bonds can be m ade within the upper lim it approved by

the Diet in accordance with P aragraph ( 1 ) , Article 4 7, of the Act on S pecial Accounts. The

lim it is provided in the general provisions of the S pecial Account budget in each fiscal year.

The gap between “the am ount of the f ront- loading issuance of R ef unding Bonds that had

been scheduled in the previous fiscal year f or this fiscal year” and “those that are scheduled

f ront- loading in this fiscal year f or the next fiscal year” can be used as part of this fiscal

year’s f und- raising am ount under the governm ent debt m anagem ent policy.

This is called “adj ustm ent between fiscal years ( ☞③ ) ” in term s of issuance type in the JGB

I ssuance P lan.

F i g .2- 2 A d j u s t m e n t b e t w e e n F i s c a l Y e a r s i n t h e F Y 2016 J G B I s s u a n c e P l a n ( I m a g e )

B. Fiscal Inv estment and L oan P rogram Bonds (FIL P Bonds)

Along with the F Y 2 0 0 1 re f orm of the F I L P ( F iscal I nvest m ent and L oan P rogra m ) , the

govern m ent started issuance of the F iscal I nvest m ent and L oan P rogra m Bonds ( so- called

☞① The problem refers to concentrated bond redemption at maturity in FY2008 result-ing from the large-scale 10-year JGB issuance mainly for economic stimulus purposes in FY1998. To address this problem, the government has coordinated the amount of JGB issuance between fiscal years by buying back JGBs redeem-able at maturity in FY2008 and sharply increasing front-loading issuance of Refunding Bonds from FY2004.

☞② In the FY2011 third supplementary budget, the government planned to issue additional JGBs (Reconstruc-tion Bonds) of 11.55 trillion yen (figures in this paragraph represent in comparison with the first supplementary budget). Then, the govern -ment has minimized impacts on demand-supply in the market by issuing additional Reconstruction Bonds instead of front-loading issuance of Refunding Bonds, which leads to holding down an increase in the calendar-based JGB market issuance as small as 800 billion yen.

☞③ The adjustment includes the difference in the amount of issuance in the accounting adjustment term between the current and the previous fiscal years besides that of front-loading issuance of Refund -ing Bonds. In the accounting adjustment term, which means a period from April to June, some of Deficit-Financing or Reconstruction Bonds for the previous fiscal year can be is-sued.

FY2016 FY2017FY2015

M onthlyissuanceamount

A mount req uired to be raised through JGB market issuance for FY2016 revenue

152.2 trillion yen ( part)

FY2016 (A pril-M arch) JGB market issuance amount

152.6 trillion yen ( part)

A d j u s t m e n t b e t w e e n f i s c a l y e a r s

▲0.4 trillion yen ( 　　　)

FY2015 transferconsolidationperiod JGBissuance amount:2.5 trillion yen

Front loadedFY2017 R efundingBond issuanceamount: 38.7trillion yen.

FY2016 transferconsolidationperiod JGBissuance amount:2.5 trillion yen

Front loadedFY2016 R efundingBond issuanceamount: 38.2trillion yen

A pril M arch

: Calendar-based JGB market issuance amount+ Non-P rice Competitive A uction II: R epresenting FY2016 revenue: R epresenting FY2015 and FY2017 revenue

Note 1: Components may not add up to the total due to rounding.Note 2: A mounts planned or estimated upon the fix ation of the FY2016 JGB Issuance P lan.

Ref: “FILP Report”

Ⅱ Framework

43

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

F I L P Bonds) to raise f unds f or the investm ent of the F iscal L oan F und. As with other types

of govern m ent bonds, this security is issued against the credit of the govern m ent, and its

m axim um issuance am ount req uires the Diet approval ( Article 6 2 ( 2 ) of the Act on S pecial

Accounts) . R evenues f rom the F I L P Bond issuance are allotted to the annual revenue f or

the S pecial Account f or the F iscal I nvest m ent and L oan P rogra m ( F I L P S pecial Account ) .

H owever, the F I L P Bonds are dif f erent f rom C onstruction Bonds and S pecial Deficit- financing

Bonds on one account. W hile f uture taxes will be used to redeem C onstruction Bonds and

S pecial Deficit- financing Bonds, the redem ption on the F I L P Bonds are covered through the

recovery of F iscal L oan F und loans to I ncorporated Adm inistrative Agencies, etc. Theref ore,

when publishing outstanding debt, F I L P Bonds are treated dif f erently f rom General Bonds

( ☞ ) .

F i g .2- 3 O u t l i n e o f F I L P R e f o r m

☞Also in the System of Na-tional Accounts (SNA), which is created by the nited Na -tions for each country to create economic statistics based on a common standard, FILP Bonds are not classified as debt of the general government.

・

Governm

ent affiliated financialinstitutionsIncorporated adm

inistrative agenciesLocal governm

ents

Fiscal Loan Fund

Financial markets

Governm

ent affiliated financialinstitutions

Incorporated administrative agencies

Local governments

Trust Fund Bureau Fund

PostalSavings Refund

Deposit

Loan

F ILP Bonds Loan

F ILP agency bonds ( non-F ILP plan)

Redemption

Recovery

Refund

Deposit

＜Before Reform＞ ＜After Reform＞

PensionReserves

( Employ eePension/NationalPension) RecoveryRedemption

Note1 : Prior to the reform, F ILP funding came from the Trust F und Bureau F und ( shown above) and also from Postal Life Insurance F unds, the Industrial Investment Special Account and Government-Guaranteed Bonds.

Note2 : Trust F und Bureau F und includes deposits from special account surplus reserves, other than those shown above.

Note1 : After the reform, F ILP includes loans to F ILP Special Account ( Investment Account), Government-Guaranteed Bonds ; loans from Postal Savings and Postal Life Insurance to local governments.

Since F Y2 0 0 7 , there has been no loan from Postal Savings and Postal Life Insurance to local governments.

Note2 : F iscal Loan F und includes deposits from special account surplus reserves, other than those shown above.

Ⅱ Framework

44

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

(2) Typ es of J GBsGovernm ent bonds are the securities issued by the central governm ent. The central governm ent pays the bondholders interests on the securities and repays the principal am ount ( i.e., redem ption) . I nterest is payable on a sem iannual basis, except f or short- term bonds, and the principal am ount is redeem ed at m aturity. The JGBs currently issued can be classified into six categories: short- term ( 1 - Y ear) ; m edium - term ( 2 - Y ear and 5- Y ear Bonds) ; long- term ( 1 0 - Y ear Bonds) ; super long- term ( 2 0 - Y ear, 30 - Y ear and 4 0 - Y ear Bonds) ; I nflation- I ndexed Bonds ( 1 0 - Y ear Bonds) ; and JGBs f or R etail I nvestors ( 3- Y ear F ixed- R ate, 5- Y ear F ixed- R ate and 1 0 - Y ear F loating- R ate Bonds) .The short- term JGBs are all discount bonds, which are accom panied by no interest paym ent during their duration to m aturity and redeem ed at f ace value at m aturity ( ☞① ) .O n the other hand, all m edium - , long- , super long- term bonds and JGBs f or R etail I nvestors ( 3- Y ear F ixed- R ate, 5- Y ear F ixed- R ate) are the bonds with fixed- rate coupons. W ith fixed- rate coupon-bearing bonds, the interest calculated by the coupon rate determ ined at the tim e of issuance is paid on a sem iannual basis until the security m atures and the principal is redeem ed at f ace value.I nflation- I ndexed Bonds ( JGBi) are securities whose principal am ounts are link ed to the consum er price index ( C P I ) . Thus, although their coupon rates are fixed, the interest paym ent also fluctuates. The principal am ount of JGBi issued in and af ter 2 0 1 3 will be guaranteed at m aturity ( deflation f loor) . I n case where the indexation coef f icient f alls below 1 at m aturity, the Bonds will be redeem ed at the f ace value.JGBs f or R etail I nvestors ( 1 0 - Y ear F loating- R ate) are JGBs with coupon rates that vary over tim e according to certain rules. 1 5- Y ear F loating- R ate Bonds ( ☞② ) as well as JGBs f or R etail I nvestors ( 1 0 - Y ear F loating- R ate) f eature their coupon rates that vary according to certain rules. New issuance has been put on hold f or the 1 5- Y ear F loating- R ate Bonds, however.

F i g .2- 4 T y p e s o f J G B s (☞②～④)

M aturityShort ter M ediu ter on ter

1 Year 2 Year, 5 Year 10 YearT ype of issue Discount bonds Coupon bearin bondsM in. face alue unit 10,000,000 yen ☞③ 50,000 yen

ssuanceethod

ublic offerinBOJ sw itch

ublic offerinOT C sales

akin offerin s and acceptin subscriptionsA uction

ethodrice co petiti e auction/

Con entional style auctionrice co petiti e auction/

Con entional style auctionNon price

Co petiti eA uction

Non rice Co petiti e A uction

Non Co petiti e A uctionNon rice Co petiti e A uction Non rice Co petiti e A uction

T ransfer Not restricted Not restrictedreq uency of issue

Y2016 M onthly M onthly each

M aturity

Super lon ter JGBs for R etail n estors n ation ndex ed Bonds Super lon ter

20 Year 30 Year 40 Year3 Year ix ed R ate,5 Year ix ed R ate,

10 Year loatin R ate10 Year 15 Year loatin R ate

（☞②

T ype of issue Coupon bearin bondsM in. face alue unit 50,000 yen 10,000 yen 100,000 yen

ssuanceethod ublic offerin

OT C salesakin offerin s and

acceptin subscriptionsublic

offerin ―

A uction ethod

rice co petiti e auction/Con entional style auction

Yield co petiti e auction/Dutch style auction ― rice co petiti e auction/

Dutch style auction ―Non price

Co petiti eA uction

Non rice Co petiti e A uctionⅠNon rice Co petiti e A uction

Ⅱ

Non riceCo petiti eA uctionⅡ

―Non rice

Co petiti eA uctionⅡ

―

T ransfer Not restricted R estricted（☞④） Not restricted

Not restricted

req uency of issueY2016 M onthly each 6 ti es M onthly each 4 ti es ―

☞① Since Feb. 2009, Trea -sury Bills and Financing Bills have jointly been issued, under unified names of Treasury Discount Bills (abbreviation: T-Bill), in the primary and secondary market transaction. But their legal status has not changed under the existing fis-cal system and they will con-tinue to be handled as Treasury Bills and Financing Bills under the fiscal system.

Ref: I 2(3)C “Promoting Market Development and Di-versity of JGB Holders” (P27)

☞② Issuance of 15-Year Floating-Rate Bonds has been suspended since May 2008.

☞③ 50,000 yen from April 1, 2017

☞④ JGBs for retail investors can be transferred only to retail investors (including certain trust custodians).

Ⅱ Framework

45

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

(3 ) J GB Market Sp ecial P articip ants SchemeAm id expectations that JGB issuance in large volum es will continue, in O ctober 2 0 0 4 the “JGB M ark et S pecial P articipants S chem e” was introduced in Japan. This schem e is designed based on the so- called “P rim ary Dealer S ystem ” generally m aintained in m aj or E uropean countries and the .S . to f acilitate secure stable issuance and to m aintain and enhance the li q uidity of governm ent bond m ark ets.

nder the sche m e, the M O F grants special entitle m ents to certain auction participants when they carry out responsibilities essential to debt m anage m ent policies, such as active participation in JGB auctions. The M O F expects the schem e to f acilitate secure and stable issuance of JGBs and to m aintain and enhance the li q uidity of the JGB m ark et.　The f ollowing is an outline of the schem e.

A. Resp onsibilities of Sp ecial P articip ants

・Bidding responsibility:I n every auction, the S pecial P articipants shall bid f or an adeq uate am ount ( at least 4 % of the planned issue am ount) at reasonable prices.

・P urchasing responsibility:The S pecial P articipants shall purchase and underwrite at least a speci f ied share of the planned total issue am ount ( 0 .5% f or short- term zone; and 1 % f or other zone) in each of the super long - term , long - term , m ediu m - term and short - term zones in auctions f or the preceding two q uarters.・R esponsibility on the secondary m ark et:

The S pecial P articipants shall provide suf ficient liq uidity to the JGB secondary m ark et.・I nf orm ation sharing:

The S pecial P articipants shall provide inf orm ation on JGB m ark ets and related transactions to the M O F .

B. E ntitlement of Sp ecial P articip ants

・P articipation in the M eeting of JGB M ark et S pecial P articipants:The S pecial P articipants can tak e part in the m eeting in order to exchange opinions with the M O F on JGB m anagem ent policies.

・P articipation in Auctions f or Buy- back s:The S pecial P articipants can tak e part in Auctions f or Buy- back s.

・S eparation and integration of S TR I P S Bonds:The S pecial P articipants can apply f or the separation and integration of S TR I P S .・P articipation in Non- P rice C om petitive Auctions I & I I :

The S pecial P articipants can ta k e part in Non - P rice C om petitive Auction I ( held concurrently with norm al com petitive auctions) and Non - P rice C om petitive Auction I I ( held a f ter norm al com petitive auctions) . These auctions enable S pecial P articipants to obtain JGBs at the weighted average accepted price at a com petitive price auction, up to a purchasing lim it preset f or each P articipant on the basis of past successf ul bid ( Non- P rice C om petitive Auction I ) and past subscriptions ( Non- P rice C om petitive Auction I I ) . ・P articipation in Auctions f or E nhanced- L iq uidity:

The S pecial P articipants can tak e part in Auctions f or E nhanced- L iq uidity that are designed to m aintain and im prove liq uidity on the JGB m ark et.

Ⅱ Framework

46

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

・P ref erential P articipation in I nterest R ate S wap Transactions:The S pecial P articipants can be pre f erential counterparties f or the interest rate swap transactions im plem ented by the M O F .

C . H istory of System Introduction

・O ctober 2 0 0 4 : JGB M ark et S pecial P articipants S yste m was introduced ( S pecial P articipants were designated. The M eeting of JGB S pecial P articipants started. The Non-P rice C om petitive Auction I I was launched.) .

・April 2 0 0 5: The Non- P rice C om petitive Auction I was launched.・January 2 0 0 6 : I nterest rate swap transactions started.・M arch 2 0 0 6 : The governm ent bond syndicate underwriting system was abolished.・April 2 0 0 6 : Auction f or E nhanced- L iq uidity was launched.

(4 ) Methods of IssuanceM ethods of issuing JGBs are basically divided into three: of f erings to the m ark et,　sales to retail investors, and of f erings to the public sector.

A. Offering to the market

JGBs are principally issued in public of f ering on m ark et- based issue term s.

a. P rice/ yield-comp etitiv e auction

P rice / yield - com petitive auction is a m ethod in which each auction participant sub m its a bidding price ( or yield) and bidding am ount in response to the issue term s ( e.g., issue am ount, m aturity, coupon rate) presented by the M O F , and the issue price and am ount will then be determ ined based on the bids.I n this type of auction, the issuing authority starts selling first to the highest price bidder in descending order ( or to the lowest yield bidder in ascending order) till the cum ulative total reaches the planned issue am ount. I n Japan, the auction m ethod varies by type of security. O ne is the conventional m ethod by which each winning bidder purchases the security at his bidding price; and the other is the Dutch- style m ethod by which all winning bidders pay the lowest accepted bid price regardless of their original bid prices ( or yields) ( ☞① ) .I n M arch 2 0 0 1 , the im m ediate reopening rule was introduced f or the purposes including the enhancem ent of JGB liq uidity. The rule treats a new JGB issue as an addition to an outstanding issue im m ediately f rom the issuance day in principle if the principal and interest paym ent dates and coupon rate f or the new issue are the sam e as those f or the outstanding issue.As f or 2 - year JGB issues f or which principal and interest paym ent dates are dif f erent, the im m ediate reopening rule m ay not be applied ef f ectively ( ☞② ) .

b. N on-comp etitiv e auction

Besides com petitive auction, 2 - Y ear, 5 - Y ear and 1 0 - Y ear Bonds are also issued through non- com petitive auction. This approach is to tak e into account sm all and m edium m ark et participants who tend to sub m it a sm aller bid than their larger counterparts. Biddings f or non - com petitive auction are of f ered at the sa m e ti m e as f or the price - com petitive auction, and the price of f ered eq uals to the weighted average accepted price of the price com petitive auction. O ne can bid f or either the price com petitive auction or f or the non-price com petitive auction.

☞① The price-competitive conventional auction is used for all JGB issues excluding the 40-year issue subject to the yield-competitive Dutch auc -tion and the Inflation-Indexed Bonds subject to the price-competitive Dutch auction.

☞② In FY2016, the govern-ment will reopen a 10-year Bonds four times (integrating March, April and May issues into the March issue, June, July and August issues into the June issue, September, October and November issues into the September issue, and December, January and Febru-ary issues into the December issue) unless interest rates fluc-tuate wildly (a market yield on an auction day for a new issue deviates from the coupon on an earlier issue with the same maturity date by more than 30 basis points). The reopening rule will also be used in princi-ple to integrate 20- and 30-year Bonds each into four issues. The 40-year Bonds (May, July, September, November, Janu -ary and March issues) will be integrated into one issue (May issue).

Ⅱ Framework

47

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

The m axim um issuance am ount is 1 0 % of the planned issuance am ount. E ach participant is perm itted to bid up to 1 billion yen ( ☞ ) .

c. N on-P rice C omp etitiv e Auction I & II

Non- P rice C om petitive Auction I is an auction in which biddings are of f ered at the sam e tim e as f or the price- com petitive auction. The m axim um issuance am ount is set at 1 0 % of the total planned issuance am ount and the price of f ered is eq ual to the weighted average accepted price of the price com petitive auction. O nly the JGB M ark et S pecial P articipants are eligible to bid in this auction. E ach participant is allowed to bid up to the am ount set based on the result of its successf ul bids during the preceding two q uarters.Non- P rice C om petitive Auction I I is an auction carried out af ter the com petitive auction is finished. The price of f ered is eq ual to the weighted average accepted price in the price-com petitive auction or lowest accepted price in Dutch- style yield- com petitive auction. O nly the JGB M ark et S pecial P articipants are eligible to bid in this auction. E ach participant is allowed to bid up to the am ount set based on the result of its bids during the preceding two q uarters ( ☞ ) .

B. Methods of selling J GBs to Retail Inv estors

a. J GBs for Retail Inv estors

I n M arch 2 0 0 3, issuance was started on 1 0 - Y ear F loating- R ate Bonds f or R etail I nvestors ( ☞ ) in order to prom ote JGB holdings am ong individuals. M oreover, in order to respond to retail investors’ various needs and to prom ote f urther sales, the governm ent has been im proving product f eatures by introducing 5- Y ear F ixed- R ate and 3- Y ear F ixed- R ate JGBs.I ssuance of JGBs f or R etail I nvestors rests on their handling and distribution by their handling institutions com prised of securities com panies, ban k s, and other f inancial institutions as well as post of fices ( about 1 ,0 50 institutions) . The handling institutions are com m issioned by the governm ent to accept purchase applications and to sell JGBs to retail investors. H andling institutions are paid a com m ission by the governm ent corresponding to the handled issuance am ounts.

b. N ew Ov er-The-C ounter (OTC ) sales system for selling marketable J GBs

I n addition to JGBs f or R etail I nvestors, in O ctober 2 0 0 7 a new O T C sales syste m f or m ark etable JGBs was introduced in order to increase retail investors purchase opportunities with regard to JGBs ( 2 - Y ear, 5- Y ear, and 1 0 - Y ear coupon- bearing Bonds) .W ith regard to this new O TC sales system , it allows private financial institutions to engage in subscription- based O TC sales of JGBs in a m anner previously exclusive to post of fices. This developm ent allows retail investors to purchase JGBs via financial institutions with whom they are f am iliar, it also allows them to purchase JGBs in a m anner that is essentially ongoing. Depending on m ark et yield conditions, however, the acceptance of subscriptions m ay be suspended.As with JGBs f or R etail I nvestors, f or the new O T C sales syste m , the govern m ent has com m issioned financial institutions ( about 72 0 institutions) to conduct subscriptions and sales of JGBs. Note that while these financial institutions are req uired to accept subscription and sell JGBs at prices defined by the M O F within a defined period, they are not req uired to purchase any unsold JGBs.As f or F Y 2 0 1 6 , the governm ent plans to launch the new O TC sales system f or I nf lation-I ndexed JGBs f or issuance f rom F Y 2 0 1 7 and raise the lim it on the am ount of subscription, etc.

☞The ceiling amount to bid is not applyed the Shinkin Central Bank, the Shinkumi Federation Bank, the Rokinren Bank and the Norinchukin Bank.

☞Each participant is allowed to bid up to the 15 of one s total successful biddings in the competitive auction and Non-Price Competitive Auction I.

Ref: I 3 “Diversificationof JGB Investor Base” (P31)

☞ JGBs for Retail Investors are designed not to lose prin-cipal. The minimum interest rate of 0.05 is set to prevent the rate from falling to zero or becoming negative.

Ⅱ Framework

48

M OF

①Entrusts offering and　sales of JGBs

Intermediaries

②Offering and sales of JGBs

Retail investors

③Offers to purchase　Pay s purchase 　money

⑤Issuance ⑥Pay s a commission for　handling the offering

④Reports the amount 　of sales Pay s the 　sales value

New OTC Sales Sy stem

○The M OF entrusts offering and sales of JGBs to intermediaries 　( sales prices are designated by the M OF ).○The intermediaries offer and sell JGBs at the M OF -designated prices.○Retail investors purchase JGBs through the intermediaries.

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

F i g .2- 6 N e w O T C S a l e s S y s t e m

F i g .2- 5 C o m p a r i s o n o f J G B s f o r R e t a i l I n v e s t o r s a n d N e w O v e r - T h e - C o u n t e r ( O T C ) S a l e s S y s t e m

JGBs for R etail n estors New OT C JGBs

10 Year loatin R ate

5 Year ix edR ate

3 Year ix edR ate

10 YearM arketable

ix ed R ateBonds

5 YearM arketable

ix ed R ateBonds

2 YearM arketable

ix ed R ateBonds

M aturity 10 year 5 year 3 year 10 year 5 year 2 year

req uency of issuance M onthly 12 ti es a year M onthly 12 ti es a year

urchaseunits/purchase

alue li itsM ini u purchase of 10 thousand yen in 10 thousand yen units/No upper li it

M ini u purchase of 50 thousand yen in 50 thousand yen units/M ax i u alue of 100

illion yen per indi idual application

Sales price 100 yen per 100 yen of face aluethe sa e in the rede ption

Deter ined by M O for each issue possible to sell at any ti e on the arket. H ow e er, the price ay chan e w hen the bonds are sold before aturity.

urchasers i ited to retail in estors No restrictions can also be purchased by corporate entities or condo iniu associations, etc.

nterest rate loatin rate ix ed rate ix ed rate

M ini u interest rate resent 0.05% A bsent

R ede ptionbeforeaturity

Once one year has elapsed since issuance, rede ption before aturity due to o ern ent buy back shall be possible at any ti e there is no principal loss risk . Deduct the tw o interest pay ents i ediately precedin rede ption pretax x 0.79685.

ossible to sell at any ti e on the arket how e er, because the price at ti e of sale shall be the

arket price at that ti e, loss/pro t shall occur on sale there is a principal loss risk . urther ore, there is no sche e for the o ern ent to buyback these bonds before aturity.

ntroduction1st issuance M arch, 2003 January,2006 July, 2010 October, 2007

Ⅱ Framework

49

(8.0)

Sales forR etail Investors

Bank of JapanSw itch

FIL PBonds

P ublicOffering

Non-priceCompetitive

A uction

A dj ustment betw eenfiscal years

JGB Issuance A mount P lanned for FY2016(162.2)

(16.5)(152.2)

Financedin the

market

(2.0)

JGBs forR etail Investors (1.9)

OT C Sales formarketable bonds (0.1)

(5.6)(147.0) (▲0.4)

40-year, 30-year, 20-year, 10-year, 5-year, 2-year, T reasury Discount Bills,10-year Inflation-Index ed Bonds,A uctions for Enhanced-L iq uidity

40-year, 30-year, 20-year, 10-year, 5-year, 2-year,10-year Inflation-Index ed Bonds

(trillion yen)

Note: Figures may not sum up the total because of rounding.

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

C . Offering to the p ublic sector (Bank of J ap an Switch)

W hile Article 5 of the P ublic F inance Act prohibits the BO J f rom underwriting governm ent

bonds, a proviso to the Article allows the BO J to extend credit to the governm ent, up to an

a m ount authorized by the Diet, in exceptional cases. I n practice, such cases are li m ited to

underwriting of R ef unding Bonds within the am ount of JGBs that are held by the BO J and

have reached m aturity ( ̶ of ten ref erred to as " Bank of Japan S witch" ) .

Through its m ark et operations, the BO J holds a large am ount of governm ent bonds. I f the

BO J tried to have its JGB holdings redeem ed in cash, the M O F would be req uired to issue

R ef unding Bonds in the m ark et to raise the f und needed f or redem ption.

A m assive issuance of R ef unding Bonds in the m ark et, however, could invite a f und shortage

in the private sector, thus obliging the BO J to provide the private sector with f unds by

purchasing a substantial am ount of the R ef unding Bonds f rom private sector. To avoid such

roundabout, the BO J is exceptionally allowed to underwrite only up to the am ount necessary

to roll over its m aturing bonds.

F i g .2- 7 J G B I s s u a n c e A m o u n t b y M e t h o d s o f I s s u a n c e

Ⅱ Framework

50

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

(5 ) Gov ernment Bond Administration

A. Items the Bank of J ap an handles

The governm ent entrusts the BO J with m ost of the governm ent bond- related adm inistrative

task s, such as issuance and redem ption. Those adm inistrative task s are as f ollows ( ☞ ) .

・I ssuance: The BO J accepts bids f rom bidders in auctions, notifies am ounts of bids accepted,

collects paym ents, issues the securities, and receives and handles revenues.

・R edem ption/ interest paym ent: The BO J pays principal and interests on JGBs, and receives

and handles f unds to be used f or redem ption, and m ak es their disbursem ent.

B. The Bank of J ap an gov ernment bond network system

The Ban k of Japan operates the Ban k of Japan F inancial Network S yste m ( BO J- N E T )

JGB S ervices ( ☞ ) to ef ficiently and saf ely im plem ent JGB issuance, redem ption and other

adm inistrative task s as explained above.

Ban k s, securities com panies, m oney m ark et brok ers, insurance com panies, etc. participate

in the BO J- N E T JGB S ervices that i m ple m ent JGB issuance, rede m ption and other

adm inistrative task s online.

nder the Act on Book - E ntry Transf er of C om pany Bonds, S hares, etc. at present, JGBs

traded between f inancial institutions are paperless. JGB transf ers are done in the f orm of

transf ers on accounts m anaged by the transf er institution ( the Bank of Japan) .

The BO J- NE T JGB S ervices allow the f ollowing procedures to be com pleted online:

・Notification of of f ering ( f rom the BO J to auction participants)

・Bidding ( f rom bidders to the BO J)

・C ounting the num ber of bidding and reporting to the M O F on total bidding

・Notification of accepted/ allocated bids ( f rom the BO J to bidders)

・I ssuance and paym ent ( f rom the BO J to purchasers / f rom purchasers to the BO J)

☞ The BOJ provides these government bond related ser-vices through its head office and branches, and through agent financial institutions.

☞The BOJ-NET includes the BOJ-NET current account system as a fund settlement system and the BOJ-NET JGB Services as a JGB settlement system.

Ⅱ Framework

51

( Q ualified auction participant)( Bank of Japan)( M edia)

M arketM OF sounds out

market trends & investor' s needs

About 3 monthsbefore auction

About 1 weekbefore auction

Till the daybefore auction

Day of Auction

M OF determines coupon rate

( Note.1 )

M OF releases auction information

instruction

M OF determines successful bids

1 0 :3 0( 1 0 :2 0 )

1 4 :3 0

( 1 0 :2 0 )1 0 :3 0

Announcesthe auction

Biddingcloses

1 2 :4 5

1 5 :1 5

( 1 2 :3 5 )

1 0 :3 0( 1 0 :2 0 )

1 0 :3 0

( M inistry of F inance)

M OF determines issue date& amount

M OF determines auction date

M OF announces auction results

Notifies successful

bids

Bidders1 6 :0 0

M OF determines successful bids

M OF announces auction results

Biddingcloses

Bidding

Announcesthe auction

1 4 :0 0

Notifies successful

bids

Bidders

Bidding

1 2 :0 0( 1 1 :3 0 )

1 6 :0 0

Press release

Press release

Press release

Press release

Press release

Non-price competitive auction II

Note.1 : Treasury Discount Bills are discount bonds and have no coupon rates.Note.2 : Time in paranthesis refers to the time for Treasury Discount Bills. Note.3 : Non-Price C ompetitive Auction II is an auction carried out after the competitive auction is finished. The price is eq ual to the weighted average

accepted price in the price-competitive auction or lowest accepted price in Dutch-sty le y ield-competitive auction. The JGB M arket Special Participants who participate in the auction are able to bid up to the 1 5 % of one' s total successful biddings in the price-competitive auction and Non-Price C ompetitive Auction I. Non-Price C ompetitive Auction II is not conducted for Auctions for Enhanced-Liq uidity and Treasury Discount Bills.

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

C . Auction p rocedures for p ublic offering auction

F i g .2- 8 A u c t i o n P r o c e d u r e s f o r P u b l i c O f f e r i n g A u c t i o n

Ⅱ Framework

52

❶ D ebt Management P olicies, Issuance P lan

I n Japan, the basic obj ectives of the debt m anagem ent policy are set at: ( 1 ) ensuring the stable and sm ooth issuance of Japanese Govern m ent Bonds; and ( 2 ) m ini m izing m ediu m - to long - term f inancing costs. I n line with these obj ectives, the governm ent caref ully pays attentions to m ark et conditions and m ak es ef f orts to m anage JGBs based on investor needs and m ark et trends. Basically, f oreign countries also ta k e al m ost the sa m e stance on their debt m anagem ent policies, but they have their uniq ue characteristics.F urther, the JGB I ssuance P lan is established in line with annual budget f orm ulation and an annual planned issue a m ount f or each m aturity and other data are published in Japan but m ethods f or publishing such data also vary f rom country to country. At the end of each fiscal year, Germ any publishes the total governm ent bond issue am ount and break down f or each m aturity f or the f ollowing fiscal year and their m ethods are considered sim ilar to those of Japan. O n the other hand, the .S . determ ines and publishes necessary issue am ounts not on a fiscal year basis but on a q uarterly basis, com plying with the upper debt lim it specified by law. I n addition, the tim ing of inf orm ation disclosure during the period f rom the announce m ent of a planned issue a m ount to an actual auction f or the issue also varies f rom country to country. ( F ig. c4 - 1 ) ( F ig. c4 - 2 )

F i g .c 4- 1 D e b t M a n a g e m e n t P o l i c i e s i n J a p a n a n d F o r e i g n C o u n t r i e sJapan U.S. U.K. Ger any rance

DebtM ana e ent

Of ce

inancial Bureau,M inistry of inance

Depart ent of the T reasury, Of ce of the

Debt M ana e entDepart ent of the

T reasury, Bureau of the iscal Ser ice

Debt M ana e ent Of ce DM O

Bundesrepublik Deutschland -

inanz a entur G bHGer an inance

A ency

' A ence rance T ré sor A T

T he Obj ecti e ofDebt

M ana e entolicy

・ Ensurin stable s ooth issuance of JGBs・ M ini iz in ediu -

to lon ter nancin costs

T o nance o ern ent

borrow in needs atthe low est cost o er ti e.

T o ini ise, o er the lon ter , the costs of eetin the o ern ent' s nancin needs, takin into account risk, w hile ensurin that debt ana e ent policy is consistent w ith the ai s of

onetary policy.

T o keep interest costs as low as possible across a nu ber of years and

arket phases w hile li itin the interest rate risks resultin fro the portfolio structure.

R aisin suf cient funds on the arkets to nance the State w hile keepin the debt burden to tax payers dow n to a ini u under opti u conditions of security.

iscal Year A pril toM arch nex t year

October pre ious year to Septe ber

A pril toM arch nex t year

January toDece ber

January toDece ber

ssuance lan

・ A nnounce ent of total JGB issuance a ount for the nex t scal year, breakdow ns by

aturity, and freq uency of issuance,etc. in late-Dece ber each year.・ R e iew and ex ible

adj ust ent of the plan durin the rele ant scal year

・ A nnounce ent of planned issuance a ounts by aturity, auction schedule, etc. on a q uarterly basis ebruary, M ay, A u ust and No e ber .

・ A nnounce ent of total issuance a ount for the nex t scal year, breakdow ns by

aturity, etc. in M arch each year.・ A nnounce ent of

speci c details of issuance a ounts and auction schedule on a q uarterly basis.

・ A nnounce ent of planned issuance a ounts by aturity, auction schedule, New issue/R eopenin , etc. for the nex t year in Dece ber each year. T hereafter, announce ent of auction schedule a ain on a q uarterly basis.

・ A nnounce ent of total issuance a ount for the nex t scal year in Dece ber each year.・ Speci c issuance

a ounts are deter ined at a

eetin w ith D held in the w eek precedin the issuance date.

( S ource: R elevant countries’ debt m anagem ent authorities)

D ebt Management P olicies in Foreign C ountriesC olumn 4

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

Ⅱ Framework

53

❷ Bond Typ es and Issuance Methods

M ethods of issuing govern m ent bonds adopted in various f oreign countries are divided into two types: of f ering to the m ark et through auctions or other m eans ( m ark etable bonds) and of f ering to retail investors without going through the m ark et ( nonm ark etable bonds) .M ark etable bonds are norm ally of f ered m ainly through the public auction m ethod which uses both com petitive and non - com petitive auctions. As f or com petitive auctions, notable is the f act that the . K ., Germ any and F rance e m ploy the conventional m ethod ( Note 1 ) f or al m ost all m aturities as is the case of Japan while the

. S . e m ploys the Dutch - style m ethod f or all m aturities ( Note 2 ) . I n addition, the . K . and F rance also use the syndication m ethod ( Note 3) to issue som e of the super long- term bonds and infl ation- indexed bonds ( F ig. c4 - 3) .

Note 1 : Auction m ethod by which each winning bidder purchases the security at his bidding price ( or yield)Note 2 : Auction m ethod by which all winning bidders pay the sam e lowest price/ highest yield of their biddings regardless of their original bidding

prices ( or yields)Note 3: M ethod of of f ering/ underwriting by a syndication com posed of fi nancial institutions, securities com panies, etc.

F i g .c 4- 2 A n n o u n c e m e n t T i m e o f I s s u a n c e A m o u n t a n d A u c t i o n D a t e i n J a p a n a n d F o r e i g n C o u n t r i e sJapan U.S. U.K. Ger any rance

In previousfi scal year

Quarterly basis * Auction date of each month is announced 3 months before.

Approximatelyone week before

Note 1 : As f or issuance lots by m aturity announced in the previous fi scal year and the scheduled auction date announced 3 m onths bef ore, the fi xed am ounts and other details are announced one week bef ore.

Note 2 : P lanned q uarterly am ounts fi nanced f rom the m ark et. Note 3: S cheduled auction date is announced again every q uarter.( S ource: R elevant countries’ debt m anagem ent authorities)

Scheduledauction date ( ＊3 )

Total issuance amount

Total issuance amount

Total issuance amount

Total issuance amount

Total issuanceamount ( ＊2 )

Issues Issues

Issues

Issues

Issues

Planned auction amount

Planned auction amount

Planned auction amount

Planned auction amount

Planned auction amount

Scheduledauction date

Scheduledauction date

Scheduledauction date

Scheduledauction date

Planned auctionamount ( ＊1 )

Scheduledauction date

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

Ⅱ Framework

54

F i g .c 4- 3 B o n d s T y p e s a n d I s s u a n c e M e t h o d s i n J a p a n a n d F o r e i g n C o u n t r i e sJapan U.S. U.K. Ger any rance

Short terabout 2 onth,

3 onth 6 onth, 1 year

4 w eek, 13 w eek, 26 w eek, 52 w eek

1 onth, 3 onth, 6 onth, 12 onth 6 onth, 12 onth ess than or eq ual to

1 year

M ediu ter 2 year, 5 year 2 year, 3 year, 5 year, 7 year 1～7 year 2 year, 5 year 2～7 year

on ter 10 year 10 year 7～15 year 10 year7～50 year

Super on ter 20 year, 30 yaer 40 year 30 year 15～55 year 30 year

Others

n ation ndex ed Bonds

10 year

n ation ndex ed Bonds5 year, 10 year, 30 year

loatin R ate Bonds 2 year

n ation ndex ed Bonds

5～55 year

n ation ndex ed Bonds5 year, 10 year,

30 year

n ation ndex ed Bonds

2～30 year

ssuance M ethod

Con entional style auction

40 year, n ationndex ed Bonds: Dutch

style auction

Dutch style auction

Con entional style auction

n ation ndex ed Bonds: Dutch style auction

Note 1

Con entional style auctionNote 2

Con entional style auctionNote 1

Note 1 : The syndication m ethod is used to issue som e super long- term bonds and inflation- indexed bondsNote 2 : The syndication m ethod was adopted f or the first and second 1 0 - year inflation- indexed bond issues ( 2 0 0 6 ) and the first 30 - year inflation- indexed bond issue

( 2 0 1 5) .( S ource: R elevant countries’ debt m anagem ent authorities)

R epresentative non- m ark etable bonds are bonds f or holdings only by households and other retail investors ( savings-type bonds) , issued in Japan, the .S . and the .K . The .K . f eatures uniq ue non- m ark etable bonds that cannot be seen in other countries, including P re m iu m Bonds that of f er a m onthly prize draw instead of earning interest, as well as C hildren’s Bonds that can be held only by parents or grandparents with children aged below 1 6 . M eanwhile, Germ any and F rance issued governm ent bonds f or retail investors in the past but have discontinued the issuance.The .S . issues a large am ount of non- m ark etable bonds intended f or governm ent accounts including governm ent entities and pension f unds, which account f or approxim ately 30 % of its entire governm ent debt outstanding.

( Note) F or Japanese governm ent bonds f or retail investors, see “F ig 2 - 5 C om parison of JGBs f or R etail I nvestors and New O ver- The- C ounter ( O TC ) S ales S ystem ” ( P 4 8 ) .

( R ef .) Governm ent Bond I ssuance M ethods and Their Transition in F oreign C ountriesAs explained in F ig. c 4 - 3, m a j or industrial countries widely use conventional and Dutch - style m ethods f or com petitive auctions of m ark etable govern m ent bonds. M ost of the m use either or both of the two to issue governm ent bonds ( a survey report covering dozens of countries has concluded that the conventional m ethod has been used m ore widely than the Dutch - style m ethod ) . But there are som e other auction m ethods. The f ollowing auction m ethods are actually used or advocated by auction theorists in addition to the two m ethods ( F ig. c4 - 4 ) .

F i g .c 4- 4 O t h e r G o v e r n m e n t B o n d A u c t i o n M e t h o d sA uction ethod O er iew

Spanish auction ethod

T he a era e accepted bid price is adopted for successful bidders w ith bid prices at or abo e the a era e. Successful bidders’ bid prices are adopted if their bid prices slip below the a era e accepted price. Spain introduced this ethod in 1987.

M edian bid price auction

T he edian accepted price is adopted for successful bidders w ith bid prices at or abo e the edian le el. Successful bidders’ bid prices are adopted if their bid prices slip below the edian price. Sakai 2014 ad ocated this ethod as a theoretically concei able one.

V ickrey auctionEach successful bidder’s pay ent a ount is calculated based on the hi hest of non-accepted bid prices instead of the successful bid price, in accordance w ith the bidder’s bid a ount. V ickrey 1961 ad ocated this auction ethod as a theoretically concei able one. T he ethod has the theoretical ad anta e bein strate y-proof.

( S ources: S panish debt m anagem ent authority’s website, I M F , S ak ai ( 2 0 1 4 ) , V ick rey ( 1 96 1 ) , etc.)

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

Ⅱ Framework

55

Japan switched from the yield-based Dutch auction to the price-competitive, conventional auction for 30-year JGB issues in 2007. Other countries have also changed auction methods.

For example, the U.S. had conducted competitive auctions based on the conventional method for a long time while subjecting some Treasury auctions to the Dutch method in 1973-1974, before switching from the conventional method to the Dutch method for 2- and 5-year Treasury issues in 1992 and for all other Treasury issues in 1998. Such countries as France have been reported as having switched from the Dutch method to the conventional method. (Sources: Relevant countries’ debt management authorities’ websites, etc.)

While structure estimation, economic tests and other various demonstrative analysis approaches have developed, there is no simple theoretical consensus on any optimum method for a government bond auction in which each bidder has a chance to purchase massive bonds. Countries might have chosen their respective auction methods based on their respective government bond market conditions.

❸ Medium to Long-Term Bonds Issuance Broken down by Types

In Japan, the government issues fixed-rate coupon-bearing bonds with the maturity of 40 years at the longest by striking a balance with market trends and investor needs, etc. As shown by the examples of foreign countries, the medium-term zone (7 years or less) accounts for 60% of all government bonds in the U.S. and Germany while the super long-term zone accounts for 30% of all such bonds in the U.K. Maturity mixes thus vary widely from country to country. In addition, it is notable that the U.K. and France specify no maturity and divide maturities into rough categories in a flexible manner.As for Inflation-Indexed Bonds whose issuance resumed in Japan in October 2013, the authorities plan basically to maintain the present issuance size and adjust it flexibly in response to the market environment and investment needs for the purpose of developing the market for these bonds. In the U.K. among foreign countries, Inflation-Indexed Bonds account for more than 20% of all outstanding government bonds, being established as a major fundraising means. In France, Inflation-Indexed Bonds account for 10%, occupying a fairly major position. Germany introduced 30-year Inflation-Indexed Bonds as a new product in June 2015 (Fig. c4-5).

Note 1: Other than those described above, Auctions for Enhanced-Liquidity are held in Japan.Note 2: Foreign currencies are converted into yen using the following exchange rates: 1 dollar = 112.57 yen, 1 GBP =161.65 yen and 1 euro = 128.11

yen (as of March 31, 2016).(Source: Relevant countries’ debt management authorities)

Fig. c4-5 Medium to Long-Term Bonds Issuance by Types in Major Countries (FY2015)

Japan(April to March next year) (October previous year to September)

U.S. FranceGermany(January to December)

U.K.(April to March next year) (January to December)

0

50

100

150

200

250

300

2-year

5-year10-year20-year30-year40-year

(trillion yen)

2-year

3-year

5-year

7-year

10-year30-year

Inflation-Indexed Bonds

Inflation-IndexedBonds

Floater

0

5

10

15

20

25

30

～40-year

～5-year

～10-year

～20-year

～50-year

Inflation-Indexed Bonds(trillion yen)

～5-year

～10-year

～20-year～30-year

Inflation-IndexedBonds

～55-year

2-year

5-year

10-year30-year

Inflation-Indexed Bonds

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

Ⅱ Framework

56

❹ L iq uidity Maintenance/ E nhancement Measures

As f or on - the - run ( new ) JGB issues, Japan has adopted reopening f or 2 0 - to 4 0 - year and I nflation - I ndexed JGB issues in principle and 1 0 - year JGB issues unless yields fluctuate wildly ( the gap between a m ark et yield and a coupon on a new issue exceeds 30 basis points) . Japan has thus tried to m aintain and enhance liq uidity by securing a suf ficient outstanding value f or each issue. As f or of f - the- run ( outstanding) JGB issues, Auctions f or E nhanced-L iq uidity are used to expand issues viewed as illiq uid by m ark et participants am ong alm ost all issues.Am ong f oreign countries, the . S . and Germ any have adopted reopening f or on - the - run issues ( excluding 7 - year or shorter issues in the .S .) in principle. I n the .K . and F rance, the debt m anagem ent authorities discretionarily reopen any issue whether it is on or of f the run ( F ig. c4 - 6 ) . I n Germ any, m eanwhile, the authorities reserve part of each debt issue and gradually sell such reserves in consideration of secondary m ark et conditions. C ountries i m ple m ent various m easures to m aintain and enhance governm ent bond m ark et liq uidity.

F i g .c 4- 6 R e o p e n i n g I s s u a n c e sJapan U.S. U.K. Ger any rance

On the R un ssues

・ 5 year Note 1・ 10 year Note 2・ 20 year・ 30 year・ 40 year・ n ation index ed

bonds

・10 year・30 year・ n ation index ed bonds

・ M ediu ter1～7 year・ on ter

7～15 year・ Super on ter

15～55 year・ n ation index ed

bonds

Note 3

・2 year・5 year・10 year・30 year・ n ation index ed

bonds

・ M ediu ter 2～7 year・ on ter 7～50

year・ n ation index ed

bonds

Note 3Off the R un ssues

・ A uctions for Enhanced iq uidity －

・ 30 year Note 4

W ithout reopenin

・2 year ・2 year・3 year・5 year・7 year

－ － －

Note 1 : R eopening issuances only in case nom inal coupon is the sam e as that of previous issue.Note 2 : “R eopening m ethod in principle” except in case of significant changes ( the gap between a m ark et yield and a coupon on a new issue exceeds 30 basis points) in m ark et

environm ents.Note 3: The debt m anagem ent authorities discretionarily reopen any issue whether it is on or of f the run.Note 4 : The debt m anagem ent authorities decide whether to reopen any issue.( S ource: R elevant countries’ debt m anagem ent authorities)

❺ Av erage Maturity

The “stock - base average m aturity” is viewed as an im portant benchm ark f or assessing ref unding risk s.

C om parison between stoc k - based average m aturities f or govern m ent bonds in Japan and m a j or f oreign countries

indicates that the averages range f rom f our to seven years in the .S ., Germ any and F rance ( the average stands at as

high as m ore than 1 6 years in the .K . with super long- term issues accounting f or a large share of all governm ent

bonds) , while the Japanese average bottom ed out at 4 .9 years at the end of F Y 2 0 0 3 and increased by approxim ately

3.5 years in 1 2 years to 8 . 4 years at the end of F Y 2 0 1 5 ( F ig. c 4 - 7 ) . The stoc k - base average m aturity in Japan is

expected to rem ain stable f or the im m ediate f uture even if the flow- base average m aturity is k ept unchanged at the

present level ( see C olum n 3 P 2 9) .

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

Ⅱ Framework

57

❻ Breakdown by Gov ernment Bond H olders

A signi f icantly large portion of JGBs are held by Japanese dom estic investors including f inancial institutions. Although the percentage of JGBs held by f oreign investors has been in an uptrend recently, it stays at the low level of approxim ately 1 1 % . O n the contrary, bonds of m aj or f oreign countries are held in large part by overseas investors who account f or 4 0 % in the .S ., approxim ately 50 % in Germ any and approxim ately 6 0 % in F rance. ( F ig. c4 - 8 )

F i g . c 4- 7 A v e r a g e M a t u r i t y

2 0 1 52 0 1 42 0 1 32 0 1 22 0 1 12 0 1 02 0 0 92 0 0 82 0 0 72 0 0 62 0 0 5

9

1 1

1 3

1 5

1 7

U.K.

4

5

6

7

8

2 0 1 52 0 1 42 0 1 32 0 1 22 0 1 12 0 1 02 0 0 92 0 0 82 0 0 72 0 0 62 0 0 52 0 0 42 0 0 32 0 0 22 0 0 12 0 0 01 9 9 91 9 9 81 9 9 7

Japan U.S. Germany F rance

( Year)

( F Y)

<F low Base><Stock Base>

1 2

1 4

1 6

1 8

2 0

2 2

2 4

U.K.

4

5

6

7

8

9

1 0

Japan U.S. Germany F rance

( F Y)

1 0

( Year)

( S ource: E stim ated by M inistry of F inance based on websites of O E C D and relevant countries’ debt m anagem ent authorities)

Government5 %

C entral bank3 2 %

F inancialinstitutions

5 0 %

H ouseholds 1 %

Others1 %

Overseas1 1 %

Japan( Dec. 2 0 1 5 )

Total 1 0 3 5 .7trillion y en

Government

Government

Government

Government

1 7 %

C entral bank

C entral bank

C entral bank

1 6 %

F inancialinstitutions

F inancialinstitutions

F inancialinstitutions

F inancialinstitutions1 7 %H ouseholds

H ouseholdsH ouseholds+ Others

H ouseholds

8 %Others

Others

Others

1 %

Overseas

Overseas

Overseas

Overseas

4 0 %

U.S.

Germany F rance

U.K.

Total 1 5 .1trillion dollars

( Dec. 2 0 1 5 )

Total 2 .2trillion euros

( Dec. 2 0 1 5 )

Total 1 .9trillion pounds

( Dec. 2 0 1 5 )

Total 2 .0trillion euros

( Dec. 2 0 1 5 )

8 %

2 1 %

4 1 %

4 %

0 %

2 6 %

9 %

4 %

2 8 %

7 %

5 3 %

1 %

3 7 %

0 %

0 %6 2 %

F i g .c 4- 8 B r e a k d o w n o f g o v e r n m e n t b o n d s b y h o l d e r c a t e g o r y

Note 1 : Japanese governm ent bonds include F iscal I nvestm ent and L oan P rogram Bonds and Treasury Discount Bills ( T- Bills) .Note 2 : The central bank ’s share in F rance is not m ade available.Note 3: I n Germ any and F rance, the total covers m unicipal and public f und bonds ( on a general governm ent basis) .( S ources: Japan: Bank of Japan, .S .: F ederal R eserve Board, .K .: O f fice f or National S tatistics, K Debt M anagem ent O f fice, Germ any: Deutsche Bundesbank , F rance: Banq ue de F rance)

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

Ⅱ Framework

58

❼ P rimary D ealer System

P ri m ary dealers ( “ P Ds” ) originally re f erred to govern m ent - certi f ied dealers in the . S . C om panies designated as P Ds are entitled to directly trade with the F ederal R eserve Ban k of New Y ork when it conducts open m ark et operations and to exchange opinions by participating in periodic m eetings with the authorities. At the sam e tim e, candidates f or P D designation are exa m ined be f orehand f or their ability to provide m ark et - m a k ing services, financial conditions, auction participation records, etc. and af ter the designation, certain obligations, such as bidding f or governm ent bonds, m ark et m ak ing and providing inf orm ation to the authorities, are placed on P Ds. I n this way, under a certain syste m , com panies with special responsibilities and q ualifications in regard to govern m ent bond m ark ets are designated as P Ds to ensure that the liq uidity, ef ficiency and stability of governm ent bond m ark ets are m aintained and im proved. S uch system is generally called the P rim ary Dealer S ystem .Nowadays, various countries have si m ilar syste m s in place, including Japan’s JGB M ark et S pecial P articipant S chem e. But P Ds’ responsibilities and q ualifications vary f rom country to country as shown below ( F ig. c4 - 9) .

F i g .c 4- 9 P r i m a r y D e a l e r S y s t e mJapan 45 U.S. U.K. Ger any Note 1 rance

Na e JGB M arket Special articipants ri ary Dealers

Gilt ed ed M arket M akers

（GEM M s）

Bieter ruppe Bundese issionenBund ssues A uction

Group

Spé cialistes en V aleurs du T ré sor

SV T

ntroduction ti e 2004 1960 1986 1990 1987

Nu ber of e bers as of M arch 2016 22 co panies 22 co panies 19 co panies 36 co panies 18 co panies

Responsibilities

Biddin

・ articipation in all auctions・ 4% of total planned

issuance a ount

・ articipation in all auctions・ T otal planned

issuance a ount／the nu ber of Ds

[ obj ecti e] ・ articipation in all

auctions・ 5% or ore of total

issuance a ount o er a rollin 6 onth period

―・ articipation in all

auctions・ articipation in all

syndications

urchasin

< Short ter > 0.5% or ore of total planned

issuance a ount o e the last tw o q uarters< Ex cludin Short ter > 1% or ore of the said a ount o er the last tw o q uarters

―

[ obj ecti e]2% or ore of total issuance a ount o er a rollin 6 onth period

0.05% or ore oftotal issuance a ount o er the last one scal year

2% or ore of total issuance a ount o er the last one year

M arket akin

ro idin suf cient liq uidity to the JGB secondary arket

M akin reasonable arkets for the New York ed w hen it transacts on behalf of its forei n of cial accountholders

[ obj ecti e]H a in a 2% or ore share in the ilt secondary arket spot

―

H a in a 2% or ore share in the rench

o ern ent bond secondary arket spot and repo

nfor ation pro ision

counterpartyM inistry of inance New York ed DM O ― A T

Quali

cations

Ex clusi e participation

in auction

・ Non rice Co petiti e A uction ・ Non rice Co petiti e

A uction ・ A uctions for

Enhanced iq uidity・Buy back A uctions

―

・ Co petiti e A uctions・ Non Co petiti e

A uctions・Buy back A uctions・ Syndication Book

runner

・ Co petiti e A uctions・ Non Co petiti e

A uctions・Buy back A uctions

・ Co petiti e A uctions・ Non Co petiti e

A uctions・Buy back A uctions

R e ular eetin

counterparty

M inistry of inance [ q uarterly]

・ U.S. Depart ent of the T reasury [ q uarterly]・ New York ed

[ annually]

・DM O [ q uarterly]・ H M T reasury

[ annually]― A T [ periodically]

Note: Germ any’s “Bund I ssues Auction Group” is sim ilar to prim ary dealer system in other countries in that only the group m em bers are allowed to participate in governm ent debt auctions. But the only req uired q ualification f or a Bund I ssuance Auction Group m em ber is a financial institution based in the E uropean nion and group m em bers have no obligation to participate in governm ent debt auctions and no opportunity f or exchanging views with debt issuance authorities. Theref ore, the Germ an group is viewed as dif f erent f rom the P D group in other countries.

( S ource: R elevant countries’ debt m anagem ent authorities)

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds

Ⅱ Framework

59

❽ Recent Trends

R ecent debt m anage m ent policies in f oreign countries m aintain the basic ob j ective of holding down m ediu m - to long- term financing costs while tak ing risk s into account.H owever, responses to the continuation of a low interest rate environ m ent di f f er f rom country to country. W hile som e E uropean countries including F rance, S pain and Belgium have issued longer- m aturity governm ent bonds, the

.S . has given priority to regular and predictable issuance and been cautious of autom atically issuing super long-term bonds.I n response to f alling govern m ent bond m ark et li q uidity, toughened f inancial regulations and other changes, f oreign govern m ent bond m ark et environ m ents have changed. I n the . S ., m oney m ark et f und re f orm , li q uidity risk regulations and other m easures to toughen financial regulations are expected to prom pt de m and to increase f or short- term issues, with the authorities considering introducing a 2 - m onth issue as a new short- term instrum ent. I n response to declining govern m ent bond m ark et li q uidity, the . K . published a pac k age of policy m easures responding to m ark et environ m ent changes in its 2 0 1 6 - 2 0 1 7 govern m ent bond issuance plan, including the reduction of auction sizes, a greater unallocated portion ( representing bonds with unfixed m aturities) and flexible changes to an auction calendar. Germ any introduced 3 0 - year I nflation - I ndexed Bonds in 2 0 1 5 and i m ple m ented m ultiple sm aller- size auctions f or 3 0 - year f ixed interest bearing bonds to address dwindling m ark et li q uidity. R esponding to the E uropean C entral Ban k ’s launch of the P ublic S ector P urchase P rogra m ( P S P P ) , a sovereign q uantitative easing progra m , F rance has expanded additional supply f or outstanding govern m ent bond issues to m aintain and enhance liq uidity throughout the yield curve.

❾ C oop eration between D ebt Management Authorities

National debt m anage m ent authorities can exchange in f orm ation through internatinoal con f erences sponsored by international organizations.These conf erences include the O E C D ( O rganization f or E conom ic C ooperation and Developm ent) W ork ing P arty on P ublic Debt M anagem ent, the I M F ( I nternational M onetary F und) P ublic Debt M anagem ent F orum , the W orld Bank Governm ent Borrowers F orum and the ADB ( Asian Developm ent Bank ) R egional P ublic Debt M anagem ent F oru m . The Japanese debt m anage m ent authorities have attended these international con f erences as m uch as possible. At m ost of these conf erences, Japanese debt m anagem ent authority of ficials have given presentations on Japan’s Debt M anagem ent P olicy and proactively shared inf orm ation and opinions with their f oreign counterparts on debt m anagem ent policies. Appreciating these ef f orts, in f all 2 0 1 5 the O E C D W ork ing P arty elected a Japanese authority of ficial as a m em ber of its steering.

Chapter 1 G

overnment B

onds (JGB

s)1 Prim

ary Market for G

overnment B

onds