For the six months ended September 30, 2012

Japan Finance Organization for Municipalities

Semiannual Financial Statements

Japan Finance Organization for Municipalities

0Contents
Semiannual Balance Sheets2

Semiannual Statements of Income

3

Semiannual Statements of Changes in Net Assets

4

Semiannual Statements of Cash Flows6

Notes to Semiannual Financial Statements

71

■Semiannual Balance Sheets (As of September 30, 2011 and 2012)

Item
AssetsLoans (Note 3)
Securities (Note 11)
Cash and bankdeposits
Other assets
Tangible fixed
assets (Note 6)
Intangible fixed
assets

As of
As of
September 30,
September 30,
2011
2012
Amount¥22,238,975
886,938¥22,385,203
871,904

421,251
16,666574,973
13,653

2,993

2,547

679

540

Item
Liabilities
Bonds (Note 7)
Borrowed money
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
Reserves 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 accountsemiannual
unappropriatedretained earnings
Valuation, translation
adjustments and others
Management accountsurplus reserve
Management accountappropriatedsurplus reserve
Management accountsemiannual
unappropriatedretained earnings
Total net assets

Total assets¥23,567,505¥23,848,822

Total liabilities and net
assetsSee notes to semiannual financial statements.

2(Millions of yen)
As of
As of
September 30,
September 30,
2011
2012
Amount¥18,549,813
14,14551¥18,927,003
30,00013,484
51

5

7

159

165

22

28

915,818

919,279

908,104

911,935

7,713

7,344

4,004,127

3,854,135

880,000

1,100,000

3,030,722

2,672,708

93,40481,42723,484,143

23,744,156

16,602
21,527

16,60239,531

13,86029,393

7,667

10,137(5,842)(5,708)51,07454,242

47,56553,666

3,509

576

83,361

104,666¥23,567,505¥23,848,822

■Semiannual Statements of Income (For the six-month periods ended September 30, 2011 and 2012)
Six months ended
September 30,
2011

Item
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(Millions of yen)Six months ended
September 30,
2012

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

¥246,674
245,714
90
868
592
276
136,669
132,232
134
2,939
1,362

Ordinary income

118,881

110,005

Special gains
Reversal of management account reserve for interest rate volatility
Reversal of reserve for interest rate reduction
Special losses
Provision for reserve for interest rate volatility
Provision for management account reserve for interest rate volatility
Payment to national treasury (Note 4)

226,484
220,000
6,484
334,189
220,000
114,189-575,860
570,000
5,860
675,151
220,000
105,151
350,000

Semiannual net income¥11,176¥10,714

See notes to semiannual financial statements.

3■Semiannual Statements of Changes in Net Assets(For the six-month period ended September 30, 2011)(Millions of yen)

Stockholders’ equity

Retained earnings
Generalaccount
appropriatedsurplusreserve

CapitalBalance atApril 1, 2011
Changes during
semiannual
accounting
periodSemiannual
netincomeNet changes
duringsemiannual
accounting
period initems otherthanstockholders’equityNet changes
duringsemiannual
accounting
periodBalance at
September 30,
2011

General accountsemiannual
unappropriatedretainedearnings

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

Management
account
semiannual
unappropriatedretainedearnings

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¥83,3614

(For the six-month period ended September 30, 2012)(Millions of yen)

Stockholders’ equity
Retained earnings
CapitalGeneralaccount
appropriatedsurplusreserve

General accountsemiannual
unappropriatedretainedearnings

Balance at¥16,602¥29,393
April 1, 2012
Changes during
semiannual
accounting
periodSemiannual
net¥10,137
incomeNet changes
duringsemiannual
accounting
period initems otherthanstockholders’equityNet changes
duringsemiannual
10,137accounting
periodBalance at
September 30,¥16,602¥29,393¥10,1372012
See notes to semiannual financial statements.

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

Management
account
semiannual
unappropriatedretainedearnings

Total
net
assets¥45,995¥(5,964)¥53,666-¥93,696

10,137--¥576

10,714

-

255

-

-

255

10,137

255

-

576

10,969¥56,133¥(5,708)¥53,666¥576¥104,666

5

■Semiannual Statements of Cash Flows (For the six-month periods ended September 30, 2011 and 2012)(Millions of yen)Six months
Six months
ended
ended
September 30,
September 30,
2011
2012
AmountItem

Ⅰ Cash flows from operating activities
Semiannual net income
Depreciation and amortization
Interest income
Interest expenses
Increase in reserve for bonuses
Increase/(decrease) in reserve for directors’ bonuses
Increase/(decrease) in reserve for retirement benefits
Increase/(decrease) in reserve for retirement benefits for
directors and corporate auditors
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 (increase)/decrease 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
Payment to national treasury
Net cash used in financing activities
Ⅳ Effect of exchange rate changes on cash and cash
equivalents
Ⅴ Net increase/(decrease) in cash and cash equivalents
Ⅵ Cash and cash equivalents at beginning of period
Ⅶ Cash and cash equivalents at end of period
See notes to semiannual financial statements.

6¥11,176
176(259,191)
136,930
10
(0)
(36)

¥10,714174(245,714)
132,232
4
0
18

(4)

4

(5)
220,000(592)
220,000(105,810)(6,484)(7,119)220,760
261,313(137,009)(608)
334,096(114,848)(5,860)2,207
748,309
246,894(132,350)
505
861,701

1,314,600(1,743,920)
(97)
(60)
(429,477)

2,470,000(2,578,871)
(14)
(91)
(108,977)-(350,000)(350,000)(95,381)516,633¥421,251

402,723
172,250¥574,973

■Notes to Semiannual Financial Statements
1. Basis of Presentation
Japan Finance Organization for Municipalities (hereinafter, “JFM”) has prepared semiannual financial statements in accordancewith the Japan Finance Organization for Municipalities Law (Law No. 64, 2007; hereinafter, the “Law”), the ordinances based on
the Law and other regulations applicable to JFM and accounting principles and practices applicable to semiannual financial
statements generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements ofInternational Financial Reporting Standards.
Since JFM does not have any subsidiaries or affiliates, it does not prepare semiannual consolidated financial statements.
Amounts less than one million yen have been omitted. As a result, the totals in Japanese yen shown in the semiannual financial
statements do not necessarily agree with the sum of the individual amounts.
2. Summary of Significant Accounting Policies(1) Securities
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 income, except for
those which meet the criteria for hedge accounting.
(3) Depreciation and amortization(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 possible loan losses has been maintained.
(b) Reserve for bonuses
The reserve for bonuses is provided for payment of bonuses to employees, in the amount of estimated bonuses, which are
attributable to the semiannual period.
(c) Reserve for directors’ bonuses
The reserve for directors’ bonuses is provided for payment of bonuses to directors, in the amount of estimated bonuses,
which are attributable to the semiannual period.
(d) Reserve for retirement benefits
The reserve for retirement benefits is provided for payment of retirement benefits to employees, in the amount deemed
accrued as of the end of the semiannual period, based on the projected retirement benefit obligation and fair value of plan
assets as of the end of the semiannual period.
(e) Reserve for retirement benefits for directors and corporate auditors
The reserve for retirement benefits for directors and corporate auditors is provided for payment of retirement benefits todirectors and corporate auditors, in the amount deemed accrued at the end of the semiannual period based on internal
policies.
(7) Hedge accounting(a) Hedge accounting method
Interest rate swaps used to hedge the risk of interest rate fluctuations that qualify for hedge accounting and meet specificmatching 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 risk of foreign currency
fluctuation qualify for deferral hedge accounting, the foreign currency-denominated assets and liabilities are translated at thecontracted rate.
(b) Hedging instruments and hedged items(ⅰ) Hedging instruments・・・Interest rate swaps
Hedged items・・・・・・・・・Bonds and borrowed money(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. 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, a foreign exchange forward contract is entered into at the time of each deposit to hedge
the risks.
(d) Assessment of hedge effectivenessJFM ensures hedging instruments and hedged items have the same major terms when entering into hedge transactions tooffset bond and borrowed money market fluctuation risks. Accordingly, JFM deems these to be highly effective and thus
does not assess effectiveness. Moreover, a periodic assessment of hedge effectiveness for interest rate swaps for which hedge
accounting is applied and currency swaps and forward contracts that qualify for deferral hedge accounting is omitted whenthe exceptional accrual method is applied.
(8) Cash and cash equivalents
Cash and cash equivalents in the semiannual statements of cash flows consist of “Cash and bank deposits” on the semiannual
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 ofoperations 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 rate 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 rate 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; hereinafter, “former JFM”)
pursuant to the provisions of Article 38, Sections 1 and 3 of the Law, and Article 9, Section 8 of the supplementary provisionsof the Law, and is calculated and accounted for based on the provisions of Article 34 of the Ministerial Ordinance on Financeand Accounting of Japan Finance Organization for Municipalities (Ordinance No.87 of the Ministry of Internal Affairs andCommunications, 2008; hereinafter, “Ordinance on Finance and Accounting”) and Article 22 of the Government Ordinance on
Preparation of Relevant Government Ordinances and Provisional Measures for the Abolishment of the Japan FinanceCorporation for Municipal Enterprises Law (Government Ordinance No. 226, 2008; hereinafter, “Preparation Ordinance”).
Management account reserve for interest rate volatility is set aside to manage interest rate risk associated with refinancing ofbonds issued by the former JFM pursuant to the provisions of Article 9, Sections 9 and 10, and Article 13, Sections 5 and 7 ofthe 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 Management 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 Management Account Operations Ordinance.
(12) Consumption taxes
National and local consumption taxes are accounted for using the tax exclusion method.
3. Loans
There are no bankrupt loans, non-accrual loans, past due loans (three months or more), or restructured loans. Since JFM has neverexperienced loan losses in the past, it does not record a reserve for possible loan loss.
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 periods for interest payments to assist in corporate reorganization or to support business.
Past due loans (three months or more) represent loans on which payment of principal or interest is in arrears for more than threemonths, calculated from the day following the contractual due date, excluding bankrupt loans and non-accrual loans.
Restructured loans represent loans, given certain favorable terms and conditions, such as reduction or exemption of interest, grace
periods for interest or principal payments, and debt waivers, to assist borrowers in corporate rehabilitation or to support business,
excluding bankrupt loans, non-accrual loans and past due loans (three months or more).
4. Transfer to the National Treasury of a Part of JFM’s Reserve for Interest Rate Volatility within Management AccountIn accordance with the supplementary provisions to the Law, a part of JFM’s reserve for interest rate volatility withinmanagement account is to be attributed to the Japanese national government over a period of three years from fiscal 2012 throughfiscal 2014, with the aim of transferring 1 trillion yen over this period.

8

In fiscal 2012, 350,000 million yen has been transferred to the national treasury by JFM, pursuant to Article 14 of the
supplementary provisions to the Law for fiscal 2012 (Ordinance No. 2 of the Ministry of Internal Affairs and Communication, andthe Ministry of Finance, 2012).
5. Financial Instruments(1) Status of financial instruments(a) Policy for 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 and risks 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 duration gap is created between lending andfund-raising, and JFM is exposed to the interest rate risk associated with bond and borrowed money 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. The ALM Committee is held four times a year, in principle.
Specifically, medium- and long-term management analysis as well as risk analysis and evaluation are conducted throughscenario analysis, VaR analysis, and duration analysis, among other methods. In addition, JFM reflects the findings in its
bond issuance plans and other aspects of management and endeavors to reduce interest rate risk.
(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, whichcauses 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 on loans
JFM extends loans exclusively to local governments. Local governments have a zero Bank of International Settlements(BIS) risk weighting and JFM 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 securesrevenue 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 on 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 riskof this type by constantly monitoring counterparties’ financial standing, taking measures including suspension of newdeals and cancellation of transactions in case of a deterioration of their credit standings. Moreover, JFM limits
counterparties to financial institutions that achieve a certain credit rating and other criteria, and conducts transactions
within the credit lines for each counterparty in order to diversify risks. In addition, JFM enters into ISDA (International
Swaps and Derivatives Association) master agreements and CSA (Credit Support Annex) with all derivatives
counterparties to reduce credit risk.
(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

9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 losses incurred or a decrease in profits due to fluctuations in interest rates when there is aninterest rate or duration gap between assets and liabilities.
JFM makes loans to local governments. The maximum term to maturity is 30 years, but the funds for these loans areraised 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 theeffectiveness of its management of interest rate risk. JFM also endeavors to reduce exposure to interest rate risk by
setting the following medium-term (between fiscal 2009 and fiscal 2013) management target, such as continuously
issuing super long-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 the reserve for interest rate volatility and the fund for improvement of operations ofmunicipalities.
2. “Decline in economic value” is the decline of present value after interest rate shocks (an upward or
downward 200 bp parallel shift of the yield curve).
b. Maintain a duration gap of less than approximately 2 years
Management account, which manages assets related to money loaned by the former JFM, is currently exposed togreater interest rate risk than general account, but JFM contributes to the required reserves for interest rate volatility
as described above.
• In accordance with Article 14 of the supplementary provisions of the Law, it was decided that a part of JFM’s reservefor interest rate volatility within management account would be attributed to the Japanese national government. The
transfer is projected to occur over a period of three years from fiscal 2012 through fiscal 2014, with the aim oftransferring 1 trillion yen over this period.
Such transfer will not affect the smooth operation of JFM's business at time of transfer or in the future.
JFM is also exposed to pipeline risk, whereby losses would be incurred or profits decreased as a result of interest rate
fluctuations during the time from when JFM raises money until 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
Loans, bonds and borrowed money are primarily affected by interest rate risk, which is a major risk variable amongmarket risks.
With respect to general account loans, bonds and borrowed money, JFM establishes a management target and uses theoutlier ratio for quantitative analysis in the management of interest rate risk.
Specifically, JFM is attempting to maintain the outlier ratio below approximately 20% from fiscal 2009 to fiscal 2013 bymeans of issuing bonds of various terms, including super long-term bonds, which have a redemption period of over 10
years, considering the composition of the remaining periods of the bonds held.
The outlier ratio is calculated based on the following conditions.
• Future cash flows
With respect to loans, future cash flows regarding such loans are calculated based on the type of interest rate of theloans. In addition, the advanced redemption in the future is not expected by 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 hedged by interest rate swaps, that qualify for hedge
accounting and meet specific matching criteria, future cash flows corresponding to such floating rate bonds arecalculated in a manner similar to fixed-rate bonds.
• Indicative Interest Rate
For the assessment of loans, bonds and borrowed money, the corresponding interest rate of Japanese government
bonds as of September 30, 2012, is used.
• Calculation of outlier ratio
Based on an assumption that risk variables, except for interest rate risk, are fixed as of September 30, 2012, 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 the reserve for interest rate volatility and thefund for improvement of operations of municipalities.

10

Information the outlier ratio as of September 30, 2012 is as follows:
One outlier ratio reflecting a rise of 200 basis points of the indicative interest rate is calculated as JFM has determined thatthe change in fair value in the case of rising interest rates would be greater than that in the case of falling interest rates.

Outlier ratio(a)=-(b)/(e)Change in fair value in the case of 200 basis points rise ininterest rates
Total
Loans
Bonds and(b)=(c)+(d)(c)
borrowed money(d)General account

15.6%¥(323,057)¥(1,129,645)[+0.7%][(50,438)][(284,618)]
Note: Amounts posted in square brackets indicate the change from September 30, 2011.

¥+806,588[+234,179](Millions of yen)
Net assets
including reservefor interest rate
volatility andfund forimprovement ofoperations ofmunicipalities(e)¥2,069,703[+241,597]

With respect to loans and bonds in management account, JFM raises funds by the issuance of bonds as necessary in orderto manage existing loans until their redemption. For this reason, while JFM reports the calculation results of thequantitative information regarding the interest rate risk to the ALM Committee and confirms the status or transition, etc. ofinterest 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 management account, based on assumption that the risk variables, except forinterest rate risk, hold steady, for an indicative interest rate as of September 30, 2012 that is 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 57,971 million yen. On the contrary, for an indicative interest rate as of
September 30, 2012 that is 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 58,815 million yen.
(ⅲ) Liquidity risk
Liquidity risk is the risk that JFM would incur losses due to difficulties in securing the necessary funds or the necessity ofobtaining funds at far higher interest rates than under normal conditions as a result of a mismatch between the maturities ofassets and liabilities 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 than under 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 the 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.
(2) Items related to fair value of financial instruments
The book value, fair value and difference between them as of September 30, 2011 are as follows.
Book value¥22,238,975

Fair value¥23,756,568(Millions of yen)
Difference¥1,517,592

886,938
421,251

886,916
421,251(22)-

Total assets
Bonds

23,547,166
18,549,813

25,064,735
19,282,657

1,517,569
732,844

Total liabilities
Derivative transactions(*1)
Hedge accounting applied

18,549,813

19,282,657

732,844

2,695

2,695

-

2,695

2,695

-

(1) Loans(2) Securities
Held-to-maturity securities(3) Cash and bank deposits

Total of derivative transactions

11

The book value, fair value and difference between them as of September 30, 2012 are as follows.
(1) Loans(2) Securities
Held-to-maturity securities(3) Cash and bank deposits
Total assets(1)Bonds(2)Borrowed money
Total liabilities
Derivative transactions(*1)
Hedge accounting applied

Book value¥22,385,203

Fair value¥23,989,467(Millions of yen)
Difference¥1,604,264

871,904
574,973
23,832,081
18,927,003
30,00018,957,003

871,864
574,973
25,436,305
19,756,893
30,577
19,787,470(40)
1,604,223
829,889577
830,467

147

147

-

147

147

-

Total of derivative transactions(*1) Assets and liabilities resulting from derivative transactions are presented on a net basis with liabilities in parentheses.
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 prepayment at the discount rate calculatedusing the Japanese government bond rates as of September 30, 2011 and 2012.
(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 deposit are short-term, the fair value approximates the book value. As a result, the bookvalue is deemed to be the fair value.
(As of September 30, 2011)Type
Securities withfair values
exceeding thesemiannual balance
sheet amount
Securities withfair values that does
not exceed thesemiannual balance
sheet amountBook value

Sub total
Treasury discount bills
Negotiable certificates ofdeposit
Sub total
Total(Millions of yen)
Difference

Fair value
¥-

¥-

¥-

425,938

425,916(22)

461,000

461,000-

886,938

886,916(22)¥886,938¥886,916¥(22)(As of September 30, 2012)Type
Securities withfair values
exceeding thesemiannual balance
sheet amount
Securities withfair values that does
not exceed thesemiannual balance
sheet amountBook value-(Millions of yen)
Difference

Fair value
¥-

¥-

¥-

Sub total
Treasury discount bills
Negotiable certificates ofdeposit479,904

479,864(40)

392,000

392,000-

Sub total

871,904

871,864(40)¥871,904¥871,864

¥(40)

Total

(3) Cash and bank deposits
The book value is used as the fair value for deposits without maturities. Since all deposits with maturities are short-term,
the fair value approximates the book value. As a result, the book value is deemed to be the fair value.
Liabilities(1)Bonds

12

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 a market price is calculated by discounting the future cash flows using the interest rate that would be applied whenissuing similar bonds with the same total principal and interest and payment term.
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
the current value using the total of the corresponding interest rate swap accounted for together with the principal andinterest and discounting the future cash flows using the interest rate that would be applied when issuing a similar bond.
(2)Borrowed money
The fair value of borrowed money is calculated by discounting the future cash flows using the interest rate that would
presumably be applied when issuing bonds with the same total principal and interest and payment term.
Derivative transactions
Transactions for which hedge accounting is applied
For derivative transactions for which hedge accounting is applied, the contractual amount or the amount equivalent to theprincipal in the contract under 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
Deferralhedge
accountingforcurrency
swaps
Deferralhedge
accounting
forforeignexchange
contracts

Type ofderivativetransactions
Interest rate
swap
transactions
Receive/fixed
andpay/floating

Contract amountPrimary hedged items

Of which 1 year
or moreFair value

Method for
calculating
fair value¥2,695

Based onpricesprovidedby thecounterparty
financial
institutions

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

Bonds

95,00095,000(*1)

Currency swap
transactions

Foreigncurrency-denominatedbonds

483,090

483,090(*2)

Foreignexchange
contracts

Foreigncurrency-denominateddeposits

55,000-(*2)¥756,090¥701,090

Total¥2,695For derivative transactions for which hedge accounting is applied, the contractual amount or the amount equivalent to theprincipal in the contract under each hedge accounting method as of September 30, 2012 is as follows:(Millions of yen)Hedge
accounting
methodPrincipal
accounting
methodType ofderivativetransactions
Interest rate
swap
transactions
Receive/fixed
andpay/floating

Contract amountPrimary hedged items

Of which 1 year
or moreBonds
Borrowed money¥258,500

13¥258,500

Fair value

Method for
calculating
fair value¥147

Based onpricesprovidedby thecounterparty
financial
institutions

Hedgeaccounting
for interest
rate
swaps
Deferralhedge
accountingforcurrency
swaps
Deferralhedge
accounting
forforeignexchange
contracts

Interest rate
swap
transactions
Receive/floating
and pay/fixed

Bonds

95,00095,000(*1)

Currency swap
transactions

Foreigncurrency-denominatedbonds

666,389

666,389(*2)

Foreignexchange
contracts

Foreigncurrency-denominateddeposits

55,000-(*2)¥1,074,889¥1,019,889

Total

¥147

(*1) Since interest rate swaps for which hedge accounting is applied are accounted for together with the bond being hedged, the fairvalue is presented together with the fair value of the relevant bond.
(*2) Since currency swaps and foreign exchange contracts for which deferral hedge accounting is applied are accounted for together

with the foreign currency-denominated bond or foreign currency-denominated deposit being hedged, the fair value is presented
together with the fair value of the relevant hedged item.
Note 2. Repayment schedule for monetary claims and securities with maturities is as follows:
As of September 30, 2011
Within 1
year
Loans
Securities
Held-to-maturity
securities
Deposits¥1,542,990

After 1year
through 2
years¥1,533,480

After 2years
through 3
years¥1,552,425

After 3years
through 4
years¥1,527,691

After 4years
through 5
years¥1,478,552

After 5years
through 10
years¥6,351,664

886,938
421,251

-

-

-

-

-

¥1,532,757

After 1year
through 2
years¥1,562,436

After 2years
through 3
years¥1,569,058

After 3years
through 4
years¥1,540,729

After 4years
through 5
years¥1,478,193

After 5years
through 10
years¥6,419,136

872,000
574,973

-

-

-

-

-

(Millions of yen)
After 10After 20
years
years
through 20
through 30
years
years
¥6,935,405¥1,316,766--

As of September 30, 2012
Within 1
year
Loans
Securities
Held-to-maturity
securities
Deposits

14(Millions of yen)
After 10After 20
years
years
through 20
through 30
years
years
¥6,930,374¥1,352,515--

Note 3. Repayment schedule for bonds and borrowed money is as follows:
As of September 30, 2011
After 2years
through 3
years¥2,358,110

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

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¥2,456,560

After 1year
through 2
years¥2,358,110

After 2years
through 3
years¥1,711,350

After 3years
through 4
years¥1,566,250

After 4years
through 5
years¥1,652,536

After 5years
through 10
years¥7,341,833(Millions of yen)
After 10After 20
years
years
through 20
through 30
years
years
¥1,636,535¥220,000

-

-

-

-

-

30,000Within 1
year
Bonds

¥2,082,530

After 1year
through 2
years¥2,456,560

As of September 30, 2012
Within 1
year
Bonds
Borrowed
money

-

-

6. Accumulated Depreciation
Accumulated depreciation of tangible fixed assets amounted to 230 million yen and 214 million yen as of September 30, 2011 and2012, 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
bonds in the amounts of 18,549,813 million yen and 18,927,003 million yen as of September 30, 2011 and 2012, respectively.
(2) Securities in the amounts of 469 million yen and 37,455 million yen are pledged as collateral for derivative transactions as of
September, 2011 and 2012, respectively.
8. Semiannual Net Income by AccountSemiannual net income of general account amounted to 7,667 million yen and 10,137 million yen, while semiannual net incomeof management account amounted to 3,509 million yen and 576 million yen, for the six-month periods ended September 30, 2011
and 2012, respectively.

15

9. Information by Account (Semiannual balance sheets)
The semiannual balance sheet of general account and management account at September 30, 2011 is 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
Reserves 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 semiannual unappropriatedretained earnings
Valuation, translation adjustments and others
Management account surplus reserve
Management account appropriated surplus
reserve
Management account semiannual
unappropriated retained 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

16¥(1,595,867)¥23,567,505

The semiannual balance sheet of general account and management account at September 30, 2012 is as follows:(Millions of yen)
Item
GeneralManagement
OffsetTotal
account
account(Assets)
Loans¥6,141,060¥16,244,143¥22,385,203
Securities
871,904
871,904
Cash and bank deposits
574,973
574,973
Other assets
3,149
10,503
13,653
Tangible fixed assets
2,547
2,547
Intangible fixed assets
540
540
Due from general account1,052,816¥(1,052,816)
Due to management account for fund for
improvement of operations of municipalities
292,831(292,831)
Total assets(Liabilities)
Bonds
Borrowed money
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
Reserves 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 semiannual unappropriatedretained earnings
Valuation, translation adjustments and others
Management account surplus reserve
Management account appropriated surplus
reserve
Management account semiannual
unappropriated retained earnings
Total net assets
Total liabilities and net assets

7,887,007

17,307,463

4,732,218
30,000
2,016
51
7
165

14,194,785(1,345,648)

23,848,822
18,927,003
30,00013,48451
7
165

11,46828

28

919,279

919,279

911,935

911,935

7,344
1,052,816

7,344
292,831

1,100,000
1,100,000

7,836,583(1,052,816)(292,831)

2,754,135

3,854,135
1,100,000

2,672,708
81,427

2,672,708
81,427

17,253,221(1,345,648)

23,744,156

16,60239,531
29,393

16,60239,531
29,393

10,137(5,708)54,242

10,137(5,708)54,24253,666

53,66650,424576
54,242576
104,666¥7,887,007¥17,307,463¥(1,345,648)¥23,848,822

Notes: 1. General account and management accountIn accordance with the provisions of Article 13, Section 1 of the supplementary provisions of the Law, management
account is used to conduct administration, collection and other related operations of the assets that JFM inherited from theformer JFM (management of the assets of the former JFM).
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. General account semiannual unappropriated retained earnings and management account semiannual unappropriatedretained earnings

17

“Semiannual net income” of general account is posted as “General account semiannual unappropriated retained
earnings, ” while “Semiannual net income” of management account is posted as “Management account semiannual
unappropriated retained earnings. ”
3. Due from general account and due to management account
These amounts represent funds lent between general account and management account pursuant to the provisions of Article
13, Section 4 of the supplementary provisions of the Law.
4. Due from general account for fund for improvement of operations of municipalities and due to management account forfund for improvement of operations of municipalities
These amounts represent cash received for “Fund for improvement of operations of municipalities,” which was lent tomanagement account from general account pursuant to the provisions of Article 9, Section 12 of the supplementaryprovisions of the Law.
10. Information by Account (Semiannual statements of income)The semiannual statement of income of general account and management account for six-month period ended September 30, 2011is as follows:(Millions of yen)
Item
GeneralManagement
OffsetTotal
account
account
Income¥39,741¥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 management account
423
(423)
Interest on fund for improvement of operations ofmunicipalities
5,756(5,756)
Interest on due from general account
196
(196)
Transfer from 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 management accountTransfer to management account for fund for
improvement of operations of municipalities
Administrative fee for management accountInterest on fund for improvement of operations ofmunicipalities

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

Ordinary income

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

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

(196)

7,739
423

(7,739)
(423)

5,756

(5,756)

7,667

111,214-

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

220,000
220,000

226,484(220,000)(220,000)

226,484

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

220,000
220,000

Semiannual net income¥7,667220,000
6,484

18

220,000
6,484

334,189(220,000)

114,189
220,000(220,000)¥3,509¥-334,189
220,000
114,189¥11,176

The semiannual statement of income of general account and management account for the six-month period ended September 30,
2012 is as follows:(Millions of yen)
Item
GeneralManagement
OffsetTotal
account
account
Income¥48,907¥208,905¥(11,138)¥246,674Interest income
43,771201,943
245,714Fees and commissions
90
90
Other income
868
0
868
Amount received for fund for improvement ofoperations of municipalities
592
592
Other
276
0
276
Administrative fee for management account
450
(450)
Interest on fund for improvement of operations ofmunicipalities
3,726(3,726)
Interest on due from general account
159
(159)
Transfer from general account for fund for
6,802(6,802)
improvement of operations of municipalities
Expenses
Interest expenses
Fees and commissions
Other operating expenses
General and administrative expenses
Interest on due to management accountTransfer to management account for fund for
improvement of operations of municipalities
Administrative fee for management accountInterest on fund for improvement of operations ofmunicipalities

38,76928,865
28
1,622
1,291
159

Ordinary income

109,037
103,367
106
1,317
71

(11,138)

136,669
132,232
134
2,939
1,362

(159)

6,802
450

(6,802)
(450)

3,726

(3,726)

10,13799,867-110,005

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

220,000
220,000

575,860(220,000)(220,000)

575,860

Special losses
Provision for reserve for interest rate volatility
Provision for management account reserve forinterest rate volatility
Transfer to general accountPayment to national treasury

220,000
220,000

Semiannual net income¥10,137

570,000
5,860
675,151

570,000
5,860(220,000)

105,151

19

220,000
350,000(220,000)

¥576

¥-

675,151
220,000
105,151
350,000¥10,714

11. Fair Value of Marketable Securities
Marketable held-to-maturity securities at September 30, 2011 consist of the following:(Millions of yen)Book value
Treasury 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)

Marketable held-to-maturity securities at September 30, 2012 consist of the following:(Millions of yen)Book value
Treasury discountbills
Negotiablecertificates ofdeposit
Total

Fair value

Difference

Unrealized gains

Unrealized losses¥479,904¥479,864

¥(40)

-

¥(40)

392,000

392,000---¥871,904¥871,864

¥(40)

-

¥(40)

Notes: 1. The fair value of treasury discount bills is based on the market price at September 30, 2011 and 2012.
2. The balance sheet amount for negotiable certificates of deposits are recognized as the fair value.
3. Difference is the net amount of “unrealized gains” and “unrealized losses.”
12. Information on Derivative Transactions(1) Types of derivative transactions
Derivative transactions entered into by JFM are interest rate swaps for interest rate related transactions, and currency swaps andforeign 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 to interest
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 that qualify for hedge accounting and meet specificmatching 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 risk of foreign currency
fluctuation qualify for deferral hedge accounting, the foreign currency-denominated assets and liabilities are translated at thecontracted rate.
(b) Hedging instruments and hedged items(ⅰ) Hedging instruments: Interest rate swaps
Hedged items: Bonds and borrowed money(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 deposits(c) Hedging policy
JFM uses hedging instruments as a means of hedging exposure to interest rate risk and foreign exchange risk. 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, a foreign exchange forward contract is entered into at the time of each deposit to thehedge the risks.
(d) Assessment of hedge effectivenessJFM ensures hedging instruments and hedged items have the same major terms when entering into hedge transactions tooffset bond and borrowed money market fluctuation risks.
Accordingly, JFM deems these to be highly effective and thus does not assess effectiveness. Moreover, a periodic

20

assessment of hedge effectiveness for interest rate swaps for which hedge accounting is applied and currency swaps andforward contracts that qualify for deferral hedge accounting 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 tomarket value changes. Credit risk is the risk of losses incurred when counterparties are unable to fulfill their contracts due tobankruptcy or other reasons.
As for derivative transactions used for hedging purposes, market risk is offset by the corresponding change into underlying
hedged items.
JFM enters into ISDA master agreements and CSA agreements with financial institutions, which are its 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 the transaction
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.

21