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Current conditions and management issues ofmajor public debts

Provisional Translation

A report by "The Study Groupon Structural Changes in Flows of Funds in the21st Century" (June 2000)

Currentconditions and management issues of major publicdebts
- For more effectivepublic debt management policy -
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1. Introduction

In the 1990s, the structuralchange of Japan's financial flow has made, as aresult of fund raising by the government for thedecrease of tax receipts and for the stimuluspackages, in contrast with diminishing corporatefund demands. Now the public sector is now asector with the largest shortage of funds.

At the end of 1999, theoutstanding debts of the general government wereover ¥600 trillion, exceeding the nominal GDP.Furthermore, affirmative debts such as the FiscalInvestment and Loan Program (FILP) bonds will beintroduced and resulting from the increasinglyaging population combined with the low birthrate,future benefits of public pensions should be takeninto consideration.

In the beginning of the 21stcentury, economic and fiscal policy managementretaining a huge public debt must be assumed. Thebiggest issue will be how to provide effectivemanagement not only for the flow of fund raisingbut also for the stock of public debts, withconsistency to the macro/microeconomic policiesand to the financial flows as a whole.

2. Current conditions of major public debts

A summary of the currentconditions of public debt considered in the broadsense is as follows.

(1) Thecurrent conditions of the government bonds

The outstanding of the governmentbonds have been rapidly increasing lately, whichis estimated to reach a total of ¥364 trillion bythe end of fiscal year 2000.

While government bonds outstandingis cumulatively increased, interest payments onthese debts are restrained from increasing by thedeclining interest rates, however, they mayrapidly shift to an increase depending on thefuture trend of interest rates.

There is a very fair possibilityof a considerable amount of government bondscontinuously issued, including refunding of bonds.From fiscal year 2001, the FILP bonds will beissued. Therefore, it is significantly required topursue a more efficient management policy forgovernment bonds.

(2) thedebts of the Special Accounts and publiccorporations

(a) An overview of the SpecialAccounts

Only the case that there is alegal clause, the Special Accounts can borrow,however, it is usually the case that there arerestrictions on the purposes of the fundsborrowed.

The current amount of thelong-term loans (over one year) for the SpecialAccounts is ¥61.9 trillion (as of the end ofMarch 1999).

(b) An overview of the publiccorporations

There is a strict check system,like as the approval of the supervising ministeris required for public corporations to raise debts(As of the end of March 1999, there are 81 publiccorporations).

Financial information onindividual public corporations is being disclosedto a considerable extent. However, there is nopublic cross-section data on the total debts ofthe public corporations. In the case of the amountof outstanding debts through the FILP for the 47public corporations, it is announced ¥249.2trillion as of March 1999.

(c) Government financialinstitutions

For the government financialinstitutions belonging to public corporations,provisions are recorded in the debt accounts forthe loan receivables which are likely to become acredit loss in the future and the amount ofnon-performing receivables are also disclosedseparately.

(d) Government guarantee

The government is generallyprohibited to provide guarantees of debts ofcorporations. Guarantees may only be providedunder very restrictive conditions such that it islegally prescribed and that the Diet approves theceiling of guarantees in annual budget, however,there have been no default of debts guaranteedsince the WWII.

The total outstanding amount(performance expectancy) of government guaranteeas of FY 1999 is expected to be ¥52.1 trillion.

It is often pointed out that"implicit government guarantees" existwhen public corporations are to raise fundswithout government guarantees. In relation, thereare comments that legal stipulations on theability of bankruptcy for public corporationsshould be provided in order to clearly deny theexistence of "implicit governmentguarantees". There are also comments that thepublic responsibility and the significance of thepresence of the corporation should be taken intoconsideration in order to study such issues as theability of bankruptcy for public corporations.

(3)Credit guarantee

The Credit Guarantee Corporations(52 corporations in Japan) guarantee debts such asloan receivables when small businesses attempt tomake loans with financial institutions such asbanks.

In the event of defaultsconcerning the debts guaranteed by a CreditGuarantee Corporation, benefit payments will bemade to the Credit Guarantee Corporation by thenational government (Japan Small and MediumEnterprise Corporation) and the local governmentwill make compensation payments for the residualdebts. This implies that the portion of the debtguarantee made by the Credit GuaranteeCorporations could be considered a debt of thenation or of local governments. Although the finalburden charge for the nation and for the localauthorities will depend on various factorsincluding future economic performance, financialmeasures have been made by presuming the outageand collection rates.

(4) Therelations between national and local debts

Local bonds are classified intoordinary account bonds and public corporationbonds (the amount expected at the end of FY 2000is approximately ¥132 trillion and ¥61 trillion,respectively). As a measure to increase the totalamount of local allocation tax, loans mayexceptionally be made through the Special Accountfor the Allotment of Local Allocation Tax andLocal Transfer Tax (the national and localgovernments are liable, the amount expected at theend of FY 2000 being approximately ¥38 trillion).

In the current framework, therange of local debts and the liabilities betweenthe government and the local authorities are notclearly defined. There are critique that localpublic entities do not recognize loans made by theSpecial Accounts for the Allotment of LocalAllocation Tax and Local Transfer Tax as debts andthat such lack of awareness for the liabilitiesmight incur the inefficiency of annualexpenditures. There are opinions that, in order toclarify the relations between profit andliabilities, and also to realize localself-government in a true sense, it is necessaryto create a mechanism in which the debts for thenational and local governments do not increase bythe moral hazard of the local governments.Furthermore, the necessity of substantivelyenacting the capacity of bankruptcy for localpublic entities is being heard.

(5)Public Pensions

The budget estimates and futurebenefits for the National Pension and theEmployees' Pension Insurance have been indicatedthrough the actuarial revaluation of the financialconditions of these programs. From the viewpointof grasping the financial flow, it is significantto examine how amendment of the pension programsand the fluctuation of the population would affectthe projected benefits of the programs, and howpension insurance costs would be collected fromthe constituents and benefits would be providedfor them.

3. Management policy for government bonds

(1) Basicperspectives

As for actual objectives of themanagement policy for the government bonds, thefollowing points are important; (a) to ensure asmooth and steadily digestion of government bonds,(b) to minimize the financing cost by governmentbonds in the long run, and (c) to coordinate withrelated policies such as the fiscal and monetarypolicy.

(2)Measures of the management policy for governmentbonds

In order to issue governmentbonds, including the FILP bonds, smoothly andsteadily, it is desirable to develop measuresbased on such basic thoughts as:

(a) maintaining confidence in theJapanese Government Bonds.
(b) in actual issuance of government bonds,allocating an appropriate issue amount for eachmaturity, while diversifying maturities, basedupon market needs.
(c) enhancing and securing the transparency onissuing government bonds.
(d) realizing a higher liquidity in the secondarymarket.
(e) improving an infrastructure such as thesettlement system, in coordination with securingfair and appropriate taxation, in the issue andsecondary market as well as in the related marketssuch as the money market.
(f) developing diversified investors stratumincluding private investors.

(3)Future agenda

In order to promote a moreeffective management policy for government bonds,it is appropriate to deepen consideration as thebasic perspectives, on the following thoughts:

(a) presenting the principles andpriorities of the management policy for thegovernment bonds to the market.
(b) holding broad dialogues with the marketparticipants and the relevant authorities, andaddressing actively towards the improvement of themarket.
(c) making the Japanese Government Bonds moreattractive for investors in the global market,compared to the government bonds issued by majorcountries.

4. Comprehensive debt management and risk management of the government

(1)Comprehensive apprehension of public debt

The following points aresignificant in discussing the comprehensive debtmanagement of the government.

(a) providing the accountabilityof the financial conditions of the government tothe constituents by disclosure and comprehensiveapprehension of public debts including governmentbonds.

(b) minimizing the costs andmaintaining stable fund raising and researching ona system to form a comprehensive apprehension ofthe involved risks such as interest rate risks andinflation risks by analyzing the data afterattaining a comprehensive apprehension of thedebts .

(2)Difficulties involved in the comprehensiveapprehension of debts

The current system, establishedwithout considering the comprehensive apprehensionof debts, involves difficulties.

(a) recognizing who will finallybe responsible for the debts, while the nominaldebtor is clear.
(b) making distinction between commitments orcontingent liabilities and debts.
(c) noting that a simple summation of varioustypes of debt does not make sense, as types ofdebts are too diverse.

(3)Perspectives of grasping the financial flow

It is important to grasp theconditions of the financial flow by picking upappropriate items for each analytical or politicalpurpose, while there are difficulties in thecomprehensive apprehension of debts by theconcrete figures.