Japan
| Pages | 117-126 |
Page 117
Debt management policies in Japan have two primary objectives: first, to ensure smooth and stable funding for fiscal management; second, to curb costs on medium-to long-term financing, thus alleviating the burden on taxpayers.1
Smooth funding aims to ensure that Japanese government bond (JGB) issuance will not have a turbulent impact on the market. This can be accomplished by maintaining high levels of transparency, predictability, and considerations to financial market trends. Stable funding means to issue bonds according to the planned amount of government bond issuance.
Improving the secondary market is also an essential element that needs to be taken into account in formulating debt management policies. The government bond market is the market where credit risk-free interest rates are formed. Thus, it serves as the foundation for the broader financial marketplace. JGBs also account for the majority of securities in the domestic bond and debenture market, both in issue amount and trading volume. Consequently, efforts to improve liquidity and increase efficiency in the secondary market, instead of improving the primary market alone, are essential to foster the financial market as a whole. In the end, this will help to increase the Japanese market's international competitiveness. Another point is that an improved secondary market will also facilitate a smoother, more stable, and low-cost issuance of government bonds.
The primary objectives of debt management policies are to ensure smooth and stable funding while curbing financing costs to alleviate the fiscal burden. Accordingly, debt management policies must facilitate fiscal management.
Both debt management policies and monetary policies can affect the economy via interest rates. So, unless consistency is secured between these two areas, appropriate economic policies cannot be implemented. Therefore, it is essential for the government and the central bank to maintain adequate levels of consistency and transparency in their own policies Page 118 while fully taking into account policy interactions during the process of policymaking.
In the relations with monetary policy, it is essential to prohibit the central bank from underwriting government bonds in the primary market and adhere to the principle of issuing government bonds in the market. This is mandatory in the context of maintaining fiscal restraints and the independence of the central bank, and it is legally set forth in Japan's Finance Law (Article 5). One exception exists. With the approval of the parliament (the Diet), refunding bonds can be issued directly to the Bank of Japan (BoJ) when government bonds held by the BoJ mature. This exception is permitted because such issuance of refunding bonds will not lead to increased money supply.
The government should not be allowed to request the central bank to ease its monetary policy, alleviate the fiscal burden, or purchase government bonds to help absorb JGBs. Requests such as these would be detrimental to debt management policies, because they would undermine investor confidence in government bonds and also could fuel inflationary expectations. Therefore, such requests are never made. Moreover, developing monetary policy is the prerogative of the policy board at the BoJ, and the final decision making concerning the purchase of government bonds lies with the BoJ.
Article 85 of the constitution stipulates that no money shall be expended, nor shall the state obligate itself, except as authorized by the Diet. Accordingly, JGBs are, without exception, issued on legal grounds.
In principle, the issue amount of government bonds is determined for each fiscal year, which begins on April 1 and ends on March 31 the following year. At present, four main laws provide the grounds for the issuance of government bonds:
- Construction bonds under the Public Finance Law: Although the Public Finance Law stipulates that, in principle, government expenditure must be financed by tax revenue (Body, Paragraph 1 of Article 4), it allows for government bond issuance or borrowing only as a means to finance public works (Proviso, Paragraph 1 of Article 4). The maximum issue amount for each fiscal year is specified in the general provisions of the budget and must be approved by the Diet.
- Special deficit-financing bonds under the special laws: As mentioned, the Public Finance Law permits the issuance of government bonds only to finance public works. However, when there is a budgetary deficit, a special law enacted for each fiscal year based on Article 4 of the Public Finance Law authorizes the government to issue special deficit-financing bonds. Also, with special deficit-financing bonds, the maximum issue amount for each fiscal year is specified in the general provisions of the budget and must be approved by the Diet.
- Refunding bonds under the Special Account Law of the Government Debt Consolidation Fund: The government can issue refunding bonds (except for fiscal loan fund special account bonds) up to the amount required for consolidation or redemption of government bonds during a given fiscal year (Article 5 and 5-2 of the Special Account Law of the Government Debt Consolidation Fund). Because refunding bond issues will not affect the outstanding government debt, their maximum issue amount is not subject to approval from the Diet. The actual issue amount is determined according to the so-called 60-year redemption rule (discussed in another section).
- Fiscal loan fund special account bonds under the Fiscal Loan Fund Special Account Act: The government can now issue bonds or borrow to finance fiscal loan programs (Article 11 of the Fiscal Loan Fund Special Account Act) as a result of the reform of the Fiscal Investment and Loan Program (FILP) system that took effect in April 2001. (Under the old system, all postal savings and pension reserves were deposited with the trust fund bureau to finance the FILP. Such a scheme with a compulsory deposit no longer exists. Instead, under the new system, each FILP Page 119 agency must in principle raise funds from the market by issuing FILP agency bonds. Should circumstances necessitate, however, the funds can be raised in part by issuing government bonds.)
The laws define how the proceeds will be used. However, from the investor's perspective, there is no differentiation between construction bonds, special deficit-financing bonds, refunding bonds, and fiscal loan fund special account bonds.
The minister of finance is granted the authority by the Law Concerning Government Bonds to determine government bond issuance, registration, and other basic procedural matters related to government bonds. Specific procedures are stipulated in the ministry ordinances established by the Law Concerning Government Bonds. The law also specifies the BoJ's role in handling government bonds.
Debt reduction in Japan is built around the government debt consolidation fund (GDCF). Fiscal resources for all interest payments and redemption of government bonds are funneled into the GDCF, accumulated, and disbursed from the GDCF.
Funds are transferred from the general account to the special account for the GDCF. Revenue from issuing refunding bonds is also stored at the GDCF, to be used to redeem bonds at maturity. Independent management of the cash flow regarding interest payments and redemption, as such, aims to contribute to investor confidence in the security of interest payments and redemption.
The so-called 60-year redemption rule-meaning each issue of debt should be redeemed over a span of 60 years-plays a central role in the debt reduction system. The concept is based on the average economic depreciation period of the assets purchased by construction bonds and special deficit-financing bonds being about 60 years, so redemption should be completed during that period.
The rule allows calculation of the net amount to be redeemed out of the gross redemption amount for maturing bonds. In other words, the rule is used to determine the amount of fiscal resources to be financed by issuing refunding bonds (for the purpose of net redemption). The 60-year redemption rule is not applied to fiscal loan fund special account bonds, because the fund collected from the FILP investment will be used for their redemption.
The following is an example to show how the rule actually works. A new ¥60 billion, 10-year funding bond is issued. When the bonds become due, ¥10 billion yen-or one-sixth of the original issue amount- will be put toward cash...
To continue reading
Request your trial