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debt management systems. Business Information and Advice
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3 Debt Management Systems
(1) Redemption system
All the bonds issued to fund a shortfall in the general account of the national budget are repaid through the
Government Debt Consolidation Fund (GDCF).
To ensure stable redemption, redemption funds are transferred from the general account to the GDCF
based on certain rules.
In addition, revenues from refunding bonds, issued through the Special Account for the Government Debt
Consolidation Fund, are posted to the GDCF. Moreover, the proceeds from the sales of government owned
shares that belong to the Special Account for the Government Debt Consolidation Fund are also Chapter
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transferred into the GDCF.
Simply put, fiscal resources for government bond redemption are all funneled through the GDCF — from
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reception and accumulation to disbursements.
＜ Mechanism of redemption ＞
Given below are explanations about each type of fiscal redemption resource.
Ａ Fiscal resources from the general account for redemption
For government bond redemption, there are four ways to transfer fiscal resources from the general
account to the GDCF.
ａ Fixed-rate transfer (1.6% of total government bond outstanding as of the beginning of the previous
fiscal year):
Pursuant to Article 42(2) of the Act on Special Accounts the amount equal to 1.6% 1 of total
government bond outstanding in face value -excl. Financing Bills, borrowings, temporary borrowings,
subsidy bonds and subscription / contribution bonds2-as of the beginning of the previous fiscal year
is transferred from the general account to the GDCF.
When calculating the outstanding amount of discount bonds, their issue price is used as the face value
Article 42(3) of the Act on Special Accounts. As to the difference between the issue price and the face
value (i.e., (the sum) equivalent to redemption profit), the difference divided by the number of years to maturity
is additionally transferred to the GDCF every fiscal year Article 42(4) of the Act on Special Accounts.
1. For details, see (2). 60-year redemption rule.
2. For these securities, see Chapter 2-1. Other Types of Debt.
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ｂ Special transfer on tax reduction-related special deficit-financing bonds:
Tax reduction-related special deficit-financing bonds were issued during the period of FY1994 to
FY1996 to make up for the decline in tax revenues due to a series of advanced income tax cuts in
the wake of tax reform.
Given the nature of these issues, early redemption was deemed essential. Accordingly, while the
redemption period for ordinary government bonds is 60 years, these special deficit-financing bonds
are supposed to be redeemed in 20 years -one third of the normal redemption period.
Specifically, during the period of FY1998 to FY2017, one-thirtieth part of the balance that subtracts
the amount of issues to make up for the loss caused by the abolition of automobile consumption tax
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and special corporation surtax from the total issue amount of tax reduction-related special deficit-
2 financing bonds is to be transferred to the GDCF every fiscal year, in addition to the fixed-rate transfer.
ｃ Transfer of a budgetary surplus (A minimum of half of the surplus in the general account as a
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result of the settlement of the fiscal year):
Pursuant to Article 6(1) of the Public Finance Act, when surplus is generated in the general account
as a result of the settlement, at least half the surplus must be transferred to the GDCF within two
years from the said fiscal year in which the surplus was generated.
ｄ Direct budget transfer (A discretionary transfer from the general account budget when necessary):
To ensure smooth redemption of government bonds, in addition to the above transfers, Article 42(5)
of the Act on Special Accounts prescribes that a discretionary transfer can be made as needed from
the general account budget to the GDCF.
Ｂ Issuance of refunding bonds
Refunding bonds are the government bonds issued through the Special Account for the Government
Debt Consolidation Fund to raise funds to redeem outstanding JGBs. Revenues from issuing refunding
bonds are directly posted to the GDCF. (See Section 2-1-(1). Refunding Bonds.)
Ｃ Proceeds from Government-Owned Shares belonging to the Special Account for Government Debt
Consolidation Funds
Proceeds from sales and dividends of government-owned shares that belong to the Special Account for
Government Debt Consolidation Fund shall be set aside for resource for government debt redemption.
A part of NTT and JT shares were transferred to the Government Debt Consolidation Fund in FY1985
and a part of Teito Rapid Transit Authority shares3 were transferred in FY1998, and a part of Japan
Post shares were transferred in FY2007, as the source for government debt redemption.
The Ministry finished to sell out NTT shares in special Account for GDCF in September 2005 and JT
shares in special Account for GDCF in June 2004.
Ｄ Proceeds from allocation
The GDCF can manage government bonds by either possessing them by itself or by depositing them
to the Fiscal Loan Fund. We pursue efficient allocation of these government bonds, while taking into
account the need to secure adequate levels of liquidity in order to ensure smooth implementation of
large-scale redemption and refunding.
Proceeds from the allocation are credited to the Special Account for the Government Debt
Consolidation Fund to be included in its revenues.
(2) 60-year redemption rule
Cash needed for redemption are allocated from the GDCF and the revenues from issuing refunding bonds.
The ratios of these resources are determined based on the so-called "60-year redemption rule," which
means redeeming government bonds 60 years after issuance. The rule stands on the fact that the average
economic depreciation period of the assets purchased by the construction bonds is about 60 years.
Deriving from this rule is the 1.6% ratio for fixed-rate transfer for each fiscal year, which is about equivalent
to one-sixtieth.
3. Teito Rapid Transit Authority was privatized and Tokyo Metro, Co.,Ltd. was established on April, 2004. As a result of this privatization, Tokyo Metro's shares
were distributed to the Ministry of Finance free of charge in proportion to Teito Rapid Transit Authority's equity contribution which used to belong to the
Ministry of Finance.
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Explanations below will give you an idea about how the 60-year redemption rule works. Suppose you issue
60 billion yen of debt in fixed-rate coupon-bearing 10-year bonds, at maturity (i.e., 10 years from now) you
will redeem 10 billion yen of them in cash -equivalent to 1/6 of 60 billion yen -while issuing refunding
bonds to cover the remaining 50 billion yen.
Assuming that these refunding bonds will also be issued in fixed-rate coupon-bearing 10-year bonds, then
you will redeem 10 billion yen in cash -1/6 of the initial issue amount of 60 billion yen -in another 10
years. At this point, the amount of outstanding debt will be 40 billion yen. Repeat this for four more times,
then, you'll be able to complete the cash redemption in 60 years from the first issuance.
＜ Redemption via refunding bonds -"60-year redemption rule" ＞
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Framework
Before, unlike construction bonds, special deficit-financing bonds didn't accompany the issuance of
refunding bonds. Yet in FY1985, we started to apply the 60-year rule also to special deficit-financing
bonds.
This was because a large-scale redemption of special deficit-financing bonds was imminent at the time,
and if we had redeemed the entire amount in cash in a severe fiscal situation, a drastic cut in expenditures
and a substantial increase in burden would have had been inevitable, thus giving adverse effects on
national economy and people's lives.
In the context of steady promotion of fiscal reform, however, it is essential to try to reduce the outstanding
debt as quickly as possible, regardless of the 60-year rule.
(3) Interest rate swap transactions
An interest rate swap transaction is a transaction in which different types of interest payments (for example,
floating-rate and fixed-rate) are exchanged for a specific period of time. Interest rate swap transactions for
the purpose of debt management operations became possible under the Act for the Special Account of the
Government Debt Consolidation Fund, as amended in 2002. In "the new promotion of debt management
policy", it was stated that the Government would utilize swap transactions (starting in 2005) in order to
control the duration of the Outstanding JGBs, thereby managing interest rate risk.
In consideration of the above, the MOF has worked to upgrade the relevant systems, and entered into a
master agreement with counterparties, most of which are JGB Market Special Participants, pursuant to the
guidelines issued by ISDA (the International Swaps and Derivatives Association, Inc.). Since January
2006, we have carried out swap transactions when market trends have been found to be stable. To carry
out a transaction, we make an offer to several counterparties according to a rotation schedule, and enter
into a contract with the counterparty that presents the most favorable terms.
Transaction results are published on a semi-annual basis on the MOF website (in April and October).
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(4) Buy-back Program
The buy-back program is a scheme for the government to retire debt by buying back outstanding immature
bonds.
The buy-back program is similar to advance redemption in that both are meant to retire debt before
maturity. But, there is a difference. With advance redemption, the debt is repaid in principle at face value in
complete disregard of the will of bondholders. With the buy-back program, the debt is bought back only
from the bondholders willing to take part in the deal.
In the past, buy-back program used to be implemented on very limited occasions, such as when an heir
pays government bonds as the tax in kind pursuant to the Inheritance Tax Act, or when the deposit a
Chapter candidate set aside pursuant to the Public Office Election Act has to be confiscated upon losing an
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election.
To level out JGB redemptions with maturities heavily concentrated on FY2008, we improved the existing
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system in June 2002 by revising the Act on Buy-backs and Retirement of Government Bonds, and by
taking other actions. In February 2003, we began to conduct buy-backs for bonds maturing in FY2008. At
this point in time, we are conducting buy-backs for bonds covering a wide range of years to maturity in
order to maintain or enhance liquidity in the JGB market. We are buying back bonds held by private
financial institutions through auctions.
In FY2008, the buy-back amount from the market was increased to approx. 3.5 trillion yen from approx. 1.8
trillion yen, and was focused on the 15-year floating-rate bonds and the 10-year inflation-indexed bonds
whose market price had declined greatly. In FY2009, the buy-back amount from the market will be further
increased to approx. 4 trillion yen and will still be focused on the above mentioned bonds.
The legal system for STRIPS was developed in FY2008 and 40 billion yen of buy-back was conducted. In
FY2009, the buy-back of STRIPS will be conducted, taking in the market needs.
(5) Auctions for Enhanced-liquidity
Auctions for Enhanced-liquidity is designed to reopen existing issues that suffer from structural or long term
liquidity problems, either because a majority of the issue is held by investors to maturity, or becomes
temporarily illiquid because of transient rising demand. In this way, the auction seeks to maintain or
enhance liquidity in the JGB market and was introduced in April 2006.
Auctions for Enhanced-liquidity is thought to have yielded a certain effect in their target zones to date,
while we have verified market needs for expansion to additional zones. In FY2008, therefore, the goal was
moved from "enhancing the liquidity of "zones" with structural lack of liquidity" to "enhancing the liquidity
of "issues" with a structural lack of liquidity". We expanded our target zones and amount of issues broadly.
Also, the scheme of Special Auction for Enhanced-liquidity was introduced in order to respond to temporal
excessive lack of market liquidity of specific issues as seen in the squeezes by reopening certain amount
of those urgently.
In the first quarter of FY2009, the target zones will consist of JGBs with 1) remaining maturities of 6-16
years and 2) remaining maturities of 16-29 years, and both zones will be targeted each month. In FY2008,
the zones near the current issues were excluded from the target zone, considering the supply and demand
balance of the new issues. However, responding to the strong market needs, the exclusion period was
shortened to approximately 6 months after issuance. The details for the second quarter will be decided,
taking in the situation of the first quarter and other relevant matters.
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(6) Dialogue with Market Participants
In order to secure stable financing and to implement appropriate policies to enhance market liquidity of
JGBs, the Ministry of Finance aims to promote the dialogue with the market.
Ａ The Advisory Council on Government Debt Management
Since November 2004, the Ministry has held the Advisory Council on Government Debt Management.
This council enables us to benefit from opinions and advices of market experts and academics in the
private sector with a high degree of insight into the market, and its discussions concern public debt
management with a focus on government debt management policy from a medium to long-term
perspective.
Ｂ The Meeting of JGB Market Special Participants Chapter
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Since the introduction of the JGB Market Special Participants scheme in October 2004, the Ministry
also have had the Meeting of JGB Market Special Participants to exchange opinions between members
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and the Ministry concerning important topics relating to the bond market.
Ｃ The Meeting of JGB Investors
The Ministry has hosted the Meeting of JGB Investors since April 2002, to directly and continually
share ideas with JGB investors on a continuous basis. This meeting, held about four times a year,
consists of academic experts and major institutional investors such as banks and life insurance
companies.
Ｄ The Meeting of JGB Top Retailers
From the perspective of promoting bond ownership by retail investors, in June 2007 we began to hold
meetings with top JGB retail brokers to express our appreciation of the performance achieved and
efforts made by financial institutions that aggressively make offerings to and solicit subscriptions from
retail investors. The meetings also allow for a mutual exchange of views and opinions between JGB
selling agencies and the MOF on the further promotion of JGB sales to retail investors.
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