Research Update:Japan Finance Organization For
Municipalities 'A+' Ratings Affirmed
After Criteria Revision; Off UCO;
Outlook Positive
Primary Credit Analyst:
Satoru Matsumoto, Tokyo (81) 3-4550-8673; satoru.matsumoto@spglobal.com
Secondary Contact:
Kensuke Sugihara, Tokyo (81) 3-4550-8475; kensuke.sugihara@spglobal.com

Table Of Contents
Overview
Rating Action
Outlook
Rationale
Key Statistics
Ratings Score Snapshot
Related Criteria
Related Research
Ratings List

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Research Update:Japan Finance Organization For Municipalities'A+' Ratings Affirmed After Criteria Revision; Off
UCO; Outlook Positive
Overview• We have completed our review of the ratings on Japan Finance Organization
for Municipalities (JFM), a Japan-based public sector funding agency that
lends to Japanese local and regional governments, following the releaseof our "Public-Sector Funding Agencies: Methodology And Assumptions"criteria.
• We had placed the ratings on the agency Under Criteria Observation (UCO)
on May 22, 2018, in conjunction with the criteria's release.
• After our review, we are affirming our 'A+' long-term and 'A-1'
short-term issuer credit ratings on JFM and are upgrading the stand-alone
credit profile for JFM to 'a+' from 'a'. We are also removing the ratingsfrom UCO.
• The positive outlook reflects the positive outlook on our long-termsovereign credit rating on Japan and no expected change in our assessmentof the likelihood of extraordinary support for JFM over the next two
years.

Rating Action
On Aug. 6, 2018, S&P Global Ratings affirmed its 'A+' long-term and 'A-1'
short-term issuer credit ratings on Japan Finance Organization for
Municipalities (JFM). We upgraded our stand-alone credit profile (SACP) forJFM to 'a+' from 'a'. We also removed the ratings from Under Criteria
Observation (UCO), where we placed them May 22, 2018. The outlook is positive.

Outlook
The positive outlook reflects the positive outlook on our long-term sovereign
credit rating on Japan and our view that the likelihood of JFM receiving
extraordinary government support if needed is unlikely to change in the next
two years. In addition, we expect the SACP for JFM to remain stable at 'a+',reflecting its strong public policy role; sound capitalization under its
capital policy, including accumulation of net earnings; and financial risk
management over the next two years.
We could upgrade JFM if we raise our sovereign ratings on Japan. Conversely,

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Research Update: Japan Finance Organization For Municipalities 'A+' Ratings Affirmed After Criteria Revision; Off
UCO; Outlook Positive

we could lower the ratings or revise downward the outlook on JFM if we lower
our ratings or revise downward the outlook on Japan. We may also consider
lowering our ratings on JFM if, in our view, its policy role becomes lessimportant or its link with the central government weakens. We could also
downgrade JFM in the event that we lower the SACP for the agency to ' a-',which we consider fairly unlikely for now.
Even if we revise upward the SACP for JFM because of factors including
strengthening capitalization through accumulation of net earnings, we see a
low likelihood of upgrading our long-term rating on JFM as long as we maintainthe current sovereign ratings on Japan.

Rationale
The ratings reflect our view of JFM's strong public policy role and its stable
market position as a provider of financing to local and regional governments(LRGs) in Japan. Also supporting our ratings are low risk in Japan's LRG
sector, owing to a favorable institutional framework and strong economic
resilience, strengthening capitalization through accumulation of net earnings,
JFM's financial management of risk related to volatility in interest rates,
and its adequate liquidity. Counterbalancing factors include a lower market
share of LRG funding than global peers, taking interest rate risk because ofunhedged duration mismatches between assets and liabilities, and its liquidity
coverage in our extremely stressed scenario.
We see an extremely high likelihood of JFM receiving government support in atime of need. This is because JFM plays a very important role as the primarylong-term funding provider with competitive prices to LRGs in Japan and its
lending comprises an integral part of the central government's support for
LRGs under the Local Government Borrowing Programme (LGBP).

Enterprise Risk Profile: Strong public policy mandate and low sector risk in LRGs in Japan• JFM has a strong public policy mandate as a major lending institution for
LRGs in Japan.
• Risk in Japan's LRG sector is low, reflecting its favorable institutionalframework, solid economic resilience, and healthy financial system, while
LRGs' gross debts are easing but remain high.
• Adequate risk management offsets unhedged interest rate risk arising fromduration mismatches.
JFM plays a strong public policy role as a major long-term provider of
low-cost financing to Japanese LRGs, in our view. JFM acts as a safety net forprovision of lending to small and midsize LRGs. While it has a low market
share of around 15% of LRG funding compared with global peers, we view its
market position as stable because its lending is incorporated into the LGBP
that the Ministry of Internal Affairs and Communications (MIC) provides to

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Research Update: Japan Finance Organization For Municipalities 'A+' Ratings Affirmed After Criteria Revision; Off
UCO; Outlook Positive

LRGs. In the LGBP, JFM serves as the public funding provider together with thegovernment's Fiscal Investment and Loan Program (FILP). Furthermore, JFM is
the primary provider of long-term loan funding (over 10 years).
We view JFM's customer base as stable, reflecting customers that are all LRGs
in Japan and JFM shareholders. We see limited sensitivity to price in JFM'sbusiness and see high customer loyalty in its historical financing records,
which has produced stable revenues despite declining profitability. We see nomaterial concentration in its revenues, because it has achieved
well-diversified lending exposures among Japanese LRGs.
We view as a weakness in JFM's risk management the interest rate risk stemmingfrom unhedged duration gaps in its assets and liabilities, compared with mostglobal peers, who match funding to minimize such risks. However, its risk
management, including a ¥2.2 trillion reserve fund in its general account andasset and liability management (ALM) monitoring such as maintaining duration
mismatches to within two years, offsets the weakness. Our assessment also
reflects our view that JFM's management and governance has close links to thegovernment. This is reflected, for example, in management of credit risk in
JFM's lending activities, which involves MIC in credit applications andspecial monitoring procedures if an LRG experiences financial difficulties.
We view credit risk in doing business in Japan's LRGs sector as low. This
reflects our view that the institutional framework for Japanese LRGs is stableand predictable, which we base on its record of a stable structure andimproving credit metrics for the LRG sector despite the central government's
mounting fiscal deficits and debt burden. In addition, Japan's economic
resilience is strong, for which we revised up our assessment in April 2018,
and Japanese banking system has a robust systemwide funding structure andprudent regulatory monitoring, while intensive rate competition threatens thestability of the banking system. However, LRGs' improving but still-high grossdebt compared with global peers partly weighs on our assessment of risk in the
sector.

Financial Risk Profile: Strong capitalization, sufficient cushion for interest rate risk volatility, andadequate liquidity• Accumulation of net earnings in JFM's general account supports its strong
capitalization.
• Reserve funds provide a sufficient buffer to cushion risk of loss frominterest rate volatility.
• JFM benefits from healthy access to funding in Japan's deep anddiversified capital market and maintains adequate liquidity.
We believe JFM's strong capitalization will continue over the next two years
under its current capital policy. JFM's risk-adjusted capital (RAC) ratio was
13.6% as of March 31, 2018, and 8.2% if we make adjustments for singleborrower concentration. We expect its RAC ratios to continue to improve thanks
to stable accumulation of net earnings in its general account, while loans

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Research Update: Japan Finance Organization For Municipalities 'A+' Ratings Affirmed After Criteria Revision; Off
UCO; Outlook Positive

outstanding will not grow significantly, in our view, because of progresscollecting principal and interest on loans in its management account.
JFM has not suffered any losses in its loan portfolio since being establishedand maintains prudent underwriting standards. On the other hand, and incontrast with many of its international peers, JFM takes risk on interest
rates by allowing unhedged duration gaps because it provides mostly
fixed-rate, long-term loans up to 40 years while raising funds mainly throughthe issue of 10-year fixed rate bonds. However, JFM sets aside ¥2.2 trillion
in a reserve fund in its general account as a buffer against interest raterisk, which sufficiently covers the risk of loss in our view.
JFM has access to diversified financial instruments in a deep and broad
capital market with a diversified investor base in Japan, and it periodicallyissues bonds in global markets. Therefore, JFM has strong name recognition in
its respective markets. On the other hand, the ratio of its liquidity coverageover one year is below 1.0x in our extreme stress scenario, assuming loss offunding access and various assumptions for scheduled loan disbursements.
However, we consider JFM capable of managing its liquidity in such a casebecause we believe it has some flexibility to reduce loan disbursement, given
the government shares LGBP funding allocations to LRGs with JFM. Part of its
debt service being on government-guaranteed bonds in its management accountalso mitigates the pressure that bond redemptions put on its liquidity, in ourview.

Extremely high likelihood of extraordinary support from the Japanese government• We base our assessment of an extremely high likelihood of extraordinary
support for JFM if needed on our view that JFM has a very important role
for and integral link to the government of Japan.
We believe JFM plays a very important role as the primary public financial
institution offering long-term, low-cost financing to Japan's LRGs so they canfund national policy targets--such as disaster-proof projects--and as a
primary lender to the LRG sector for basic infrastructure-related funding. On
the other hand, the replicability of JFM's financing by private financial
institutions constrains its role.
Even if Japanese LRGs own JFM, we consider it has an integral link to thegovernment of Japan. We base this on our view that JFM's lending constitutes
an integral part of central government support for the LRG sector's financial
system under the LGBP.
Moreover, JFM's management account funding comes from the government's FILP.
The government guarantees funding supplied to JFM through FILP and still
guaranteed about 36% of JFM's funding in fiscal 2017. Despite the central
government's complete divestiture of its interest in JFM's predecessor at theend of September 2008, we believe JFM's link to the government remains intact.

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Research Update: Japan Finance Organization For Municipalities 'A+' Ratings Affirmed After Criteria Revision; Off
UCO; Outlook Positive

Key Statistics
Japan Finance Organization for Municipalities--Selected Indicators--Fiscal year*-(Bil ¥)

2017

2016

2015

2014

2013

Total assets

24,75624,786

24,64324,524

24,101

Customer loans (gross)

23,76823,72023,66523,43823,083Business position

Growth in loans (%)

0.2

0.2

1.0

1.5

1.8

Net interest revenues

155

164

174

183

194

Noninterest expenses

3

3

4

3

3

24,48824,54524,427

24,351

23,959

Capital and risk position
Total liabilities
Total adjusted capital

261

235

206

176

146

Assets/capital (x)

94.9

105.7

119.4

139.2

165.0

RAC ratio before diversification (%)

13.6

N.A.

N.A.

N.A.

N.A.

RAC ratio after diversification (%)

8.2

N.A.

N.A.

N.A.

N.A.

0

0

0

0

0

Liquidity ratio with loan disbursement (one year)(x)

0.7

N.A.

N.A.

N.A.

N.A.

Liquidity ratio without loan disbursement (one year)(x)

1.2

N.A.

N.A.

N.A.

N.A.

Funding ratio (one year)(x)

1.4

N.A.

N.A.

N.A.

N.A.

Gross nonperforming assets/gross loans
Funding and liquidity*Fiscal year ended March 31 of the following year. RAC--Risk-adjusted capital. N.A.--Not available.

Ratings Score Snapshot
Issuer Credit Rating

A+/Positive/A-1

SACP

a+

Enterprise Risk Profile
PICRA
Business Position
Management & Governance
Financial Risk Profile
Capital Adequacy
Fundingand Liquidity

Strong (2)Strong (2)Strong (2)Adequate (3)Adequate (3)Strong (2)NeutralAdequate (3)SupportGRE Support
Group Support

00
0

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Research Update: Japan Finance Organization For Municipalities 'A+' Ratings Affirmed After Criteria Revision; Off
UCO; Outlook Positive

Additional Factors

0

Related Criteria• Public-Sector Funding Agencies: Methodology And Assumptions, May 22, 2018
• Rating Government-Related Entities: Methodology And Assumptions, March
25, 2015• Risk-Adjusted Capital Framework Methodology, July 20, 2017
• Use Of CreditWatch And Outlooks, Sept. 14, 2009
• Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

Related Research• 10 Public-Sector Funding Agencies Placed Under Criteria Observation On
Publication Of New Criteria, May 22, 2018
• Assumptions For Liquidity Gap Analysis Under “Public-Sector Funding
Agencies: Methodology And Assumptions”, May 22, 2018
• Credit FAQ: A Closer Look At The New Public-Sector Funding Agencies
Criteria, May 22, 2018

Ratings List
Ratings Affirmed
Japan Finance Organization for Municipalities
Issuer Credit Rating
A+/Positive/A-1
Japan Finance Organization for Municipalities
Senior Secured
A+

Certain terms used in this report, particularly certain adjectives used toexpress our view on rating relevant factors, have specific meanings ascribedto them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further
information. Complete ratings information is available to subscribers ofRatingsDirect at www.capitaliq.com. All ratings affected by this rating action
can be found on S&P Global Ratings' public website atwww.standardandpoors.com. Use the Ratings search box located in the left
column.

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