Summary of the Discussion concerning Fundamental Reform of the Fiscal Investment and Loan Program

(Provisional Translation)

Summary of the Discussion concerning Fundamental Reform of the Fiscal Investment and Loan Program
(Working Groups in Sub-committee of Fund Operation Council)

1.	Fundamental Reform of the Fiscal Investment and Loan Program
2.	The Post-Reform FILP Plan
3.	The FILP and the Diet
4.	Harmonization with Market Principles
5.	FILP Agency Bonds (Public-Offered Bonds Issued by Each FILP Agency WITHOUT Government Guarantee)
6.	Government-Guaranteed Bonds (Public-Offered Bonds Issued by Each FILP Agency WITH Government Guarantee)
7.	FILP Bonds
8.	Transitional Measures Required for Smooth Enforcement of FILP Reform
9.	Introduction and Sophistication of Policy (Subsidy) Cost Analysis
10.	Towards Continuous Reforms of the FILP

1. FundamentalReform of the Fiscal Investment and Loan Program (FILP)

Basic Concepts

FILP Reform:

Fundamental change from "integrated management and allocation of compulsorily deposited public funds (e.g., postal savings and pension reserves)" into "fiscal policies with financial means (i.e., capital subscriptions, loans, and guarantees) raising only the required funds based on the market principles".

*	The basic role and necessity of the FILP, which are to provide interest-bearing funds efficiently to the appropriate areas of fiscal policy, will remain important in the future, but its concrete activities will change to adopt to social and economic condition changes.

(1)

Direction of FILP Reform

Functions of the FILP:

Effective and efficient fiscal policy vehicle for areas in which the use of interest-bearing funds is appropriate. For instance:

(a)	To provide social infrastructure and other public goods,
(b)	To encourage or guide investments in goods under-served by the market due to their externalities, and,
(c)	To supplement financial markets by providing long-term fixed-rate funds in accordance with the maturity of loans.

FILP target areas and projects:

Strictly limited by examining FILP agencies' complementary role to private business and the financial soundness thereof in the future, and analyzing costs and benefits.

Reform of FILP agencies:

Fundamental changes to market-based fund raising mentioned above will bring about promotion of reform and efficient operation of public corporations.

(2)

Main Target Areas and Projects:

Present main targets of the FILP:

Where interest-bearing funds are appropriate as those in Developed countries, e.g., housing, small and medium-sized enterprises (SMEs), social infrastructure, local governments.

	->	Continuous review of their eligibility as FILP targets: (i) housing, (ii) SMEs, (iii) agriculture, forestry and fisheries, (iv) social infrastructure, (v) environment, (vi) industry and technology, (vii) overseas cooperation, and (viii) local governments.
	->	Policy cost analysis will be utilized in the review.

Policy finance:

By the Big Bang and other deregulations, the role of private finance will develop in the future.

Based on the principle of complementing private business, FILP shall withdraw from the areas in which the needs for public finance have decreased or can be handled using private finance.

(3)

Fund Raising

The current system, namely passive fund collection, shall be reconsidered.

In the reconsideration, the following shall be kept in mind:

(a)	To raise only the required funds for policy implementation,
(b)	To raise funds in the most efficient way according to market principles, and,
(c)	To be accompanied by appropriate risk management by the Trust Fund Bureau.

2. ThePost-Reform FILP Plan

Basic Concepts
	The Post-Reform FILP Plan:	Outline the FILP, namely fiscal resource distribution with financial means, in a consolidated and readable manner in accordance with the principles of the FILP reform.

(1)

Status of the FILP Plan

Present:

Zaito-Sanpyo (three tables showing annual FILP) are edited and submitted to the Diet as the de facto reference: (i) the FILP Financing Plan, (ii) the FILP Funding Estimate, and (iii) the FILP Classified by Target Areas.

Reformed:

The FILP plan will be the de juri scheme and the annual FILP will be classified into capital subscriptions, loans, and guarantees based on the type of credit extension. Detailed description of the three tables will be revised for improving consolidation and readability.

(2)

For Further Improvement on Consolidation and Readability of the FILP Plan

(a)

Loans to local governments by postal savings and postal life insurance reserves

These loans shall be part of the FILP due to their function to distribute fiscal resources.

->	The total amount of loans extended by the government will be shown in the FILP plan in consolidated and readable manner.

(b)

Government guarantee

For consistency with FILP capital subscriptions and loans, government guarantees only with resource distribution functions will be listed on the FILP plan.

->	Measures for showing all guarantees by the government shall be further examined.

(c)

The FILP Funding Estimate shall be reorganized due to issuance of FILP bonds.

(d)

The FILP Classified by Target Areas will be simplified due to the abolition of compulsory deposit of postal savings and pension reserves.

(Note)

Whereas FILP agency bonds are not included in the FILP framework--governmental credit extension scheme--since these bonds are issued only depending on FILP agencies' credit, measures for clarifying the relationship between FILP agency bonds and the FILP shall be further examined.

3. The FILP andthe Diet

Basic Concepts
	The FILP:	Approved by the Diet as part of the budget because of its fiscal resource distribution function.

The reformed FILP will continue to be approved by the Diet in accordance with the basic ideas and direction of the FILP fundamental reform.

(1)

Diet Approval

Present:

Approved by the Diet as part of the budget such as the long-term (equal or more than five years) appropriation of the Trust Fund Bureau Fund.
(Approval to each funding resource: (i) the Trust Fund Bureau Fund, (ii) the Postal Life Insurance Reserves, (iii) the Industrial Investment Special Account, and (iv) Government-guaranteed Bonds and Borrowings)

Reformed:	The concrete process of Diet approval shall be adapted to the FILP reform, i.e., fundamental change from integrated management and allocation of compulsorily deposited public funds (e.g., postal savings and pension reserves) into fiscal policies with financial means (i.e., capital subscriptions, loans and guarantees) raised only the necessary funds according to the market principles. Detailed measures shall be examined.
	Issuance of FILP bonds will be also subject to limitation approved by the Diet.
	Market operation will be necessary for the reformed FILP in order to coordinate the time lag between FILP bond issuance and loan disbursements. Such operation will require flexibility and mobility for adjusting changes in financial and economic conditions as well as further disclosure or other governance measures.
	The framework of the Trust Fund Bureau Special Account and the Industrial Investment Special Account are also to be further investigated.

(2)

References to the Diet

Present:

The FILP Financing Plan, the FILP Funding Estimate, the FILP Classified by Target Areas (Zaito-Sanpyo), and the Explanation of the Budget and the FILP Plan

Reformed:

Further references and disclosures shall be examined in order to facilitate discussion in the Diet.

(3)

Provision for Additional FILP Appropriation

*	The means to balance democratic control and flexible administration shall be examined.

4.Harmonization with Market Principles

Basic Concepts
	The Reformed FILP:	Fiscal-policy vehicle with financial means raised only necessary fund to accomplish fiscal policy targets for areas in which the use of interest-bearing funds is appropriate

->	The relation between the FILP and private finances shall be constantly reviewed, and FILP administration shall be harmonized with market principles as much as possible.

(1)

Loan Rate

Present:

The identical rate applies to every loan in spite of the maturity thereof.

Reformed:

Basically, the loan rate will change according to the maturity of the loan based on the prevailing yield curve of Japanese government bonds in the market.

->	The rule for setting the loan rates shall be clear and objective so that the rates correspond to market rates.
->	Based on fund-raising conditions as well as accompanied with the appropriate interest-rate risk management, the loan rates of FILP will be diversified. For instance, loan-rate revision every ten years shall be introduced.

(2)

Funding Rate

Present:

Deposit rates to the Trust Fund Bureau, determined by cabinet order, imply concerns of depositors management of the business.

Reformed:

FILP bonds will be issued on market conditions.

(3)

Asset-Liability Management (ALM)

Present:

While liquidity is sufficient because of daily cash inflow from postal savings, the maturity of the deposit is determined by the depositor and therefore market operation is the dominant method for ALM.

Reformed:

Issuance of FILP bonds will be restricted to the needed funds for policy implementation so that surplus funds will be restrained within a minimum level.

->	Adequate funding and investment instruments shall be established to achieve optimal ALM with sufficient liquidity.

Fund Operation:

Liquid assets will be held as the need arises.

->	New risk-hedge instruments will be prepared for the reformed Trust Fund Bureau Fund as financial technology develops.

Fund Raising:

Whereas the FILP bonds are issued constantly, loan disbursements will fluctuate due to the money demands of projects.

->	Some financing bills shall be introduced in order to adjust time lags between fund raising and loan disbursement and manage working capital appropriately.

5. FILP Agency Bonds(Public-Offered Bonds Issued by Each FILP Agency WITHOUT Government Guarantee)

Basic Concepts
	FILP agency bonds:	Public-offered bonds issued by each agency without government guarantee.

The regulatory ministries and FILP agencies will examine feasibility on issuance of FILP agency bonds in terms of introducing private finances or other funding alternatives to the agencies.

(1)

Notices on Issuing FILP Agency Bonds

As FILP agency bonds are issued by each agency by itself, the bonds shall be distinguished from the FILP scheme, namely, the governmental credit extension system.

Introduction of FILP agency bonds can be an incentive to improve operation of these agencies through the market mechanism.

Increase of burden on taxpayers should be avoided.

The conditions for proper market evaluation should be prepared in order to prevent FILP agencies from issuing FILP agency bonds relying upon implicit government guarantee.

*	Agencies to be privatized shall be encouraged to issue FILP agency bonds.
*	Asset-backed securities and Revenue bonds shall be positively examined to introduce.

(2)

Opinions among Market Participants

Corporate-type FILP agency bonds, depending upon the entire credit of FILP agencies, require further devices for precise evaluation of these bonds in the market.

For the purpose of ensuring appropriate market evaluation of the operations of FILP agencies, the credit of each agency and the government shall be separated by the following measures; (i) further disclosure of each agency, (ii) utilization of bond ratings and external audit, (iii) clarification of subsidies, (iv) preparation of legal schemes for bankruptcy of public corporations, and (v) transitional measures during reform period.

Bonds issued by privatizing agencies can be evaluated accurately in the market.

Asset-backed securities and revenue bonds, whose credits are separated from the agencies, can be structured as FILP agency bonds, and appreciated bond-ratings can be obtained according to their assets or projects.

(3)

Preparation for Issuing FILP Agency Bonds

*	Examination for introducing asset-backed securities
*	Examination for introducing corporate-bonds without government guarantee

(4)

Bankruptcy Laws Task Force, Legislative Council of the Ministry of Justice

*	Within an overall review of bankruptcy laws, the legal scheme for the bankruptcy of public corporations will be examined.

6.Government-Guaranteed Bonds (Public-Offered Bonds Issued by Each FILP Agency WITHGovernment Guarantee)

Basic Concepts
	Government-guaranteed Bonds:	Public-offered bonds issued by each agency with government guarantee

Each FILP agency shall not issue bonds easily depending on the government guarantees in terms of proper debt management.

On the other hand, government-guaranteed bonds can be issued under each strict examination in the following cases:

--	Where the agencies will issue government-guaranteed bonds in the transitional period until the agencies will issue the FILP agency bonds in the near future.
--	Where the agencies will issue government-guaranteed bonds in a limited manner for their efficient policy implementation as a supplementary fund-raising instrument to borrowings from the government funded by FILP bonds.

Notices on Issuing Government-Guaranteed Bonds

The concrete process and scheme for issuing government-guaranteed bonds under the reformed FILP system shall be reorganized, taking the following merits into consideration.

(a)	Government guarantees lead to further governance of the government and the Diet to FILP agencies; and,
(b)	For self-sufficient management by FILP agencies, government guarantees can be effective by being transitionally granted to agencies that are taking steps to issue FILP agency bonds without guarantee but are facing difficulties in immediate issue without such guarantees.

The fiscal disciplines can be hurt by loose examination of the guarantees since no cash is required to grant. Strict management controls for guarantees shall be established with a view to avoiding an increase of taxpayers burden resulting from guarantees.

The burden on taxpayers and/or beneficiaries can rise since the funding cost of government-guaranteed bonds, issued by each agency, will be higher than that of FILP bonds. Prudential attention concerning the request from the market, such as the size of the issue with regard to smooth absorb and the prevention of disturbance, considering the effect of corporate bonds on the primary and secondary market, shall be paid in terms of the amount issued thereof.

(Note	1) Bonds issued by KfW (Kreditanstalt fE Wiederaufbau), a German public financial institution, had been virtually guaranteed by the government based on a German customary law, Anstaltslast, without explicit guarantee contracts. Since last year, however, the legal government guarantee has been granted to KfW bonds in order to clarify the government commitment.
(Note	2) The description above applies onlly to government-guaranteed bonds in the FILP scheme.

7. FILP Bonds

Basic Concepts
	FILP bonds:	A kind of Japanese government bonds (JGB) for the purpose of financing FILP; nonetheless, they are not to be regarded as general government debt but as public enterprise debt as defined in SNA (System of National Account).

	*	FILP bonds, issued at the risk-free JGB rate, shall be introduced since the government is obligated to provide lowest-cost funds for FILP agencies to implement necessary businesses which private companies cannot accomplish because of their low returns.
	*	FILP bonds can minimize issuing costs with optimal amount and maturity adjustment determined by the government.

->	FILP bond scheme shall be legally examined in terms of fiscal aspects and market aspects for the primary and secondary.

Fiscal Aspects:

Establishing suitable due process for securing fiscal discipline

Market Aspects:

Utilizing present JGB infrastructure as much as possible

(1)

Characteristics of FILP Bonds

Funds raised by FILP bonds form financial and loan assets, redeeming by funds collected from loans or other financial assets

->	FILP bonds are not to be regarded as general government debt but as public enterprise debt as defined in SNA. (Ordinary government bonds are redeemed by tax revenues.)

Bonds issued by the government

->	The borrower for FILP bonds is the Government of Japan so that FILP bonds are the Japanese governments liability in legal terms.

(2)

Fiscal Aspects (Establishing Suitable Due Process for Securing Fiscal Discipline)

The due process for appropriate control by the Diet shall be established in line with the differences between the fiscal traits of FILP bonds and existing JGB. For instance:

(a)	Diet approval for upper limit on issuance of FILP bonds;
(b)	Appropriate accounting and legal status in the government fiscal accounting system;
(c)	Application of current JGBs redemption system and Redemption Plan; and,
(b)	Reference to the Diet.

(3)

Market Aspects (Utilizing JGB infrastructure as much as possible)

While further comments from market participants or other considerations are expected, FILP bonds wiil be considered to be handled as JGB in primary and secondary market because of the following:

(a)	Existing JGB and FB are regarded as the same financial product respectively in the market although each security has different legal bases. Similarly, local government bonds are also handled as one product in the market despite of the difference in legal and accounting status.
(b)	There is no distinction among governmental securities in terms of the market no matter how the raised funds are used in Western countries.
(c)	The borrower for both existing JGB and FILP bonds is the same entity, namely, the Government of Japan (there is no difference in credit risk between JGB and FILP bonds).
(d)	FILP bonds and JGB, emerged in the market, will promote development of Japanese securities market.
(e)	Utilization of JGB infrastructure, such as the JGB Futures market, prevents additional investment of both the government and market participants for dealing with FILP bonds.

8. TransitionalMeasures Required for Smooth Enforcement of FILP Reform

Basic Concepts
	*	The abolition of the compulsory deposit of postal savings and pension reserves shall be accompanied by appropriate transitional measures on the issuance of FILP bonds to sustain loans and avoid detrimental effects on the market for the smooth enforcement of FILP reform.

(1)

Appropriate Transitional Measures Required for Smooth Enforcement of FILP Reform

FILP:

Large outstanding, long-term loan.
Closely associated with the interests of nations in housing and small and medium-sized enterprises.

Transitional measures shall be prepared for the following purposes:

(a)	To secure raising funds for continuing foregone loans; and,
(b)	To avoid detrimental effects on the market resulting from FILP reform.
*	The Fundamental Law on the Reform of Government Ministries and Agencies (June 1998) and others state that such transitional measures are to be established.

(2)

Market Investment of Postal Savings and Pension Reserves

Postal savings and pension reserves, which are huge public funds collected by the government, shall be basically invested in marketable products with the following reservations:

Secure and prudent operation (The investment shall be restricted because of the public fund.)

Consideration of the influence to the market, management to prevent detrimental effects to the market.

A gradual and smooth transition shall be made so that the amount of portfolio investment does not increase suddenly.

Investment in FILP agency bonds and local government bonds in the secondary markets shall be also transparent according to market principles. Consequently, measures for preventing detrimental effects on the market and investment based on policy decisions shall be established. (For example, they should pay attention not to be a price leader and/or market maker. Investment concentrated in specific names shall be avoided.)

--	Pension System Reform Bill (July 1999

?and Interim Report of the Study Group on Investments of Postal Savings and Postal Life Insurance Funds (June 1999)
These documents mention the transitional measures stated above. * It is inappropriate that they lend funds to FILP agencies.

->	Loans with resource-allocation functions shall be properly appropriated under the control of the Diet as part of FILP for the purpose of appropriate fiscal-policy implementation.

* Exceptionally, fund will be lent from postal savings and postal life insurance reserves to local governments facing financial difficulties.

Loans to local governments have resource-allocation function so they shall be extended under the supervision of the Diet. (i.e., (i) listed on the FILP plan for consistency and readability, (ii) approved by the Diet as part of the budget, and (iii) uniform conditions in accordance with market conditions)

9. Introduction andSophistication of Policy (Subsidy) Cost Analysis

Basic Concepts
	*	The FILP shall be allocated based on appropriate examinations and policy decisions by measuring and disclosing policy costs quantitatively with a view to developing disclosure of information concerning taxpayer burden and fiscal soundness.
	*	At the same time, it should be noted that it takes time to establish concrete analyzing methods in the analysis. In addition, care should be taken since the quantified policy costs may vary widely depending on different assumptions.
->	It is important to employ possible analysis methods for the policy cost analysis each by each. In addition, analysis methods should continuously be reviewed in order to refine the analysis.

(1)

Outline of Policy Cost Analysis

*	Policy cost is the present value of future fiscal expenditures from the Government with the implementation of FILP projects, based on certain assumptions until the completion of the projects concerned.

(2)

Effects of Policy Cost Analysis

Disclosure of information concerning future taxpayers burdens will be improved by disclosing the estimated policy costs such as subsidies which are provided from a certain policy perspective, with FILP projects, based on various assumptions.

FILP agencies can assess their future business and financial situations more accurately through the process of the policy cost analysis so that the analysis would contribute to the improvement in their businesses and finances.

FILP projects can be examined by more diversified methods, such as comparison between policy cost and social and economic benefits arising from the project.

It is desirable in the future that not only policy costs but also benefits derived from FILP projects shall be assessed, and the introduction of policy cost analysis is an important step toward such a direction. Ultimately, benefits regarding FILP projects shall also be shown clearly in the publication of results of the policy cost analysis in the future.

10. TowardsContinuous Reforms of the FILP

Basic Concepts
	Continuous Reform:	Changes in social and economic conditions can require further and continuous review of the FILP.

->	It is important to continue reforming the FILP.

(1)

For Discipline of Public Corporations

(a)

Further Accountable Disclosure beyond the Standards for Private Businesses
Disclosure by public corporations was conducted after the Law concerning Preparation and Disclosure of Financial Statements of Public Corporations (1997)

->	Further disclosure shall be examined.

(b)

Accounting
Financial statements of public corporations are based on the Public Corporation Accounting Principles, which are in line with the Corporate Accounting Principles.

->	These financial statements shall be further harmonized with the Corporate Accounting Principles to improve accountability on the financial statements.

(c)

Establishment of Objective Evaluation and Surveillance Framework

Utilizing external audit and other measures

*	Whereas some public corporations have already introduced external audits, others shall also introduce external audits for further transparency in financial conditions. Local governments introduced external audits in October 1998.
*	Inspection by the supervising authority to government financial institutions shall be improved.

Framework for policy evaluations introduced by the reform of governmental ministries and agencies

*	Enhancement of objective policy evaluations in accordance with changes in social and economic conditions from the viewpoint of taxpayers.
*	Each ministry will evaluate its own policies based on necessity, priority, and effectiveness criteria by utilizing academicians and private professionals, and will publish the results.
*	The Ministry of General Affairs will establish the Commission for the Evaluation of Policies and Administrative Agencies (provisional name), which will deliberate policy evaluation plans and implementations at each ministry.

(2)

For Control of the Entire FILP System

Further disclosure

References to the Diet and others are disclosed, such as: (i) Featured articles regarding the FILP in Ministry of Finance Statistics Monthly; (ii) Monthly Trust Fund Bureau Report; (iii) annual FILP Report; (iv) annual FILP Booklet; and (v) FILP Report and other materials on the MOF website. Further disclosure will be pursued.

Accounting

->	Balance sheet will reflect the changes in assets and liabilities because of the change from the cash basis to the accrue basis so that financial transparency and clarity will improve.
->	Reserves and/or allowances for interest-rate risk shall be examined.

HOME