For the six months ended September 30, 2011

Japan Finance Organization for Municipalities

Interim Financial Statements

Japan Finance Organization for Municipalities

0Contents
Interim Balance Sheets

2

Interim Statements of Income

3Interim Statements of Changes in Net Assets

4Interim Statements of Cash Flows6

Notes to Interim Financial Statements

7

1

■Interim Balance Sheets (As of September 30, 2010 and 2011)

Item
AssetsLoans (Note 4)
Securities (Note 11)
Cash and bankdeposits
Other assets
Tangible fixed
assets (Note 6)
Intangible fixed
assets (Note 6)

As of
As of
September 30,
September 30,
2010
2011
Amount¥21,987,044
1,290,009¥22,238,975
886,938

141,232
20,472421,251
16,666

2,957

2,993

796

679

Item
Liabilities
Bonds (Note 7 )Other liabilities
Reserve for bonuses
Reserve for directors’
bonuses
Reserve for retirement
benefits
Reserve for retirement
benefits for directors
and corporate auditors
Fund for improvementof operations ofmunicipalities
Basic fund for
improvement ofoperations ofmunicipalities
Additional fund for
improvement ofoperations ofmunicipalities
Reserve under special
laws
Reserve for interest rate
volatility
Management accountreserve for interest
rate volatility
Reserve for interest rate
reduction
Total liabilities
Net assets
CapitalRetained earnings
General accountappropriatedsurplus reserve
General accountinterim unappropriatedretained earnings
Valuation, translation
adjustments and others
Management accountsurplus reserve
Management accountappropriatedsurplus reserve
Management accountinterim unappropriatedretained earnings
Total net assets

Total assets¥23,442,512¥23,567,505

Total liabilities and net
assets2(Millions of Yen)
As of
As of
September 30,
September 30,
2010
2011
Amount¥18,661,768
14,18651¥18,549,813
14,145
51

8

5

204

159

49

22

907,906

915,818

901,407908,104

6,498

7,713

3,783,300

4,004,127

660,000

880,000

3,016,545

3,030,722

106,755

93,40423,367,475

23,484,143

16,602
9,618

16,602
21,527

5,834

13,860

3,783

7,667

5,299

(5,842)43,51751,07439,51747,565

4,000

3,509

75,037

83,361¥23,442,512¥23,567,505

■Interim Statements of Income (For the six-month periods ended September 30, 2010 and 2011)
Six months ended
September 30,
2010

Item

(Millions of Yen)
Six months ended
September 30,
2011

IncomeInterest income
Fees and commissions
Other income
Amount received for fund for improvement of operations of municipalities
Other
Expenses
Interest expenses
Fees and commissions
Other operating expenses
General and administrative expenses
Other expenses
Transfer to fund for improvement of operations of municipalities

Amount¥272,004
271,889101
14
14145,847
141,258
133
2,290
1,196
967
967

Ordinary income

126,157

118,881Special gains
Reversal of management account reserve for interest rate volatility
Reversal of reserve for interest rate reduction

227,128
220,000
7,128

226,484
220,000
6,484

Special losses
Provision for reserve for interest rate volatility
Provision for management account reserve for interest rate volatility

345,501
220,000
125,501

334,189
220,000
114,189

Interim net income¥7,783¥11,176

3¥259,307
259,1919620
5
14
140,425
136,930
133
2,132
1,228
-

■Interim Statements of Changes in Net Assets(From April 1, 2010 through September 30, 2010)(Millions of Yen)

Stockholders’ equity

Retained earnings
Generalaccount
appropriatedsurplusreserve

CapitalBalance atApril 1, 2010
Changes during
interimaccounting
periodInterim net
incomeNet changes
during interim
accounting
period initems otherthanstockholders’equityNet changes
during interim
accounting
periodBalance at
September 30,
2010

General accountinterimunappropriatedretainedearnings

Valuation,translation
adjustments
and others
Unrealized
gain/(loss)
from
Total
stockholders’ hedging
instruments
equityManagement
account
appropriatedsurplusreserve

Management
account
interimunappropriatedretainedearnings

Total
net
assets¥16,602¥5,834-¥22,436¥(1,340)¥39,517-¥60,613--¥3,783

3,783

-

-

¥4,000

7,783

-

-

-

-

6,639

-

-

6,639

-

-

3,783

3,783

6,639

-

4,000

14,422¥16,602¥5,834¥3,783¥26,220¥5,299¥39,517¥4,000¥75,037

4

(From April 1, 2011 through September 30, 2011)(Millions of Yen)

Stockholders’ equity
Retained earnings
Generalaccount
appropriatedsurplusreserve

CapitalBalance atApril 1, 2011
Changes during
interimaccounting
periodInterim net
incomeNet changes
during interim
accounting
period initems otherthanstockholders’equityNet changes
during interim
accounting
periodBalance at
September 30,
2011

General accountinterimunappropriatedretainedearnings

Valuation,translation
adjustments
and others
Unrealized
gain/(loss)
from
Total
stockholders’ hedging
instruments
equityManagement
account
appropriatedsurplusreserve

Management
account
interimunappropriatedretainedearnings

Total
net
assets¥16,602¥13,860-¥30,462¥(8,645)¥47,565-¥69,382--¥7,667

7,667

-

-

¥3,509

11,176

-

-

-

-

2,803

-

-

2,803

-

-

7,667

7,667

2,803

-

3,509

13,979¥16,602¥13,860¥7,667¥38,130¥(5,842)¥47,565¥3,509¥83,3615

■Interim Statements of Cash Flows (For the six-month periods ended September 30, 2010 and 2011)(Millions of Yen)
Six months
Six months
ended
ended
September 30,
September 30,
2010
2011
AmountItem

Ⅰ Cash flows from operating activities
Interim net income
Depreciation and amortization
Interest income
Interest expenses
Increase in reserve for bonuses
Increase/(decrease) in reserve for directors’ bonuses
Decrease in reserve for retirement benefits
Decrease in reserve for retirement benefits for
directors and corporate auditors
Increase/(decrease) in fund for improvement of operationsof municipalities
Increase in reserve for interest rate volatility
Decrease in management account reserve for interest rate
volatility
Decrease in reserve for interest rate reduction
Net decrease/(increase) in loans
Net increase in bonds
Interest received
Interest paid
OthersNet cash provided by operating activities
Ⅱ Cash flows from investing activities
Proceeds from redemption of securities
Purchases of securities
Purchases of tangible fixed assets
Purchases of intangible fixed assets
Net cash used in investing activities
Ⅲ Cash flows from financing activities
Ⅳ Effect of exchange rate changes on cash and cash
equivalents
Ⅴ Net decrease in cash and cash equivalents
Ⅵ Cash and cash equivalents at beginning of period
Ⅶ Cash and cash equivalents at end of period

6¥7,783
172(271,889)
141,258
8
0(5)¥11,176
176(259,191)
136,930
10
(0)
(36)

(6)

(4)

967
220,000(5)
220,000(94,498)(7,128)43,183125,335
273,169(141,439)
617
297,528(105,810)(6,484)(7,119)220,760
261,313(137,009)(608)
334,096

3,033,300(3,338,748)
(12)
(99)
(305,560)-

1,314,600(1,743,920)
(97)
(60)
(429,477)-(8,031)
149,264¥141,232(95,381)516,633¥421,251

■Notes to Interim Financial Statements
1. Basis of presentation
Japan Finance Organization for Municipalities (hereinafter, “JFM”) has prepared interim financial statements in accordance with
the Japan Finance Organization for Municipalities Law (Law No. 64 of May 30, 2007) (hereinafter, the “Law”) and the Ministerial
Ordinance on Finance and Accounting of Japan Finance Organization for Municipalities (Ordinance No.87 of the Ministry of Internal
Affairs and Communications, 2008) (hereinafter, the “Ordinance on Finance and Accounting”) and accounting principles andpractices applicable to interim financial statements generally accepted in Japan.
The comparative information as of and for the six-month period ended September 30, 2010 was not presented in the original
interim financial statements in Japanese, but is included in these interim financial statements in English solely for the convenience ofthe reader.
Since JFM does not have any subsidiaries or affiliates, it does not prepare interim consolidated financial statements.
Amounts less than one million yen have been omitted. As a result, the totals in Japanese yen shown in the financial statements do
not necessarily agree with the sum of the individual amounts.
2. Significant accounting policies(1) Securities
As for security valuation, held-to-maturity securities are carried at amortized cost (straight-line method).
(2) Derivative transactions
Derivative transactions are carried at fair value with changes in unrealized gain or loss charged or credited to operations, except
for those which meet the criteria for hedge accounting.
(3) Depreciation(a) Tangible fixed assets
Depreciation of tangible fixed assets is calculated by the straight-line method based on the estimated useful lives and theresidual value determined by management. The estimated useful lives of major items are as follows:
Buildings: 20 to 41 years
Others: 2 to 19 years(b) Intangible fixed assets
Amortization of intangible fixed assets is calculated by the straight-line method based on the estimated useful lives and theresidual value determined by management. Software for internal use owned by JFM is amortized over 5 years.
(4) Deferred assets
Bond issuance costs are expensed in full when incurred.
(5) Translation of assets and liabilities denominated in foreign currencies into Japanese yen
Monetary assets and liabilities denominated in foreign currencies, for which foreign currency swaps or foreign exchange forward
contracts are used to hedge the risk of foreign currency fluctuation, are translated at the contracted rate as these swap contracts or
the forward contracts qualify for deferral hedge accounting.
(6) Reserves(a) Reserve for possible loan losses
JFM has never experienced any loan losses. Accordingly, no reserve for loan losses has been maintained.
(b) Reserve for bonuses
Reserve for bonuses is provided for payment of bonuses to employees, in the amount of estimated bonuses, which are
attributable to the interim period.
(c) Reserve for directors’ bonuses
Reserve for directors’ bonuses is provided for payment of bonuses to directors, in the amount of estimated bonuses, which are
attributable to the interim period.
(d) Reserve for retirement benefits
Reserve for retirement benefits is provided for payment of retirement benefits to employees, in the amount deemed accrued asof the end of the interim period, based on the projected retirement benefit obligation and fair value of plan assets as of the endof the interim period.
(e) Reserve for retirement benefits for directors and corporate auditors
Reserve for retirement benefits for directors and corporate auditors is provided for payment of retirement benefits to directors
and corporate auditors, in the amount deemed accrued at the end of the interim period based on internal policies.
(7) Hedge accounting(a) Hedge accounting method
Interest rate swaps used to hedge the risk of interest rate fluctuations and which qualify for hedge accounting and meet
specific matching criteria are not measured at fair value, but the differential paid or received under the swap agreements is
recognized and included in interest expense or income. If swap contracts or forward contracts used to hedge the foreign
currency fluctuation qualify for deferral hedge accounting, the foreign currency-denominated assets and liabilities aretranslated at the contracted rate.
(b) Hedging instruments and hedged items(ⅰ) Hedging instruments・・・Interest rate swaps
Hedged items・・・・・・・・・Bonds(ⅱ) Hedging instruments・・・Currency swaps
Hedged items・・・・・・・・・Foreign currency-denominated bonds(ⅲ) Hedging instruments・・・Foreign exchange forward contracts
Hedged items・・・・・・・・・Receipt of interest and principal of foreign currency-denominated bank deposits7(c) Hedging policy
JFM uses hedging instruments as a means of hedging exposure to interest rate risk and foreign exchange risk resulting frombond issuances. Hedged items are identified by each individual contract.
As a means of hedging foreign exchange fluctuation risks associated with the receipt of interest and principal of foreign
currency-denominated bank deposits, foreign exchange forward contracts are entered into at the time of deposit.
(d) Assessment of hedge effectivenessJFM ensures that hedging instruments and hedged items have the same major terms when making hedge transactions areentered into offset bond market fluctuations. Accordingly, JFM deems these to be highly effective and thus does not assess
their effectiveness. Moreover, a periodic assessment of hedge effectiveness for interest rate swaps and currency swaps andforward contracts which qualify for deferral hedge accounting is omitted when the exceptional accrual method is applied.
(8) Cash and cash equivalents
Cash and cash equivalents in the interim statements of cash flows consist of “Cash and bank deposits” on the interim balance
sheets.
(9) Fund for improvement of operations of municipalities
In accordance with the provisions of Article 46, Section 1 of the Law, JFM has established the Fund for Improvement of
Operations of Municipalities to reserve contributions as stipulated in Article 32-2 of the Local Finance Law (Law No. 109, 1948).
Also, pursuant to the provisions of Article 46, Section 5 of the Law, income arising from the investment of the fund (hereinafter,“investment income”) is used to reduce interest rates of the loans to municipalities, and if there is any surplus in the investment
income after this interest rates reduction process, the surplus amount is added to the fund. Further, pursuant to the provisions ofArticle 46, Section 6 of the Law, if there is any shortfall after the interest rates reduction process, the shortfall is covered bywithdrawal of the fund within the limits of the total of the additional portion to the fund made up to the previous fiscal year andthe contributions made in the most current fiscal year.
(10) Reserve for interest rate volatility and Management account reserve for interest rate volatility
The reserve for interest rate volatility is set aside to prepare for interest rate risk associated with refinancing of JFM bonds(excluding the bonds issued by the former Japan Finance Corporation for Municipal Enterprises) pursuant to the provisions ofArticle 38, Sections 1 and 3 of the Law, and Article 9, Section 8 of the supplementary provisions of the Law, and is calculated
and accounted for based on the provisions of Article 34 of the Ordinance on Finance and Accounting and Article 22 of theGovernment Ordinance on preparation of relevant government ordinances and provisional measures for the abolishment of theJapan Finance Corporation for Municipal Enterprises Law (Government Ordinance No. 226, 2008; hereinafter, “Preparation
Ordinance”).
The management account reserve for interest rate volatility is set aside to mitigate interest rate risk associated with refinancing
of bonds issued by the former Japan Finance Corporation for Municipal Enterprise (hereinafter, “former JFM”) pursuant to theprovisions of Article 9, Sections 9 and 10, and Article 13, Sections 5 and 7 of the supplementary provisions of the Law, and is
calculated and accounted for based on the provisions of Articles 1 through 3 of the Ministerial Ordinance on the operations of theManagement Account at Japan Finance Organization for Municipal Enterprises (Ordinance No. 2 of the Ministry of Internal
Affairs and Communication, and the Ministry of Finance, 2008; hereinafter, “Management Account Operations Ordinance”) and
Articles 3 and 5 of the supplementary provisions of the above ordinance.
(11) Reserve for interest rate reduction
The reserve for interest rate reduction is set aside to reduce interest rates on the loans made by the former JFM to local
governments pursuant to the provisions of Article 9, Section 13, and Article 13, Section 8 of the supplementary provisions of theLaw, and Article 26, Sections 1, 3 and 4 of the Preparation Ordinance, and is calculated and accounted for based on theprovisions of Article 5 of the Management Account Operations Ordinance.
(12) Consumption taxes
National and local consumption taxes are accounted for using the tax exclusion method.
3. Additional Information
JFM has applied “Accounting Standard for Accounting Changes and Error Corrections” (ASBJ Statement No.24, December 4,2009) and “Guidance on Accounting Standard for Accounting Changes and Error Corrections” (ASBJ Guidance No.24, December
4, 2009) effective April 1, 2011.
4. Loans
There are no bankrupt loans, non-accrual loans, past due loans (3 months or more), or restructured loans. Since JFM has neverexperienced loan losses in the past, it does not account for loan loss reserves.
Bankrupt loans represent loans to borrowers as defined in Articles 96, Section 1, Clause 3 (a) through (e) and Clause 4 of the
Enforcement Ordinance of the Corporate Income Tax Law (Government Ordinance No. 97, 1965), and on which accrued interest
is not accounted in revenue as there is no expectation of collection of either principal or interest because they are past due for aconsiderable period of time or for other reasons (excluding loans on which bad debts are written off; hereinafter, “Non-accrualloans”).
Non-accrual loans represent loans on which accrued interest is not accounted in revenue, excluding loans to bankrupt borrowers
and loans with grace for interest payment to assist in corporate reorganization or to support business.
Past due loans (3 months or more) represent loans on which payment of principal or interest is in arrears for more than 3 months,
calculated from the day following the contractual due date, excluding bankrupt loans and non-accrual loans.
Restructured loans represent loans which are given certain favorable terms and conditions, such as reduction or exemption ofinterest, grace for interest or principal payment, and debt waiver, to assist borrowers in corporate rehabilitation or to support
business, excluding bankrupt loans, non-accrual loans and past due loans (3 months or more).
All principal and interest (2,543 million yen in total) of which due dates were extended during the previous fiscal year ended
March 31, 2011 due to the Great East Japan Earthquake, have been fully repaid by the end of September 30, 2011.

8

5. Financial instruments(1) Status of financial instruments(a) Policy on financial instruments
In order to maintain a sound and good financial standing and earn the solid confidence of capital markets, JFM needs toappropriately manage various risks including interest rate risks.
JFM adopts an integrated risk management approach to appropriately respond to various risks while endeavoring to further
advance its risk analysis and management.
Accordingly, JFM has developed a system for appropriate risk management, including the establishment of the Integrated
Risk Management Committee, which supervises JFM’s overall risk management, and the Risk Management Office, whichmonitors the risks in each department. The content of risk management can then be appropriately reflected in management
decisions.
(b) Details on and risk of financial instruments
JFM raises funds by primarily issuing 10-year bonds, and makes loans with a maximum maturity of 30 years and withrepayment of interest and principal in equal installments. Therefore, a large maturity gap is created between lending andfunding, and JFM is exposed to the interest rate risk associated with bond refinancing.
JFM has set aside reserves for interest rate fluctuations (Reserve for Interest Rate Volatility), and has set up the ALM
committee separately from the Integrated Risk Management Committee to comprehensively analyze and manage JFM’s assets
and liabilities in a timely and appropriate manner. Specifically, the medium- and long-term management analysis and risk
analysis and evaluation are conducted through scenario analysis, VaR analysis, and duration analysis, among other methods. In
addition, JFM endeavors to lower interest rate risk by narrowing the maturity gap between lending and funding through avariety of methods, such as issuing super-long-term bonds.
(c) Risk management for financial instruments(ⅰ) Credit risk
Credit risk is the risk of loss arising from a credit event, such as deterioration in the financial condition of a borrower, thatcauses an asset to lose value or become worthless. In addition to credit risk associated with loans, market transactions also
involve credit risk.
A. Credit risk for loans
JFM makes loans exclusively to local governments, and does not expect any default on loans made to local governments
for the reasons outlined below. JFM and the former JFM have never experienced any loan losses.
• The national government of Japan includes local government debt servicing costs in the expenditure of the Local
Government Finance Program, and secures the total amount of local allocation tax which balances local governments’total expenditures including debt servicing costs and total revenue. Thus, the national government effectively securesrevenue sources for principal and interest payments for local governments. The national government also secures revenue
sources for debt servicing for individual local governments by including a portion of local government debt servicing
costs in the Standard Financial Needs when calculating local allocation tax.
• Under the consultation system for local government bonds and loans, credit reviews must include checks on thecircumstances of local government debt servicing, and tax revenue and necessary revenue sources to be secured.
Additionally, under the Early Warning System, the local governments whose debt servicing costs and financial deficits
exceed a certain level must apply for approval to issue bonds or obtain loans, so that the credit standing of local
government bonds and loans is maintained.
• Under the Law Relating to the Financial Soundness of Local Governments, which was promulgated in June 2007
(No.94), local governments whose fiscal indicators exceed the early warning limits must make their own efforts towardachieving fiscal soundness, and local governments whose fiscal indicators exceed the reconstruction limits must takenecessary actions to restore their finances under the oversight of the national government with regard to redemption of
local government bonds and loans, and other operations.
• JFM is not subject to the “Banking Law” (1981, No. 59) or the “Financial Reconstruction Law” (1998, No. 132) but
performs self-assessment of loans made by the former JFM to local government road corporations in accordance with the“Financial Inspection Manual” of the Financial Services Agency (FSA).
B. Credit risk associated with market transactions
JFM is exposed to the risk of loss arising from credit events, such as deterioration in the financial condition of acounterparty, which causes an asset to lose value or become worthless. However, JFM appropriately manages credit risk ofthis type by constantly monitoring counterparties’ financial standing and limiting them to financial institutions that meet thecredit rating and other criteria. In addition, JFM enters into ISDA (International Swaps and Derivatives Association) masteragreements and CSA (Credit Support Annex) agreements with all derivatives counterparties to reduce credit risk resulting
from fluctuations in the value of derivative transactions.
(ⅱ) Market risk
Market risk is the risk of loss resulting from changes in the value of assets and liabilities due to fluctuations in risk factors
such as interest rates, securities prices and foreign exchange rates, or the risk of loss resulting from changes in earnings
generated from assets and liabilities. Market risk includes interest rate risk, foreign exchange risk, inflation risk and pricechange risk.
A. Interest rate risk
Interest rate risk is the risk of loss resulting from fluctuations in interest rates. More specifically, it is the risk of losses
incurred or decrease in profits, which would arise from fluctuations in interest rates when there is an interest rate or
maturity gap between assets and liabilities.
JFM makes loans to local governments. The maximum term to maturity is 30 years, but the majority of the funds for these9loans are raised mainly through issuance of 10-year bonds, which creates interest rate risk associated with bond refinancing.
JFM takes the following measures to address the interest rate risk resulting from a duration gap between lending andfund-raising .
• JFM maintains necessary reserves to cope with the interest rate risk resulting from a duration gap between lending andfund-raising.
• As assets and liabilities in JFM’s general account will expand as a result of loans and fund-raising for local governments
JFM carries out an ALM analysis of this account in a timely and appropriate manner to further enhance the effectivenessof its management of interest rate risk. JFM also endeavors to reduce exposure to interest rate risk by setting thefollowing medium-term (between fiscal 2009 and fiscal 2013) management targets, such as continuously issuing superlong-term bonds with maturities exceeding 10 years.
a. Maintain the “outlier ratio” below approximately 20%
Notes: 1. “Outlier ratio” is the ratio of “decline in economic value” as a result of interest rate shocks to net assets
including reserves for interest rate volatility and the fund for improvement of operations of municipalities.
2. “Decline in economic value” is the decline of present value after an interest rate shock (an upward anddownward 200 bp parallel shift of the yield curve).
b. Maintain a duration gap below approximately 2 years
The Management account, which manages assets related to money loaned by the former JFM, is currently exposed togreater interest rate risk than the General account, but JFM contributes to the required Reserves for Interest Rate
Volatility as described above.
JFM is also exposed to pipeline risk, whereby losses would be incurred or profits decrease as a result of interest rate
fluctuations between the time JFM raises money through bond issuance and the point at which the money is loaned to
local governments. JFM uses swap transactions to hedge against pipeline risk.
B. Foreign exchange and other risks
Various risks associated with bond principal and interest payments are hedged by swap transactions. These risks include
foreign exchange risk related to foreign currency-denominated bonds, interest rate risk related to floating rate bonds, andrisk of fluctuations in the amounts of principal and interest of inflation-indexed bonds.
JFM’s investments of surplus funds are exposed to the risk of losses on the sale of securities resulting from price declines
and the risk of realized losses on foreign currency-denominated deposits resulting from fluctuations in foreign exchange
rates. Accordingly, in principle, JFM minimizes the risk of price fluctuation by holding investments until maturity, andhedges foreign exchange risk by using foreign exchange contracts.
C. Quantitative information on market risk
In JFM, mainly loans and bonds are affected by interest risk, which is the major risk variable among market risks.
With respect to general account loans and bonds, JFM establishes a management target and uses the outlier ratio forquantitative analysis in the management of interest rate risk.
Specifically, JFM attempts to achieve roughly below 20% of the outlier ratio from Fiscal 2009 to Fiscal 2013 by means of
issuing bonds of various terms, including super long-term bonds, which have a redemption period of over ten years,
considering the composition of remaining period of the bonds held.
The outlier ratio is calculated under the following conditions.
• Future cash flows
With respect to loans, future cash flows regarding such loans are calculated by classification according to type of interest
rate of the loans. In addition, the advanced redemption in the future is not expected by the JFM.
With respect to fixed-rate bonds, future cash flows regarding such fixed-rate bonds are calculated based on theredemption schedule. With respect to floating rate bonds for which hedging interest rate swaps, quality for hedge
accounting and meet specific matching criteria future cash flows regarding such floating rate bonds are calculated as
fixed-rate bonds.
• Indicative Interest Rate
For the assessment of loans and bonds, the interest rate of government bonds as of September 30, 2011, is used.
• Calculation of outlier ratio
Based on an assumption that variable risk, except for interest rates, is fixed as of September 30, 2011, the outlier ratio is
calculated by dividing the change in fair value in the case where the indicative interest rate (government bonds) rises
across-the-board by 200 basis points (2.00%) or the change in fair value in the case such rate falls across-the-board by 200
basis points (2.00%), whichever is greater, by net assets including reserve for interest rate volatility and the fund for
improvement of operations of municipalities.
The outlier ratio as of September 30, 2011 is as follows:
One outlier ratio in the case of a rise of 200 basis points of the indicative interest ratio is calculated as JFM recognizes thatthe change in fair value in the case of rising interest rates would be greater than in the case of falling interest rates.

10

(Hundred Millions of Yen)
Change in fair value when interest rate rises by 200 basis
Net assets
pointsincluding reservefor interest rate
Total
Loans
Bonds
volatility and the(b)=(c)+(d)(c)(d)
fund forimprovement ofoperations ofmunicipalities(e)
General account
14.9%¥(2,726)¥(8,450)¥+5,724¥18,281[+5.3%][(1,190)][(3,216)][+2,027][+2,287]
Note: Amounts posted in square brackets are changes from September 30, 2010.
Outlier ratio(a)=-(b)/(e)With respect to loans and bonds in the management account, JFM raises funds by the issuance of bonds as necessary inorder to manage existing loans until the completion of their redemption. For this reason, while JFM reports the calculation
results of the quantitative information regarding the interest rate risk to the ALM committee and confirms the status ortransition, etc. of interest rate risk, JFM does not establish a management target or use the quantitative analysis in the
management of interest rate risk.
With respect to these financial instruments in the management account, on the condition that the risk variables, except
for interest rate risk, hold steady, an indicative interest rate as of September 30, 2011 of 10 basis points higher than theactual rate, it is assumed that the fair value of the net amount (assets side), after offsetting such financial instruments withthe financial liabilities, would decline by 66.0 billion yen. On the contrary, an indicative interest rate as of September 30,
2011 of due to 10 basis points lower than the actual rate, it is assumed that the fair value of the net amount (assets side),
after offsetting such financial instruments with the financial liabilities, would increase by 67.0 billion yen.
(ⅲ) Liquidity risk
Liquidity risk is the risk that JFM would incur losses due to a difficulty in securing necessary funds or the necessity ofobtaining funds at far higher interest rates than under normal conditions due to a mismatch between the maturities of assets andliabilities or an unexpected outflow of funds (funding liquidity risk). It also includes the risk that JFM would incur losses
because it is unable to conduct market transactions or is forced to conduct transactions at far more unfavorable prices thanunder normal conditions due to market disruption or other difficult situations (market liquidity risk).
JFM’s exposure to liquidity risk is extremely low because loans are made to local governments according to a pre-set
schedule, and the daily cash and liquidity management is carried out based on a quarterly plan for fund management. Moreover,JFM has entered into overdraft agreements with several financial institutions to prepare for unexpected events, and invests
surplus funds only in short-term financial products.
(ⅳ) Supplemental remarks on fair value of financial instruments
In addition to the amount based on the market price, the fair value of illiquid financial instruments includes a value that has
been rationally calculated. Since certain assumptions were made when calculating the fair value, the value may differ in theevent that the assumptions change.

11(2) Items related to the fair value of financial instruments
The interim balance sheet amount, fair value and difference between them on September 30, 2010 are as follows.
(Millions of Yen)
Interim balance
Fair value
Difference
sheet amount(1) Loans¥21,987,044¥23,856,686¥1,869,641(2) Securities
Held-to-maturity securities
1,290,009
1,289,980(29)(3) Cash and bank deposits
141,232
141,232
Total assets
23,418,286
25,287,898
1,869,612
Bonds
18,661,768
19,528,882
867,113
Total liabilities
Derivative transactions(*1)
Qualifying for hedge accounting
Total of derivative transactions

18,661,768

19,528,882

867,113

5,338

5,338

-

5,338

5,338

-

The interim balance sheet amount, fair value and difference between them on September 30, 2011 are as follows.
(Millions of Yen)
Interim balance
Fair value
Difference
sheet amount(1) Loans¥22,238,975¥23,756,568¥1,517,592(2) Securities
Held-to-maturity securities
886,938
886,916(22)(3) Cash and bank deposits
421,251
421,251
Total assets
23,547,166
25,064,735
1,517,569
Bonds
18,549,813
19,282,657
732,844
Total liabilities
Derivative transactions(*1)
Qualifying for hedge accounting
Total of derivative transactions

18,549,813

19,282,657

732,844

2,695

2,695

-

2,695

2,695

-

(*1) Assets and liabilities resulting from derivative transactions are presented on a net basis, and items corresponding to a net loss arein parentheses.

12Note 1. Method for calculating fair value of financial instruments and items related to marketable securities and derivativetransactions.
Assets(1) Loans
The fair value of loans is calculated by discounting future cash flows assuming certain early repayments at a discount rate
calculated using the Japanese government bond rate as of September 30, 2011.
(2) Securities
All bonds are held until maturity, and the fair value of treasury discount bills is the market price.
Since all negotiable certificates of deposits are short-term, the fair value approximates the book price. As a result, the bookprice is deemed to be the fair value.
(As of September 30, 2010)(Millions of Yen)Type
Securities withfair value
exceeding theInterim Balance
Sheet amount
Securities withfair value that do
not exceed theInterim Balance
Sheet amountInterim balance
sheet amount-

Fair value

Difference

¥-

¥-

¥-

Sub total
Treasury discount bills
Negotiable certificate ofdeposits

899,809899,780(29)

390,200

390,200-

Sub total

1,290,009

1,289,980(29)¥1,290,009¥1,289,980

¥(29)

Total
(As of September 30, 2011)(Millions of Yen)Type
Securities withfair value
exceeding theInterim Balance
Sheet amount
Securities withfair value that do
not exceed theInterim Balance
Sheet amountInterim balance
sheet amountSub total
Treasury discount bills
Negotiable certificate ofdeposits
Sub total
Total

Fair value

Difference

¥-

¥-

¥-

425,938

425,916(22)

461,000

461,000-

886,938

886,916(22)¥886,938¥886,916¥(22)(3) Cash and bank deposits
The book value is used as the market price for deposits without maturities. Since all deposits with maturities are short-term,
the fair value approximates the book price. As a result, the book price is deemed to be the fair value.
Liabilities
Bonds
The fair value of bonds issued by JFM that have a market price is based on the market price. The fair value of bonds without amarket price is calculated by discounting the future cash flows using the interest rate that would presumably be applied whenissuing similar bonds with the same total principal and interest.
Deferral hedge accounting is used for currency swaps, and the fair value of foreign currency-denominated bonds is thus
calculated using the total of the fair value of that bond and the fair value of the swap transaction.
Hedge accounting is used for interest rate swaps, and the fair value of floating rate bonds is thus calculated by determining thecurrent value using the total of the interest rate swap in question accounted for together with the principal and interest anddiscounting the future cash flows using the interest rate that would presumably be applied when issuing a similar bond.

13

Derivative transactions
Transactions using hedge accounting
For derivative transactions using hedge accounting, the contractual amount or the amount equivalent to the principal in thecontract for each hedge accounting method as of September 30, 2010 is as follows:(Millions of Yen)
Hedge accounting
methodPrincipal
accounting
methodHedge accounting
for interest rate
swaps
Deferral hedge
accounting for
currency swaps
Deferral hedge
accounting forforeignexchange
contracts

Type of derivativetransactions
Interest rate swap
transactions
Receive/fixed andpay/floating

Contract amountPrimary hedged items

Of which 1
year or more

Fair
value

Method for
calculating
fair value
Based onprice
providedby financial
institution

Bonds¥282,500¥282,500¥5,338Interest rate swap
transactions
Receive/floating
and pay/fixed

Bonds

80,00080,000(*1)

Currency swap
transactions

Foreigncurrency-denominatedbonds

519,420399,920(*2)

Foreign exchange
contracts

Foreigncurrency-denominateddeposits

69,000-(*2)¥950,920¥762,420

Total¥5,338For derivative transactions using hedge accounting, the contractual amount or the amount equivalent to the principal in thecontract for each hedge accounting method as of September 30, 2011 is as follows:(Millions of Yen)
Hedge accounting
methodPrincipal
accounting
methodHedge accounting
for interest rate
swaps
Deferral hedge
accounting for
currency swaps
Deferral hedge
accounting forforeignexchange
contracts

Type of derivativetransactions
Interest rate swap
transactions
Receive/fixed andpay/floating

Contract amountPrimary hedged items

Of which 1
year or more

Fair
value

Method for
calculating
fair value
Based onprice
providedby financial
institution

Bonds¥123,000¥123,000¥2,695Interest rate swap
transactions
Receive/floating
and pay/fixed

Bonds

95,00095,000(*1)

Currency swap
transactions

Foreigncurrency-denominatedbonds

483,090

483,090(*2)

Foreign exchange
contracts

Foreigncurrency-denominateddeposits

55,000-(*2)¥756,090¥701,090

Total¥2,695(*1) Since interest rate swaps under hedge accounting are accounted for together with the bond being hedged, the fair value ispresented together with the fair value of the relevant bond.
(*2) Since currency swaps and foreign exchange contracts using deferral hedge accounting are accounted for together with the foreign

currency-denominated bond or foreign currency-denominated deposit being hedged, the fair value is presented together with thefair value of the relevant hedged item.

14

Note 2. The repayment schedule for monetary claims and securities with maturity dates
The repayment schedule from September 30, 2010 for monetary claims and securities with maturity dates is as follows:(Millions of Yen)
Within 1
After 1After 2After 3After 4After 5After 10After 20
year
year
years
years
years
years
years
years
through 2
through 3
through 4
through 5
through 10 through 20
through 30
years
years
years
years
years
years
years
Loans
¥1,681,737 ¥1,539,688 ¥1,520,632 ¥1,501,674 ¥1,452,738 ¥6,203,717¥6,813,932¥1,272,923
Securities
Held-to-maturity
securities
1,290,009
Deposits
141,232
The repayment schedule from September 30, 2011 for monetary claims and securities with maturity dates is as follows:(Millions of Yen)
Within 1
After 1After 2After 3After 4After 5After 10After 20
year
year
years
years
years
years
years
years
through 2
through 3
through 4
through 5
through 10 through 20
through 30
years
years
years
years
years
years
years
Loans
¥1,542,990 ¥1,533,480 ¥1,552,425 ¥1,527,691 ¥1,478,552 ¥6,351,664¥6,935,405¥1,316,766
Securities
Held-to-maturity
securities
886,938
Deposits
421,251-15

Note 3. The repayment schedule for loans
The repayment schedule from September 30, 2010 is as follows:
Within 1
year
Loans

¥2,070,470

After 1year
through 2
years¥2,082,530

After 2years
through 3
years¥2,456,560

After 3years
through 4
years¥2,358,110

After 4years
through 5
years¥1,711,350

After 5years
through 10
years¥6,599,420(Millions of Yen)
After 10After 20
years
years
through 20 through 30
years
years
¥1,200,236¥203,139

After 4years
through 5
years¥1,456,250

After 5years
through 10
years¥6,933,040(Millions of Yen)
After 10After 20
years
years
through 20 through 30
years
years
¥1,353,470¥217,235

The repayment schedule from September 30, 2011 is as follows:
Within 1
year
Loans

¥2,082,530

After 1year
through 2
years¥2,456,560

After 2years
through 3
years¥2,358,110

After 3years
through 4
years¥1,711,350

6. Accumulated depreciation
Accumulated depreciation of tangible fixed assets amounted to 230 million yen and 150 million yen as of September 30, 2011 and2010, respectively.
7. Assets pledged as collateral(1)Pursuant to the provisions of Article 40, Section 2 of the Law, JFM’s total assets are pledged as general collateral for JFM bondsin the amounts of 18,549,813 million yen and 18,661,768 million yen as of September 30, 2011 and 2010, respectively.
(2)Securities in the amounts of 469 million yen are delivered as collateral for derivative transactions.
8. Interim net income by accountInterim net income of the general account amounted to 7,667 million yen and 3,783 million yen, while interim net income of the
management account amounted to 3,509 million yen and 4,000 million yen, for the six-month periods ended September 30, 2011
and 2010, respectively.

16

9. Information by account (Interim balance sheets)
Interim balance sheets of the general account and the management account at September 30, 2010 were as follows:(Millions of Yen)
Item
GeneralManagement
OffsetTotal
account
account(Assets)
Loans
2,454,719
19,532,325
21,987,044
Securities
1,290,009
1,290,009
Cash and bank deposits
141,232
141,232
Other assets
6,745
13,726
20,472
Tangible fixed assets
2,957
2,957
Intangible fixed assets
796
796
Due from general account951,820(951,820)
Due to management account for fund for
improvement of operations of municipalities
592,831(592,831)
Total assets(Liabilities)
Bonds
Other liabilities
Reserve for bonuses
Reserve for directors’ bonuses
Reserve for retirement benefits
Reserve for retirement benefits for directors andcorporate auditors
Fund for improvement of operations ofmunicipalities
Basic fund for improvement of operations ofmunicipalities
Additional fund for improvement of operationsof municipalities
Due to management accountDue from general account for fund for
improvement of operations of municipalities
Reserve under special laws
Reserve for interest rate volatility
Management account reserve for interest rate
volatility
Reserve for interest rate reduction
Total liabilities(Net Assets)
CapitalRetained earnings
General account appropriated surplus reserve
General account interim unappropriatedretained earnings
Valuation, translation adjustments and others
Management account surplus reserve
Management account appropriated surplus
reserve
Management account interim unappropriatedretained earnings
Total net assets
Total liabilities and net assets

4,489,292

20,497,871

1,936,399
1,333
51
8
204

16,725,369
12,852(1,544,651)

23,442,512
18,661,768
14,186
51
8
204

49

49

907,906

907,906

901,407901,407

6,498
951,820
660,000
660,000

6,498(951,820)
592,831
3,123,300(592,831)
3,783,300
660,000

3,016,545
106,755
4,457,772

20,454,354

3,016,545
106,755(1,544,651)

23,367,475

16,602
9,618
5,834

16,602
9,618
5,834

3,783
5,299
43,517

3,783
5,299
43,51739,51739,51731,5194,000
43,5174,000
75,0374,489,292

20,497,871

17(1,544,651)

23,442,512

Interim balance sheets of the general account and the management account at September 30, 2011 were as follows:(Millions of Yen)
Item
GeneralManagement
OffsetTotal
account
account(Assets)
Loans
4,426,370
17,812,605
22,238,975
Securities
886,938
886,938
Cash and bank deposits
421,251
421,251
Other assets
4,830
11,836
16,666
Tangible fixed assets
2,993
2,993
Intangible fixed assets
679
679
Due from general account
1,153,035(1,153,035)
Due to management account for fund for
improvement of operations of municipalities
442,831(442,831)
Total assets(Liabilities)
Bonds
Other liabilities
Reserve for bonuses
Reserve for directors’ bonuses
Reserve for retirement benefits
Reserve for retirement benefits for directors andcorporate auditors
Fund for improvement of operations ofmunicipalities
Basic fund for improvement of operations ofmunicipalities
Additional fund for improvement of operationsof municipalities
Due to management accountDue from general account for fund for
improvement of operations of municipalities
Reserve under special laws
Reserve for interest rate volatility
Management account reserve for interest rate
volatility
Reserve for interest rate reduction
Total liabilities(Net Assets)
CapitalRetained earnings
General account appropriated surplus reserve
General account interim unappropriatedretained earnings
Valuation, translation adjustments and others
Management account surplus reserve
Management account appropriated surplus
reserve
Management account interim unappropriatedretained earnings
Total net assets
Total liabilities and net assets

6,185,895

18,977,478

3,202,908
1,604
51
5
159

15,346,904
12,540(1,595,867)

23,567,505
18,549,813
14,145
51
5
159

22

22

915,818

915,818

908,104

908,104

7,713
1,153,035
880,000
880,000

7,713(1,153,035)
442,831
3,124,127(442,831)
4,004,127
880,000

3,030,722
93,404
6,153,607

18,926,403

3,030,722
93,404(1,595,867)

23,484,143

16,602
21,527
13,86016,602
21,527
13,8607,667(5,842)51,074

7,667(5,842)51,07447,56547,56532,287

3,509
51,074

3,509
83,361

6,185,895

18,977,478(1,595,867)

23,567,505

Notes:1. The general account and the management accountIn accordance with the provisions of Article 13, Section 1 of the supplementary provisions of the Law, the management
account is used to conduct administration, collection and other related operations of the assets that JFM inherited from theformer Japan Finance Corporation for Municipal Enterprises (management of the assets of the former Japan FinanceCorporation for Municipal Enterprises).
The management account is separated from the other account (general account) pursuant to the provisions of Article 13,
Section 3 of the supplementary provisions of the Law.
2. The general account interim unappropriated retained earnings and the management account interim unappropriated retained
earnings

18

“Interim net income” of the general account is posted as “General account interim unappropriated retained earnings, ” while“Interim net income” of the management account is posted as “Management account interim unappropriated retained
earnings. ”
3. Due from the general account and due to the management account
These figures represent the amount of funds lent between the general account and the management account pursuant to theprovisions of Article 13, Section 4 of the supplementary provisions of the Law.
4. Due from the general account for fund for improvement of operations of municipalities and due to the management accountfor fund for improvement of operations of municipalities
These figures represent the amount of cash received for the “Fund for improvement of operations of municipalities,” which
was lent to the management account from the general account pursuant to the provisions of Article 9, Section 12 of the
supplementary provisions of the Law.
10. Information by account (Interim statements of income)Interim statements of income of the general account and the management account from April 1, 2010 through September 30, 2010
were as follows:(Millions of Yen)
Item
GeneralManagement
OffsetTotal
account
account
Income28,973
260,254(17,223)
272,004
Interest income
20,532
251,356
271,889
Fees and commissions
101
101
Other income
1414Administrative fee for the management account
435
(435)
Interest on funds for improvement of operations ofmunicipalities
7,890(7,890)Interest on due from the general account
158
(158)
Transfer from the general account for fund for
improvement of operations of municipalities
8,738(8,738)
Expenses
Interest expenses
Fees and commissions
Other operating expenses
General and administrative expenses
Other expenses
Transfer to fund for improvement of operationsof municipalities
Interest on due to the management accountTransfer to the management account for fund for
improvement of operations of municipalities
Administrative fee for the management accountInterest on fund for improvement of operations ofmunicipalities

25,19012,928
11
1,246
1,138
967

Ordinary income

3,783

122,373

Special gains
Provision for the management accountReversal of the management account reserve forinterest rate volatility
Reversal of reserve for interest rate reduction

220,000
220,000

227,128

Special losses
Provision for reserve for interest rate volatility
Provision for the management account reserve forinterest rate volatility
Transfer to the management account

220,000
220,000

Interim net income

137,880
128,330
122
1,043
58

967
158

(17,223)

967
(158)

8,738
435

(8,738)
(435)

7,890

(7,890)126,157(220,000)(220,000)

220,000
7,128

3,783

19

145,847
141,258
133
2,290
1,196
967

220,000
7,128

345,501(220,000)

125,501
220,000(220,000)

4,000

227,128

345,501
220,000
125,501
7,783

Interim statements of income of the general account and the management account from April 1, 2011 through September 30, 2011were as follows:(Millions of Yen)
Item
GeneralManagement
OffsetTotal
account
account
Income39,741
233,681(14,115)
259,307
Interest income
33,445
225,746
259,191
Fees and commissions
96
96
Other income
20
20
Amount received for fund for improvement ofoperations of municipalities
5
5
Other
14
14
Administrative fee for the management account
423
(423)
Interest on funds for improvement of operations ofmunicipalities
5,756(5,756)
Interest on due from the general account
196
(196)
Transfer from the general account for fund for
improvement of operations of municipalities
7,739(7,739)
Expenses
Interest expenses
Fees and commissions
Other operating expenses
General and administrative expenses
Interest on due to the management accountTransfer to the management account for fund for
improvement of operations of municipalities
Administrative fee for the management accountInterest on fund for improvement of operations ofmunicipalities

32,074
21,694
19
1,245
1,178
196

Ordinary income

7,667

111,214

Special gains
Provision for the management accountReversal of the management account reserve forinterest rate volatility
Reversal of reserve for interest rate reduction

220,000
220,000

226,484

Special losses
Provision for reserve for interest rate volatility
Provision for the management account reserve forinterest rate volatility
Transfer to the management account

220,000
220,000

Interim net income

122,467
115,235
113
887
50(14,115)

(196)

7,739
423

(7,739)
(423)

5,756

(5,756)
118,881(220,000)(220,000)

220,000
6,484

7,667

20

140,425
136,930
133
2,132
1,228

220,000
6,484

334,189(220,000)

114,189
220,000(220,000)

3,509

226,484

334,189
220,000
114,189
11,176

11. Fair value of marketable securities
Marketable held-to-maturity securities at September 30, 2010 consisted of the following:(Millions of Yen)
Interim balance
sheet amountTreasury discountbills
Negotiablecertificates ofdeposit
Total

Fair value

Difference

Unrealized gains

Unrealized losses¥899,809¥899,780

¥(29)

-

¥(29)

390,200

390,200---¥1,290,009¥1,289,980

¥(29)

-

¥(29)

Marketable held-to-maturity securities at September 30, 2011 consisted of the following:(Millions of Yen)
Interim balance
sheet amountTreasury discountbills
Negotiablecertificates ofdeposit
Total

Fair value

Difference

Unrealized gains

Unrealized losses¥425,938¥425,916

¥(22)

-

¥(22)

461,000

461,000---¥886,938¥886,916

¥(22)

-

¥(22)

Notes: 1. The fair value of treasury discount bills is based on the market price at the end of the relevant interim period.
2. The balance sheet amount for negotiable certificates of deposits the fair value.
3. Difference is the net amounts of “unrealized gains” and “unrealized losses”.
12. Information on derivative transaction
Status of derivative transactions(1) Types of derivative transactions
Derivative transactions conducted by JFM are interest rate swaps for interest rate related transactions, and currency
swaps and foreign exchange forward contracts for currency related transactions.
(2) Policies and purposes of derivative transactions
JFM uses interest rate swaps, currency swaps and foreign exchange forward contracts as a means of hedging exposure tointerest rate and foreign exchange fluctuation risks, and does not enter into derivatives for speculative purposes.
Interest rate swaps are used to hedge exposure to interest rate risk on fund-raising activities. Currency swaps and foreignexchange forward contracts are used to hedge exposure to foreign exchange risk associated with issuance of foreign
currency-denominated bonds and foreign currency-denominated deposits.
Hedge accounting is applied to interest rate swaps, currency swaps and foreign exchange contracts.
(a) Hedge accounting method
Interest rate swaps used to hedge the risk of interest rate fluctuations and which qualify for hedge accounting and meet
specific matching criteria are not measured at market value, but the differential paid or received under the swap agreements is
recognized and included in interest expense or income. If swap contracts or forward contracts used to hedge the risk of foreign
currency fluctuation qualify for deferral hedge accounting, foreign currency-denominated assets and liabilities are translated at
the contracted rate.
(b) Hedging instruments and hedged items(ⅰ) Hedging instrument: Interest rate swaps
Hedged items: Bonds(ⅱ) Hedging instrument: Currency swaps
Hedged items: Foreign currency-denominated bonds(ⅲ) Hedging instrument: Foreign exchange forward contracts
Hedged items: Receipt of interest and principal of foreign currency-denominated bank deposits(c) Hedging policy
JFM uses interest rate swaps and currency swaps to hedge interest rate risk and foreign exchange risk resulting from bondissuances. Hedging instruments are selected for each individual contract.
As a means of hedging foreign exchange fluctuation risks associated with the receipt of interest and principal of foreign
currency-denominated bank deposits, JFM enters into a matching foreign exchange forward contract at the time of deposit.
(d) Assessment of hedge effectivenessJFM selects hedges for which the hedging instruments and underlying transactions have the same major terms when making
hedges to offset bond market fluctuations.
Accordingly, JFM deems these to be highly effective and thus does not assess their effectiveness. Moreover, a periodic

21

assessment of hedge effectiveness for interest rate swaps and currency swaps and forward contracts which qualify fordeferral hedge account is omitted when the exceptional accrual method is applied.
(3) Risks on derivative transactions
Major risks on derivative transactions are market risk and credit risk. Market risk is the risk of future revenue fluctuations due
to market value changes. Credit risk is the risk of losses incurred when counterparties are unable tofulfill their contracts due to bankruptcy or other reasons.
As for derivative transactions used for hedging purposes, market risk is offset by market risk on the underlying transactions.
JFM enters into ISDA master agreements and CSA agreements with financial institutions, which are derivative transactions
counterparties, to reduce credit risk. Moreover, JFM constantly monitors the transactions’ restructuring costs and their credit
profiles, and deals with multiple counterparties.
(4) Risk management system for derivative transactions
Execution and management of derivative transactions are conducted by the Finance Department of JFM with the approval of
persons in charge in accordance with the operational guidelines which specify transaction authority and limits on thetransaction amount.
Additionally, the total amount of derivative transactions, the status of risks, the assessed fair value, and the credit risk on
counterparties are regularly reported to the Integrated Risk Management Committee.

22