Location : HOME > Fiscal Investment and Loan Program > FILP Report > FILP Report 2010 > Part VI: Glossary

Part VI: Glossary

Glossary

Basic Knowledge of the Fiscal Investment and Loan Program

A

Accrual basis

Accrual basis is a basis on which income or expense is recognized and booked at the time of the occurrence of an increase or decrease in the economic value of a good or service, regardless of receipt or payment of cash.

With regard to the FILP Special Account, since FY2001 an income statement and balance sheet have been prepared based on the accrual basis from the viewpoint of clarifying financial conditions.

ALM (Asset Liability Management)

ALM means the "integrated management of assets and liabilities", and is one of the business management methods used to secure financial soundness in financial institutions, etc.

Analysis of financial condition (analysis of financial condition of local government)

This is an analysis of each local government’s debt repayment capacity and its cash-flow management, which has been conducted by the Ministry of Finance (Local Finance Bureau) since 2005 from the perspective of facilitating loan assessments as the lender of the Fiscal Loan Fund. All the municipalities undergo monitoring of financial standing and some of them which deemed necessary are interviewed. The outline of results is published every year.

Annuity repayment

This is the repayment method whereby the total amount of combined interest and principal is constant.

Can be viewed in PDF.

B

Bullet repayment

This is the method of repaying the principal in a lump sum.

Bullet repayment is adopted in the redemption of FILP bonds.

Can be viewed in PDF.

C

Carryforward (amount)

This means carrying forward the unexecuted portion of a FILP plan to the next fiscal year in line with the progress of relevant projects, etc.

Cash basis

Cash basis is a basis on which accounting and calculation are processed by identifying the time of receipts or payments of cash and the occurrence of income or expense. The recognition and booking of profits and losses are linked to the time.

Current figure

The current figure is the amount obtained by adding the FILP plan amount for a fiscal year and the carryfoward amount from the previous fiscal year.

D

Deferment period

Deferment period is a period commencing on the execution date of a loan wherein only interest, not the principal, is repaid.

Can be viewed in PDF.

Deposits

Deposits are funds left from the special accounts, and so forth, to the Fiscal Loan Fund. Reserves and surpluses (cash generated as surpluses for the payment) in each special account are deposited to the Fiscal Loan Fund and managed in an integrated manner.

Interest is imposed on deposits based on the interest rate of government bonds, depending on the deposit periods specified in the contract.

Diagnosis Report (analysis of financial condition of local government)

Diagnosis Report describe financial conditions and causes of financial deterioration in an easy-to-understand manner with respect to all the local governments which take interview in the process of analysis of financial condition. The Local Finance Bureau starts to present this document to local governments in FY2010.

Duration

Duration is a figure obtained by discounting future cash flows generated by assets (collections on loans, etc.) or liabilities (redemptions of FILP bonds, etc.) to their present values and then calculating the period of time until the cash flows are generated by the weighted average method based on the present value. It represents the average remaining period of the assets or liabilities.

In addition to the average term remaining, duration also has a characteristic of representing a price change resulting from interest rate variance. Therefore, the longer duration is, the larger the price (present value) change becomes.

Can be viewed in PDF.

Duration gap

A duration gap is the mismatch between the duration of assets and that of liabilities. When this gap exists, it may be the factors that bring about interest rate risk, because of the difference between the fluctuation in present assets value and liabilities one by interest rate movements.

E

Earning at Risk

Earning at Risk is one of the methods of evaluating risks, and its measures, through such analytical methods as Monte Carlo Simulation, the fluctuation in profits and losses that may occur in the future with a constant probability.

Extraordinary financial countermeasures bonds

In principle, local bonds are allowed to be issued in the cases provided in Article 5 of the Local Finance Act, such as the case of raising capital for the funding source of expenses of municipal enterprises (transportation, gas, water, etc.) or construction expenses. Extraordinary financial countermeasures bonds are the exception to this: they are local bonds issued to compensate for the shortage in the ordinary balance of the Local Public Finance Program. They have been issued since FY2001.

F

FILP agencies

FILP agencies are institutions which utilize FILP.

FILP consists of three elements: fiscal loans, industrial investments and government guarantees. Among them, fiscal loans are provided to the national government (special accounts) and local governments as well as government-affiliated financial institutions / incorporated administrative agencies etc. (institutions established based on special laws, which do not receive capital injection from the private sector). Industrial investments are provided to government affiliated financial institutions and incorporated administrative agencies, etc. which comply with the purpose of developing industries and promoting trade, and which have legislative provisions allowing them to receive investments from and return profits to the national government. Government guarantees are basically provided to government affiliated financial institutions and incorporated administrative agencies, etc., which have legislative provisions to allow them to receive government guarantees.

FILP agency bonds

Among the bonds issued by each FILP agency in the private financial markets, FILP agency bonds are those with no governmental guarantee for repayment of principal and interest.

These FILP agency bonds were introduced by the FILP Reform in FY2001, and today they function as a means of fund-raising for FILP agencies.

FILP bonds (Fiscal Investment and Loan Program Bonds)

FILP bonds are bonds issued by the national government (government bonds) as a funding source for management of the Fiscal Loan Fund. Funds procured by issuing FILP bonds constitute a part of revenue in the FILP Special Account Fiscal Loan Fund Account and are transferred to the Fiscal Loan Fund as expenditures.

Since they have the same merchantability as ordinary government bonds and are issued together with the latter, we can observe no difference as financial commodities between them. Both bonds are also the same in the sense that the maximum issuance amount is determined by a Diet resolution. FILP bonds are classified as one sort of government bond in each fiscal year's government bond issuance plan.

Still, FILP bonds are different from ordinary government bonds in the sense that their principal and interest repayment is covered by returns from loans of the Fiscal Loan Fund, while the repayment of ordinary government bonds is covered by taxation and so forth. Therefore, FILP bonds are not classified as debts of the general government in the System of National Accounts, which the United Nations has recommended its member countries to introduce as an international standard of economic indicators.

FILP plan

The FILP plan is the list of reserved amounts for each FILP agency with respect to each fiscal year's FILP (among fiscal loans, industrial investments, and government guarantees having a period of 5 years or more). It is submitted first to the Cabinet Meeting and then to the Diet, as an attachment to the Special Account Budget.

Fiscal loans, industrial investments, and government guarantees are stated as a part of the budget in the Special Account budgetary provisions, the budget for the FILP Special Account Investment Account, and the General Account budgetary provisions, respectively. They are subject to the deliberations and resolutions of the Diet.

FILP Reform

FILP Reform is a fundamental review of FILP conducted in FY2001. The main pillar of the reform was that the way of capital raising for FILP was changed to the funds through issuing FILP bonds (government bonds) from the mandatory-deposited funds in postal savings and pension reserves.

Looking at the actual content of the reform, due to the amendment to the Trust Fund Bureau Fund Act and others in FY2001, the following measures were implemented.

  1. (1) Mandatory deposits of postal savings and pension reserves to the Trust Fund Bureau Fund were abolished.
  2. (2) FILP-target projects performed by special public corporations, etc. are reviewed from the viewpoint of private-sector supplementation.
  3. (3) With regard to capital raising for FILP agencies,
    1. (i) the agencies endeavor to raise truly necessary capital themselves in the market by issuing FILP agency bonds; and
    2. (ii) funds procured by the government through the issuance of FILP bonds (government bonds) are lent to FILP agencies.
  4. (4) The interest rate system for the funding rate and loan interest rate of fiscal loans was amended to one based on the market interest rate of government bonds corresponding to the applicable period.

Funding methods in the mechanism prior to the FILP Reform were limited to the passive ones such as deposits from postal savings and pension reserves, etc., which led to the problem that funds were not be procured efficiently in response to the capital requirements. Taking this into account, the reform was undertaken to make FILP more efficient and consistent with market principles.

In addition, more information about FILP was disclosed and provision of information for making a decision on projects' appropriateness and assurance of the financial soundness of FILP agencies were promoted by introducing policy cost analysis: the policy cost analysis clarifies how much policy costs such as opportunity costs for subsidies and investments for FILP projects would become.

FILP Special Account Investment Account

This account is set up to clarify the accounting related to investments (investment of capital and loans) using the government fiscal funds, which are made for the purpose of the industrial development and the promotion of international trade, by distinguishing it from the General Account. Its predecessor is the Industrial Investment Account of the Industrial Investment Special Account, which was set up in FY1953.

The main revenues for the account are payments to the treasury by Japan Finance Corporation (Japan Bank for International Cooperation Operations Account) etc. and dividends from stocks of NTT and JT etc. held by the account. Its main expenditures are disbursements for industrial investments (industrial investments in the FILP plan).

FILP Special Account Fiscal Loan Fund Account

This account is set up to clarify the accounting related to the management of the Fiscal Loan Fund by distinguishing it from the General Account. Its predecessor is the Fiscal Loan Fund Special Account, which was set up by renaming the Trust Fund Bureau Fund Special Account in FY2001.

The main revenues for the account are Fiscal Loan Fund investment income and public bonds (FILP bonds). Its main expenditures are redemptions and interest payments for FILP bonds etc., and transfers into the Fiscal Loan Fund.

This account is managed independently without transfers from the General Account (i.e. tax revenues).

FILP subcommittee (FILP Subcommittee of the Fiscal System Council)

The FILP subcommittee is set up in the Fiscal System Council, which is an advisory council to the Minister of Finance to deliberate on the ideal form of the overall government finance.

The FILP subcommittee is composed of academic experts, and it is legally prescribed that the subcommittee states opinions concerning the FILP plan and Fiscal Loan Fund Management Plan for each year in advance and receives a Fiscal Loan Fund Management Report after the end of the fiscal year. In addition, it serves to research and deliberate on important matters related to the FILP system, FILP plan and Fiscal Loan Fund.

Fiscal Loan Fund

The Fiscal Loan Fund is a funding source (financial resource) for providing fiscal loans.

It is composed of funds procured by FILP bonds (government bonds) and reserves (see Note) or surpluses, etc. set aside from the special accounts that are under integrated management. These serve as a funding source (financial resource) for fiscal loans.

The purpose of setting it up is to integrate and manage funds procured based on the national credit, such as reserves in the special accounts, and to operate the funds securely and efficiently, thereby contributing to improved public benefit. Its predecessor, the Trust Fund Bureau Fund which was set up in FY1951, was renamed as the Fiscal Loan Fund as part of the fundamental FILP Reform in FY2001.

Loans of 5 years or more in the FILP plan are stated as the reserved amounts for long-term investments of the Fiscal Loan Fund in the Special Account budgetary provisions, and they are subject to the resolutions of the Diet.

Management of the Fiscal Loan Fund is accounted for in the FILP Special Account Fiscal Loan Fund Account, which is managed independently without transfers from the General Account (= tax revenues).

(Note) Excluding reserves pertaining to the national pension account and employee's pension account of the pension special account

Fiscal Loan Fund Management Plan

Fiscal Loan Fund Management Plan describes the planned amount for the management of the Fiscal Loan Fund for the relevant year. The Minister of Finance decides it after hearing opinions from the Fiscal System Council (FILP Subcommittee) in accordance with the Fiscal Loan Fund Act.

(The former) Fiscal Loan Fund Special Account

This is a special account which was set up to clarify the accounting related to the management of the Fiscal Loan Fund by distinguishing it from the General Account. Its predecessor was the Trust Fund Bureau Special Account, which was set up in FY1951 to process accounting transactions by distinguishing revenue and expenditures related to the Trust Fund Bureau Fund from the General Account. The Trust Fund Bureau Special Account was renamed as the Fiscal Loan Fund Special Account as part of the FILP Reform in FY2001.

As a result of the reform of special accounts, in FY2008 the Industrial Investment Account of the Industrial Investment Special Account was transferred to the Fiscal Loan Fund Special Account and renamed as the FILP Special Account, and (the former) Fiscal Loan Fund Special Account became the FILP Special Account Fiscal Loan Fund Account.

Fiscal loans

Fiscal loans are one of the methods of supplying funds in FILP, meaning lending the Fiscal Loan Fund to FILP agencies (national government special accounts, local governments, government affiliated financial institutions, incorporated administrative agencies, etc.) which engage in FILP projects contributing to the economy and society in various fields, such as small and mediumsized enterprises, education, social welfare, and the like.

The funding source of fiscal loans is the Fiscal Loan Fund, which is financed based on the national credit under the most favorable terms, enabling the provision of long term, fixed, and low-interest funds which are difficult for private financial institutions to provide.

Flexible Management Clause

The Flexible Management Clause allows an increase in expenditures to the extent that the revenue increase is secured when the need to increase the expenses of each special account has arisen by the end of the fiscal year, based on the provisions of the Act on Special Accounts and in accordance with the budgetary provisions.

Also in the FILP plan, in order to respond swiftly and flexibly to changes in economic conditions and otherwise measures are implemented to allow increases in the reserved amounts for long-term investments of the Fiscal Loan Fund and in the limits of government guarantees, to the extent provided in the budgetary provisions.

G

Government guarantees

Government guarantees are one of the methods of supplying funds for FILP, meaning the government provides guarantees for the payment of principal and interest when government affiliated financial institutions, incorporated administrative agencies, and others raise capital in the financial market. This enables raising the necessary capital for business in a smooth and efficient way.

Government guarantee obligation is subdivided into government-guaranteed bonds, which are the obligation for bonds issued by FILP agencies, etc., and government-guaranteed loans, which are the obligation for loans.

Government-guaranteed bonds issued by FILP agencies and other entities in the foreign market are called "government-guaranteed foreign bonds."

The limits of government guarantees for the fiscal year are stated in the General Account budgetary provisions and are subject to the resolutions of the Diet. Those of 5 years or more are booked in the FILP plan.

Grant funds

Grant funds are funds provided without imposing a repayment obligation. Subsidies are an example of grant funds.

I

Industrial investments

Industrial investments are one of the methods of supplying funds for FILP and are investments (investments of capital and loans) for the industrial development and the promotion of international trade, using dividends from stocks of NTT and JT etc. held by the Investment Account of the FILP Special Account, and payments to the national treasury by Japan Finance Corporation (Account for JBIC Operations), etc.

In contrast to fiscal loans which have fixed interest rates, industrial investments provide funding (mainly investment of capital) to essential projects for policy with expected returns and huge risks, which cannot be funded sufficiently by the private sector alone.

(The former) Industrial Investment Special Account

This is a special account which was set up in FY1953 to conduct investments (industrial investments) for the purpose of the reconstruction of the economy, the industrial development and the promotion of international trade, and to clarify its accounting by distinguishing it from the General Account (see Note).

With the utilization of income from the sale of NTT stocks, in FY1987 an interest-free loan system was established to promote social infrastructure improvement. The account was subdivided into the Industrial Investment Account and the Social Infrastructure Improvement Account. Moreover, as a result of the reform of special accounts, in FY2008 the Industrial Investment Account was transferred to the Fiscal Loan Fund Special Account, and, after being renamed as the FILP Special Account, it became the Investment Account.

The Social Infrastructure Improvement Account was abolished and transferred to the General Account.

(Note) Due to an amendment in FY1985, reconstruction of the economy, which had been prescribed as one of the objectives, was deleted.

Interest rate risk

Interest rate risk is risks for the fluctuations in profits and losses caused by interest volatility. For example, in the case of raising capital to refinance debts with higher interest rates than before, the funding rate may exceed the loan interest rate (negative margin), incurring losses.

In the FILP Special Account, the ALM has been carried out since the FILP Reform, reducing interest rate risk. However, the majority of loans are of a principal-equal-maturity-repayment-type cash flow or an annuity payment-type cash flow, whereas procured capital is of a bullet-maturity-repayment-type cash flow. It is difficult to completely eliminate maturity gaps, and a certain level of interest rate risk still has existed.

(Amount of) Investment balance

Investment balance is the amount of the unexecuted portion of the fiscal loans, government guarantees, etc., in a FILP plan.

With regard to the investment balance of the Fiscal Loan Fund, the issuance of FILP bonds corresponding to the balance is not conducted. Similarly, with regard to the investment balance of government-guaranteed bonds, the execution of government guarantees corresponding to the balance is suspended. As such, the occurrence of an investment balance does not mean that excess capital procurement takes place.

J

Japan Finance Organization for Municipalities Fund

This is a local bond fund to which the Japan Finance Organization for Municipalities (hereinafter referred to as the "Organization") lends.

As the Japan Finance Corporation for Municipal Enterprises was abolished, due to policy-based financial reforms, the Organization was established in FY2008 as a finance organization with the joint capital contribution of all local governments. The purpose of the Organization is to contribute to the sound financial management of local governments and the promotion of the welfare of local residents by providing long-term, low-interest loans to local governments and supporting them with respect to fundraising from the capital market. Unlike the former Japan Finance Corporation for Municipal Enterprises, since FY2009 the Organization has covered a broad range of loans, including municipal enterprise bonds, general account bonds, and bonds for the extraordinary financial measures.

L

Loan funds

Loan funds are funds provided with the assumption of a future return, such as interest and dividends. Fiscal loans and industrial investments are examples of loan funds.

Loan interest rate (loan interest rate of the Fiscal Loan Fund)

This rate is an interest rate on the fiscal loans, be decided based on the market yields of JGB corresponding to loan periods, after reflecting on the repayment method and the deferment period.

The FILP Special Account is managed independently without transfers from the General Account. The loan interest rate of the Fiscal Loan Fund is basically at the same level as the interest rate of FILP bonds and deposits, the fiscal loans are designed to achieve account balance without profit margins.

Local bond consultation system

In the case of issuing local bonds, or the case of altering the method of bond issuance, interest rate, or the method of redemption, local governments are required to clarify the purpose of bond issuance, the maximum amount, the method of bond issuance, funds, interest rate, the method of redemption, and then consult with the Minister for Internal Affairs and Communications or the governor of the prefecture. After consulting with the Minister, local governments can issue local bonds without the consent of the assembly as long as they report them to the assembly in advance. However, the consent is required in the case of borrowing public funds.

When the Minister for Internal Affairs and Communications agrees to the consultation, a prior consultation with the Minister of Finance, with respect to the maximum amount and funds for the local bonds, in question is required in principle.

Local bond plan

Local bond plan is an annual plan that describes such information as the total of planned amounts of local bonds. It is formulated and published every fiscal year after the consultation by the Minister for Internal Affairs and Communications with the Minister of Finance.

As for the local bond plan, please refer to the website of the Ministry for Internal Affairs and Communications.

Local bonds

Local bonds are the debts which local governments bear when financing by their fiscal needs from outside sources, and the performance of which is to be executed for longer than one fiscal year. In principle, local bonds are allowed to be issued in the cases provided in Article 5 of the Local Finance Act, such as the case of raising capital for funding the source of expenses incurred by municipal enterprises (transportation, gas, water service, etc.) or construction expenses.

When classifying Local bonds by their underwriting entity, they are primarily subdivided into public funds (Fiscal Loan Fund and the Japan Finance Organization for Municipalities Fund) and private funds (public offering funds and Private Placement Funds). The planned amount of each item is booked in the local bond plan.

Among them, the Fiscal Loan Fund is booked in the FILP plan as fiscal loans for local governments.

Local bonds Public funds Fiscal Loan Fund
Japan Finance Organization for Municipalities Fund
Private funds Public offering funds
Private Placement Funds

M

Maturity gap

A maturity gap is the difference between the values of the assets (collections on loans, etc.) and liabilities (redemptions of FILP bonds, etc.) that mature in a given term. When this gap exists, there is a time lag between the period of asset reinvestment and that of liability refinancing, creating interest rate risk.

Maturity ladder

A maturity ladder is the total value of cash inflows (from assets) and cash outflows (from liabilities) that mature in a specified period of time or have a renewed interest rate applied, and then arranging them in chronological order. The analysis of maturity ladder helps one to understand maturity gaps.

Can be viewed in PDF.

Monte Carlo Simulation

Monte Carlo Simulation is a mathematical technique that analyzes and quantifies uncertain factors such as interest rates and exchange by running thousands of calculations which use random values from the probability functions.

Monte Carlo Simulation furnishes the FILP Special Accounts with the effects of uncertainties and is utilized in ALM.

O

On-site monitoring

On-site monitoring means visiting FILP agencies or places where the FILP projects are implemented and checking actual conditions, with the aim of ensuring secure operation and appropriate management. There are mainly two kinds of on-site monitoring: on-site monitoring of FILP agencies and on-site monitoring of local governments.

(On-site monitoring of FILP agencies)

In the case of on-site monitoring of FILP agencies, officers who belong to the Financial Bureau of the Ministry of Finance, such as Chief Fiscal Loan Inspector and Fiscal Loan Inspector, visit the incorporated administrative agencies, etc. where the FILP projects are implemented. They check the following items from the viewpoint of a lender of public funds and the provider of high creditworthiness: 1) sufficient policy significance to be a FILP project, 2) financial soundness and redemption certainty, 3) appropriate use of funds etc.

The results of on-site monitoring are published, and used to assess annual FILP plans and linked to actual reexaminations of individual projects etc.

(On-site monitoring of local governments)

In the case of on-site monitoring of local governments, officers who belong to Local Finance Bureaus, Local Finance Offices, etc., such as Fund Inspectors, visit local governments (including service associations) which are FILP agencies. They check the following items: 1) the redemption of loans and financial conditions, 2) statements of the use of lent funds, 3) outcome of projects, etc.

Among these items, they focus in particular on checking and evaluating the financial conditions of municipal enterprises, which belong to "1) the redemption of loans and financial conditions." Based on the checking of these conditions, where necessary, local governments are requested to report on securing the redemption certainty and their efforts to improve the financial conditions of municipal enterprises. In addition, they work on checking whether or not there are expenses that should not be covered by the loans.

In addition to the above-mentioned existing monitoring, audits (spot audits) which place emphasis on verification of policy results are implemented from the viewpoint of increasing FILP transparency.

P

Policy cost analysis

Policy cost analysis refers to (1) subsidies provided by the government into the future and (2) interest alleviation effect by capital injections (opportunity cost from the perspective of the government) etc. for the projects utilizing FILP based on certain preconditions.

Policy cost is designed to enhance the degree of assistance provided to the FILP project as in fiscal policy, through such methods as reducing the beneficiaries' burden of interest and fees from the policy perspective. Therefore, it doesn't mean that there is a problem in the sound financial condition of an FILP agency.

Can be viewed in PDF.

Pre-maturity redemptions with exemption from compensation

With the aim of providing loans with the possible lowest interest rate, the Fiscal Loan Fund sets the loan interest rate and funding rate at the same amount. It provides long term, fixed loans with no spread between the rates and has managed to achieve account balance without profit margins. Therefore, when FILP agencies conduct pre-maturity redemptions, the payment of compensation (income that would be earned in the future) will be required.

However, in cases where it is found that a fundamental revision of the project, including the withdrawal from the project that is subject to for the pre-maturity redemptions, is unavoidable in order to mitigate the ultimate financial burdens for the people, the exceptional measure of pre-maturity redemptions with exemption from compensation will be implemented in accordance with the relevant laws.

Principal equal maturity payment

This is the method of repaying an equal amount of the principal.

Can be viewed in PDF.

Private placement funds (local bonds)

Private placement funds are local bond funds procured by borrowing from financial institutions, etc. or their underwriting.

Private-sector supplementation

Private-sector supplementation means that the field of an FILP agency's project, or the project itself, is too difficult to be handled by the private sector alone. This is one of important points in the assessment of FILP.

Public offering funds (local bonds)

Among local bond funds, public offering funds are funds procured through the method of soliciting a wide range of investors. For Nationwide Public Offering Local Government Bond, in addition to issuing bonds individually by a single local government, the joint issuance of these bonds started in FY2003 by increasing the issuance lot in order to reduce issuing costs and ensure stable financing. Furthermore, so as to diversify the financing methods through the promotion of the purchase of local bonds by individual investors and public offerings, and to enhance the residents' participation in local administration, the issuance of "Citizen Participatory-type Public Offering Local Government Bonds" started in March 2002.

Public offering funds (local bonds)

Can be viewed in PDF.

R

Redemption certainty

Redemption certainty is one of important points in the assessment of FILP, meaning that FILP agencies are deemed to have he ability to redeem their obligations without fail.

Repayment method

There are three ways to repay loans of the Fiscal Loan Fund. Principal equal maturity payment, amortization by repayment, and bullet repayment.

Reserves (reserves in the FILP Special Account Fiscal Loan Fund Account)

In the Fiscal Loan Fund Account, in cases wherein a surplus arises in a fiscal year as a result of the settlement of account, the surplus is reserved as reserves (Article 58, Paragraph 1 of the Act on Special Accounts) to prepare for any deficiency which may arise from interest volatility in the future. The purpose of this is to secure financial soundness in the Fiscal Loan Fund Account.

The Act on Special Accounts provides that if the amount of reserves exceeds the level required to secure the financial soundness (Article 45 of the Enforcement Ordinance of the Act on Special Accounts), the excess amount can be transferred to the Special Account for the Government Debt Consolidation Fund if provided in a budget (Article 58, Paragraph 3 of the same Act) (see "Note")

While profits generated from loans with comparatively higher past interest rates are decreasing, taking into account the difficult fiscal conditions and the current profits, reserves of 4.2 trillion yen and 7.3 trillion yen were transferred to the General Account in FY2008 and FY2009, respectively, as a temporary, exceptional provision under the Special Measures Act.

Also in FY2010, the entire reserve balance expected at the end of FY2010 (4.8 trillion yen) shall be transferred to the General Account as a temporary, exceptional provision.

It must be noted that, since "reserves" are based on a cash basis, they do not equal to "Reserves for Interest Variance" on an accrual basis.

(Note) Reserves of 12 trillion yen and 7.2 trillion yen were transferred to the Special Account for the Government Debt Consolidation Fund in FY2006 and FY2008, respectively.

Reserves for Interest Variance

Reserves for Interest Variance are reserved from profits (calculated on an "accrual basis" in accordance with business accounting principles) generated in the FILP Special Account Fiscal Loan Fund Account in order to prepare for any loss which may arise from interest volatility in the future.

In the balance sheet, (1) the portion of the profit carried forward, which corresponds to the amount of 50/1,000 of the total assets of the Fiscal Loan Fund Account or less, shall be presented separately as "Reserves for Interest Variance;" and (2) in cases where the profit carried forward exceeds such amount, the excess amount shall be presented separately as "other reserves."

Returning deposits to postal savings and pension reserves was mostly completed by the end of FY2007, and it became easier to match the investment and procurement periods as the funds got to be raised for a broad range of periods by FILP bonds. As a result, interest volatility risks of the Fiscal Loan Fund were reduced, and the upper limit of Reserves for Interest Variance was thus reduced in FY 2008 from 100/1,000 to 50/1,000 of total assets of the Fiscal Loan Fund Account.

It must be noted that, since "reserves" are based on a cash basis, they are not equal to the profit carried forward (Reserves for Interest Variance) on an accrual basis. The amount of reserves is stated in the "Detailed List of Reserves" from the Statement of the Final Revenue and Expenditures.

Rule for consenting to local bond issuance, etc.

This is a rule used for the consent or approval by the Minister for Internal Affairs and Communications or the governor of the prefecture with respect to the issuance of local bonds. It is set forth every fiscal year upon consultation by the Minister for Internal Affairs and Communications with the Minister of Finance with respect to its basic matters.

S

Securitization (securitization of loans of the Fiscal Loan Fund)

Generally speaking, securitization means a financial method by which the holder of the assets raises capital through the issuance of securities backed by the assets which generate cash flows, such as real estate and claims, and the sale of such securities to investors.

In line with such laws as the "Act on Promotion of Administrative Reform for Realization of Small and Efficient Government," securitization of loans of the Fiscal Loan Fund has been implemented in order to reduce the outstanding balance of loans of the Fiscal Loan Fund as part of asset reduction measures put forward by the government.

Although securitization of loans of the Fiscal Loan Fund accompanies a cost increase, income generated by securitization provides a funding source to redeem existing FILP bonds (buyback) and narrow the gap between future collections on loans and the redemption of FILP bonds, enabling a reduction in interest volatility risks.

Surplus (surplus in the FILP Special Account Fiscal Loan Fund Account)

Generally speaking, surplus means a remaining amount obtained by subtracting expenditure (amount of expenditure disbursed) from revenue (the amount of revenue collected) at the end of fiscal year in the national finance scheme (annual surplus).

Surplus in the Fiscal Loan Fund Account is the amount obtained by subtracting interest payment, etc. of FILP bonds from interest income, etc. of loans. Although currently the funding rate has remained low due to the continued historically low interest rates in recent years, loans with comparatively higher past interest rates still remain, generating a surplus. However, such loans have been on the decreasing trend in recent years, and there is a future risk that deficiencies may arise out of the conditions of interest rates.

Surplus is required to be reserved in reserves pursuant to the provision of Article 58, Paragraph 1 of the Act on Special Accounts. In Paragraph 4 of the same Article, the application of the provision of transferring surplus to the General Account (Article 8, Paragraph 2 of the same Act) is exempted.