Annual ReportJapan Finance Organization for Municipalities

ProﬁleName

Japan Finance Organization for Municipalities (JFM)

Establishment

August 1, 2008

Governing Law

The Japan Finance Organization for Municipalities Law

Address

Shisei Kaikan, 1-3 Hibiya Koen, Chiyoda-ku, Tokyo

President and CEO

Yuji Watanabe

Capital¥16.6 billion

Number of Employees

80 (as of April 2010)

Outstanding Amount of Loan ¥22,030.2 billion(As of March 31, 2010)
Outstanding Amount of Bond ¥18,554.9 billion(As of March 31, 2010)
Ratings(As of March 31, 2010)

S&P : AA
Moodyʼs : Aa2
R&I : AAA

Forward-looking statements including JFMʼs plans contained in this Report are based on
information available to JFM at the time of its preparation and involve potential risks anduncertainties. Actual results, therefore, may differ from those described in this Report due toa variety of factors including changes in market trends, economic conditions and regulations.
Accordingly, readers are advised to use their own discretion and exercise great caution when
making investment decisions.

President and CEOʼs Message ・・・・・・・ 2Management Philosophy ・・・・・・・・・・・ 4
Review of Operations and Financial
Statements for Fiscal 2009 ・・・・・・・・・・・ 5Internal Management System ・・・ 45
Risk Management
1. Overall Risk management(1) Integrated Risk Management andRisk Management System ・・・・・・・・・・・・・・・・・・・・・・・46(2) Characteristics of JFMʼs Risks and Interest Rate
Risk Management ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・46
2. Individual Risk Management

Organization Profile
Profile of JFM

・・・・・・・・・・・・・・

7(1) Credit Risk ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・47

8(3) Liquidity Risk ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・51

・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・

Capital ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・10(2) Market Risk ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・49(4) Operational Risk ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・52
Internal Control over Financial Reporting ・・・・・・・・・・・・・53

Corporate Governance
1. Representative Board ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・11
2. Supervisory Committee ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・12

Compliance ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・55

3. Audit by External Auditors ・・・・・・・・・・・・・・・・・・・・・・・・・・12Disclosure ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・56

General Account and Management Account ・・・・・・・・・13

Financial Section ・・・・・・・・・・・・・・・・・・・・ 57

Operations ・・・・・・・・・・・・・・・・・・・・・・・・15
Lending Operations
1. Recipients of Loans ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・16
2. Type of Loans ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・18
3. Interest Rates of Loans ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・18

Internal Audits ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・54

Financial Statements ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・58
Report of Independent Auditors ・・・・・・・・・・・・・・・・・・・・・・・・87
Supplementary Information ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・88

Appendices/JFM Data ・・・・・・・・・・・・・・ 91
Appendices4. Maturities of Loans ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・20

Results of Lending Operations by Project in Fiscal 2009 ・・・92
Fiscal 2009 Loans by Group ・・・・・・・・・・・・・・・・・・・・・・・・・・・93

5. Credit Check System ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・21

Fiscal 2009 Redemption of Loans ・・・・・・・・・・・・・・・・・・・・・94

6. Interest Rate Reduction ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・21

Long-Term Loan Balance by Project at the End of Fiscal 2009 ・・95

7. Review of Lending Operations ・・・・・・・・・・・・・・・・・・・・・22
8. Lending Operations for Fiscal 2009 ・・・・・・・・・・・・・・・25
9. Review of Entrusted Loans for Fiscal 2009 ・・・・・・・33
10. Plan of Lending Operations for Fiscal 2010 ・・・・・34

Basics of Local Government Finance and JFM's Role ・・・・・96
JFM Data
Organization History ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・99
JFM Organization ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・100

11. Prepayment Without Penalty ・・・・・・・・・・・・・・・・・・・・・34

Executive Officers and Corporate Auditors/Address ・・・101

Local Government Support Operations ・・・・・・・・・・・・・・・・35
Fund-Raising Operations
1. Type of JFM Bonds ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・36
2. Basic Stance on Issuance of JFM Bonds ・・・・・・・・・・・37
3. Characteristics of JFM Bonds ・・・・・・・・・・・・・・・・・・・・・・・38
4. Trends in Fund-Raising Operations・・・・・・・・・・・・・・・・39
5. Fund-Raising Operations for Fiscal 2009 ・・・・・・・・・40

The translation of the Japanese yen amounts into U.S. Dollars is included
solely for the convenience of readers outside Japan, using the prevailingexchange rate as of March 31, 2010, which was ¥93.60 to US$1.00.

6. Plan of Fund-Raising Operations for Fiscal 2010 ・・ 44

Japan Finance Organization for Municipalities Annual Report 20101

Review of Fiscal 2009
Japan Finance Organization for Municipalities (JFM) is a public organization established withcapital contributed by all local governments in Japan (prefectures, government-designatedcities, cities, special wards of Tokyo, towns and villages) to serve as “a joint fund-raisingorganization of local governments, by local governments, and for local governments.” In thisrole, JFM issues bonds to raise funds in the capital market, and then provides local governmentswith long-term loans at low interest rates.
In fiscal 2009, we moved ahead with several initiatives, including extending loan maturity
and making other improvements to loan terms, establishing the status of JFM bonds as “Super
Local Government Bonds,” carrying out asset liability management (ALM) analysis for ultra longterm periods, and adopting private-sector accounting standards to JFMʼs ﬁnancial statements.
Despite the harsh financial and economic conditions, we have earned the marketʼs
conﬁdence, and our operations proceeded smoothly. I would like to oﬀer my sincere gratitude
to everyone who has supported us this year.

Initiatives in Fiscal 2010
In ﬁscal 2010, we plan to make loans in the amount of ¥1,933.1 billion (US$20.7 billion), up ¥517.6
billion (US$5.5 billion) over the previous ﬁscal year, as a result of an increase in JFM funds in the
Local Government Bond/Loan Program. I believe that the extremely harsh financial conditions
for local governments make it all the more important that JFM fulﬁll its role as a joint fund-raisingorganization. We will step up to meet this challenge for the sake of all of our stakeholders.
Bond issuance will increase as a result of the rise in loans, but we will raise funds in a stablemanner by issuing bonds in a wide range of maturities, as well as issuing international bonds whileclosely monitoring the market conditions.
Moreover, we will move forward with our ALM operations and internal controls, and will
establish a concrete action plan for the local government support operations that are expected
to start on a full scale in ﬁscal 2011. JFM will proceed with operations in three areas: Research andStudy and Information Services, Training for Local Government Staﬀ, and Administrative Support
for Fund-Raising.

2

Japan Finance Organization for Municipalities Annual Report 2010

JFMʼs Role as an Organization of, by
and for Local Governments
We believe JFMʼs mission is to support local
governmentsʼ projects, which are closely
related to local residentsʼ daily lives, byproviding long-term and low-interest funds
in a stable manner, and to address new needsof local governments, adapting quickly tochanging times.
With all of JFMʼs management staﬀ working
as one to accomplish JFMʼs mission, we ask foryour continued understanding and supportof our endeavors.

Yuji Watanabe
President and CEO
July 2010

Japan Finance Organization for Municipalities Annual Report 20103

Management Philosophy
Japan Finance Organization for Municipalities (JFM) is “a joint
fund-raising organization of local governments, by local
governments, and for local governments,” and sets forth thefollowing three objectives as the management philosophy.

1

Securing Corporate Governance Beﬁtting a Joint
Organization of Local Governments
To secure a system under which local governments assume the responsibility
for autonomous and independent management, and ensure corporate
governance through appropriate risk management, and checks by theSupervisory Committee and external auditors.

2

Responding Positively to Financial Needs of Local
Governments
To closely follow up financial needs of local governments and thechanges in the environment for their fund-raising, and positively develop
appropriate services accordingly, and thus achieve the primary objective:
the stable supply of long-term and low-interest funds to local governments.

3

Gaining the Solid Conﬁdence of Capital Markets
To gain solid confidence of capital markets by maintaining appropriate
risk management, sound financial standing, and proper disclosure of
information to capital markets to enable us to raise funds at advantageous
terms in a stable manner; and to contribute to the sound development of
capital markets as a core issuer in the public bond market.

4

Japan Finance Organization for Municipalities Annual Report 2010

Review of Operations and Financial Statements for
Fiscal 2009

１. Review of Operations for Fiscal 2009
Based on the ﬁscal 2009 lending plan, JFM made 7,535 loans to local governmentsin the amount of ¥1,290.7 billion (US$13,789.1 million) with the consent (approval)of the Minister for Internal Affairs and Communications and prefectural
governors.
In particular, JFM made 39 loans, for a total of ¥11.6 billion (US$123.9 million),for General Account-Related Projects such as Regional Revitalization, Disaster
Prevention, and Special Municipal Merger Projects, which became eligible for JFM
loans as in ﬁscal 2009. We also provided 397 loans, in the amount of ¥448.8 billion(US$ 4,794.9 million), for Extraordinary Financial Countermeasures Funding to
make up for a shortfall of local allocation tax. As such, we appropriately satisﬁed
the needs of local governments.
In accordance with the fund-raising plan, on the other, JFM issued ¥721 billion(US$7,703.0 million) public offering bonds without government guarantee (JFMbonds), ¥400 billion (US$4,273.5 million) private placement bonds underwrittenby the Pension Fund Association for Local Government Officials for this lending,and ¥823.9 billion (US$8,802.4 million) government-guaranteed bonds to reﬁnancethe existing government-guaranteed bonds of the Japan Finance Corporation for
Municipal Enterprises (hereinafter, “the former JFM”) to smoothly manage the former
JFMʼs assets to which JFM has succeeded.
In addition, JFM conducted research and study and provided information on
local governmentsʼ fund-raising, trained local government staff, and provided
administrative support for fund-raising.

Japan Finance Organization for Municipalities Annual Report 20105

２. Fiscal 2009 Financial Statements(1) Profit/loss statement
In ﬁscal 2009, JFM posted ¥558.5 billion (US$5,967.1 million) in income (consisting
primarily of ¥558.3 billion (US$5,965.4 million) in interest income) and ¥308.3
billion (US$3,294.4 million) in expenses (consisting primarily of ¥297.3
billion (US$3,176.7 million) in interest expenses). As a result, ordinary income
amounted to ¥250.1 billion (US$2,672.7 million) in ﬁscal 2009.
Pursuant to the relevant laws, part of income generated by refinancing
bonds is provided to the Management Account Reserve for Interest Rate
Volatility (refer to page 13). As a result, JFMʼs net income was ¥8.8 billion(US$94.7 million) for ﬁscal 2009.

(2) Assets
As of March 31, 2010, JFMʼs total assets amounted to ¥23,184.9 billion (US$247,702.9 million), down ¥184.6 billion (US$1,972.2 million) over fiscal 2008.
Assets declined because the redemption of loans, which account for the
majority of JFMʼs assets, exceeded new loans by ¥185 billion (US$1,976.5 million).

(3) Liabilities
As of March 31, 2010, JFMʼs total liabilities stood at ¥23,124.3 billion (US$247,055.3 million), down ¥192.1 billion (US$2,052.4 million) over ﬁscal 2008.
Although the Reserve for Interest Rate Volatility increased by ¥256.3 billion(US$2,738.2 million), liabilities decreased because redemptions exceeded newissuance, which accounts for the majority of liabilities, by ¥447.9 billion (US$4,785.3 million).

(4) Net assets¥4.5 billion (US$48.4 million) in net income of the General Account was posted
as “General Account Surplus Reserves” and ¥4.3 billion (US$46.2 million) of theManagement Account was posted as “Management Account Surplus Reserve”.
Total assets amounted to ¥60.6 billion (US$647.5 million) as of March 31, 2010.
(Refer to page 13 for the General Account and Management Account)

6

Japan Finance Organization for Municipalities Annual Report 2010

Organization ProﬁleOrganization ProﬁleProfile of JFM・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・8
Capital ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 10
Corporate Governance
1. Representative Board ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 11
2. Supervisory Committee ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 12
3. Audit by External Auditors ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 12
General Account and Management Account・・・・・・・・・・・・・・・・ 13Japan Finance Organization for Municipalities Annual Report 20107

Organization ProﬁleProﬁle of JFM

Basic Flow of Lending and Fund-Raising Operations

Japan Finance
Organization for
Municipalities(JFM)
Fund-Raising

Capital Markets

Outstanding Bond Balance¥18.5 trillion

Reserve for Interest
Rate Volatility, etc.
¥3.6 trillion

Borrowers
Capital & Management
Participation

Loans
Outstanding Loan Balance¥22.0 trillion

Long-term, Low-interest

JFM Bonds
Private placement bonds

Reduction of Interest
Rates by Using
Investment Income

Government Guaranteed Bonds

Local
Governments
General
Account
Municipal
Enterprises
water supply,
sewerage,transportation,
public housing,hospitals, etc.

Fund for Improvement of Operationsof Municipalities¥0.9 trillion

Contribution ofProceeds from
Municipally
Operated Racing

Local Government
Support Operations
Support for local
governmentsʼ fund-raisingin capital markets(as of March 31, 2010)8

Japan Finance Organization for Municipalities Annual Report 2010

Organization ProﬁleJoint Fund-Raising Organization for Local Governments
Improvements to local governmentsʼ social infrastructure require a long period of time to recoup thecapital expenditures and to equalize the burden across generations, and thus it is often desirable toraise long-term funds. However, local governments generally raise funds in capital markets for terms of
10 years or less.
Because of this, we issue JFM bonds, which are publicly oﬀered bonds that are not guaranteed by
the national government. These bonds are used to raise funds in capital markets and thus ensure astable supply of long-term and low-interest funds to local governments, thereby fulﬁlling our duty ofcomplementing individual local governmentsʼ fund-raising in capital markets.

Using Reserves for Interest Rate Volatility to Address Interest Rate Risk
JFM primarily issues 10-year bonds to raise funds and extends long-term (maximum maturity of 30 years)
loans to local governments, which creates a signiﬁcant maturity gap between funding and lending. To copewith the risk of interest rate ﬂuctuations associated with reﬁnancing of bonds, JFM maintains the necessary
ﬁnancial foundation including reserves for interest rate ﬂuctuations.

Reduction of Interest Rates by Utilizing Fund for Improvement of Operations ofMunicipalities
JFM receives part of the earnings made by local governments that operate various races (horse racing,bicycle racing, motorcycle racing, and speedboat racing), and contributes to the Fund for Improvementof Operations of Municipalities. The investment income of the fund is used to reduce interest rates onloans provided to local governments.

Japan Finance Organization for Municipalities Annual Report 20109

Organization ProﬁleCapital

JFM was established by local governments as an autonomously managed organization andcapitalized solely.
As of March 31, 2010, JFM had received capital in the amount of ¥16.6 billion (US$177.3 million) from1,797 of Japanʼs local governments encompassing prefectures, government-designated cities, cities,
special wards of Tokyo, towns and villages.

Towns and Villages¥1.0 billion (6.2%)

Capital Contribution
by Type ofLocal Government

Prefectures¥6.4 billion (38.6%)

・・・・・・・・・・・・・・・・・・・・・・

Cities and Special Wards of Tokyo(excluding Government-Designated Cities)¥6.4 billion (38.5%)

Cities and Special Wards of Tokyo

Government-Designated Cities¥9.2 billion (55.2%) ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ ¥2.8 billion (16.7%)*Note: Total of contribution amounts does not add up exactly due to rounding oﬀ.

10

Japan Finance Organization for Municipalities Annual Report 2010

Organization ProﬁleOrganization ProﬁleCorporate GovernanceJFM secures responsible corporate governance through the participation of external experts in the
Representative Board and the Supervisory Committee, and external auditorsʼ audit.
Corporate Governance System
Representative Board
Members: (1) Prefectural governor, city mayor, and town/village mayor elected by thethree associations of local governments*(2) External experts elected by the three associations of local governments*
Number of Members: six (three from (1) above, and three from (2) above)
Term of Oﬃce: three years

Appointment of members

Appointment anddismissal of President
and CEO
Consultation andsuggestions

Supervisory Committee
Members: external experts
Full Number of Members: six
Term of Oﬃce: two years

Decisions on important matters
including budget, business plans,medium-term plans, etc.

President and CEO/Deputy President etc.
Report on budgets,business plans,medium-term plans, etc.

Audit

External Auditors
certiﬁed public accountants
or an audit corporation（）

Approval of changes to the Articles of Association andinstruction to correct illegal activities

National Government*Three associations of local governments are National Governorsʼ Association, Japan Association of City Mayors and National
Association of Towns and Villages.

1. Representative Board
JFM has the Representative Board as the supreme dicision-making body.
Of the six members of the Board, as an organization autonomously managed by local
governments, three members are selected from among prefectural governors, city mayors andtown/village mayors, respectively. The other three members are nominated from among experts
in local administration and ﬁnance, economics, ﬁnance, law or accounting.
The Representative Board has the authority to make decisions on important matters related tothe overall management of JFM, including budgets, settlement of accounts, and business plans. To
fulﬁll its supervisory function, the Board also has the authority to order the President and CEO toreport on the organizationʼs business, assets and liabilities, and to correct illegal activities.

Representative Board (as of June 1, 2010) *Chairperson(Representatives of Local Governments)* Yuichiro Ito(Representatives of External Experts)
Junko Obata(Governor of Kagoshima Prefecture)(Dean, Sophia Law School)

Tamio Mori

Isao Horiba(Mayor of Nagaoka City, Niigata Prefecture)(Professor, Aoyama Gakuin University)

Tadahiko Fujiwara

Tomijiro Morita(Mayor of Kawakami Village, Nagano Prefecture)(Vice Chairman, Nippon Keidanren (Japan Business Federation) and
Chairman of the Board, The Dai-ichi Mutual Life Insurance Company)

Japan Finance Organization for Municipalities Annual Report 201011

2. Supervisory Committee
Local governments are the founders of JFM, who is a lender of funds, and are also its borrowers.
In this context, and in order to secure transparency, incorporate the objective and unbiased
opinions of external parties, and to establish responsible corporate governance, the Supervisory
Committee has been established as a deliberation committee comprised of external experts.
The Supervisory Committee is comprised of experts in local administration and finance,
economics, finance, law, or accounting, and other experts in the academic world, and all areappointed by the Representative Board.
The Supervisory Committee has the function of monitoring the operations of JFM, and canoﬀer its opinion on important matters related to JFM's operations including budgets, settlementof accounts, business plans, etc. The Committee can also, if necessary, request the president
to report on those matters. The President and CEO has the duty of reporting the Committeeʼsopinions to the Representative Board and ensuring that careful regard is given to those opinions.
Supervisory Committee Members (as of June 1, 2010) *Chairperson
Osamu Kurihara

Mari Nishino(Counsel, Nishimura & Asahi)(Professor Emeritus, Meiji University)

Izumi Kuwano* Yoshitsugu Hayashi(Chairperson, Yufuin Hot Spring Tourism Association;
Representative Director and President, Tamanoyu Corporation)(Professor, Kwansei Gakuin University)

Seiji Dezuka(Former Chairperson, Naigaijoseichosakai)

Seizo Wakabayashi(Certiﬁed Public Accountant, Dezuka Accounting Oﬃce)

3. Audit by External Auditors
As JFM raises funds in capital markets, proper disclosure of information and external checks on
accounting procedures are essential in order to earn the conﬁdence of the markets and raise funds
at low cost.
From this point of view, JFM is required to have its financial statements and a report on
settlement of accounts audited not only by a corporate auditors, but also by external auditors(certiﬁed public accountants or an audit corporation) appointed by the Representative Board.

12

Japan Finance Organization for Municipalities Annual Report 2010

Organization ProﬁleOrganization ProﬁleGeneral Account and Management AccountJFM was established on August 1, 2008 with the whole capital contributed by all local governments(prefectures, government-designated cities, cities, special wards of Tokyo, towns and villages) as a joint
fund-raising organization for local governments. JFM began operations on October 1, 2008, succeeding to
the assets and liabilities of the former JFM.
As a result of the reorganization on June 1, 2009, the general accounts of local governments also
became broadly eligible for JFM loans.
New loans made and bonds issued since JFMʼs operations began are accounted for in the General
Account of JFM, while operations to administer loans carried over from the former JFM are accounted for in
the Management Account, with each accounting classiﬁed accordingly.
Established
August 1, 2008

Operations began on
October 1, 2008

Japan Finance Organization for
Municipal Enterprises

Reorganized onJune 1, 2009
Japan Finance Organization for
Municipalities
Loan eligibility was expanded tomore broadly include generalaccounts of local governments

Succeeds to assets
and liabilities
Established
June 1, 1957
Japan FinanceCorporation for
Municipal Enterprises

Abolished under administrative reform(captial returned to government)

Special public institution(funded entirely by the central government)

When JFM was founded, JFM succeeded to the Reserve for Losses on Refinance of Bonds etc in the fullamount of approximately ¥3.4 trillion (US$36.3 billion).
Of this, the ¥2.2 trillion (US$23.5 billion) needed to ensure the continuity of JFMʼs operations into the future
was to be transferred to the General Account in equal installments over ten years, with the remainder to betransferred to the Management Account to appropriately manage the former JFMʼs loans and bonds towhich JFM has succeeded and prepare for the reﬁnancing risk of the bonds the former JFM has issued.
JFM issues government-guaranteed bonds to refinance the former JFM bonds with government
guarantee in the Management Account. We prepare the former JFM Asset Management Plan every ﬁscal
year to manage the former JFMʼs assets and liabilities, and this plan must be approved by the Minister forInternal Aﬀairs and Communications and the Minister of Finance.

Japan Finance Organization for Municipalities Annual Report 201013

In accordance with the JFM law, if any assets remain when the asset management operations of theformer JFM are completed and the management account is closed, those assets shall be returned to thenational treasury.
Japan Finance Organization for Municipalities
Ensuring the ﬁnancial foundation needed to sustain thebusiness into the future¥3.4 trillion in
Reserve for Losses on
Refinance of Bonds

Reserve for ¥2.2 trillion
Interest Rate Volatility
Management Account

Ensuring a ﬁnancial foundation able to withstandreﬁnancing risk posed by theformer JFMʼ s governmentguaranteed bonds

14

General AccountJapan Finance Organization for Municipalities Annual Report 2010

¥220 billion
transferredeach year between
2008 and 2017Management AccountReserve for Interest rate Volatility

Operations

Operations
Lending Operations
1. Recipients of Loans ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・16
2. Type of Loans ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・18
3. Interest Rates of Loans ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・18
4. Maturities of Loans ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・20
5. Credit Check System ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・21
6. Interest Rate Reduction ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・21
7. Review of Lending Operations ・・・・・・・・・・・・・・・・・・・・・・・・・・・・22
8. Lending Operations for Fiscal 2009 ・・・・・・・・・・・・・・・・・・・・・25
9. Review of Entrusted Loans for Fiscal 2009 ・・・・・・・・・・・・・・33
10. Plan of Lending Operations for Fiscal 2010 ・・・・・・・・・・・34
11. Prepayment Without Penalty ・・・・・・・・・・・・・・・・・・・・・・・・34
Local Government Support Operations ・・・・・・・・・・・・・・・・・・・・・35
Fund-Raising Operations
1. Type of JFM Bonds ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・36
2. Basic Stance on Issuance of JFM Bonds ・・・・・・・・・・・・・・・・・37
3. Characteristics of JFM Bonds ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・38
4. Trends in Fund-Raising Operations ・・・・・・・・・・・・・・・・・・・・・・39
5. Fund-Raising Operations for Fiscal 2009 ・・・・・・・・・・・・・・・40
6. Plan of Fund-Raising Operations for Fiscal 2010 ・・・・・・44

Japan Finance Organization for Municipalities Annual Report 201015

Operations

Lending Operations• Provide loans as “Public Funds” as designated in the Local Government Bond/Loan Program.
• Provide long-term and low-interest funds to local governments to efficiently and effectively

complement their fund-raising in capital markets, and by doing so contribute to the sound ﬁscal
management of local governments as well as the promotion of the welfare of local residents.
Also, conduct necessary and appropriate credit reviews for all loans.

1. Recipients of Loans
The recipients of JFM loans are limited to local governments.
The former JFM provided loans for a total of 21 project categories and two types of local
government corporations.
At JFM, on the other hand, the total was reduced to 18 project categories with lending to local
government corporations discontinued.
As a result of the reorganization in June 2009, JFM is now able to provide loans for the General
Account to the same extent as municipal enterprises, which have been the main targetsof lending.
Specifically, in fiscal 2009, General Account-Related Projects that local governments initiate,such as Regional Revitalization, Disaster Prevention, and Special Municipal Merger Projects andExtraordinary Financial Countermeasures Funding, are now eligible for JFM loans. In addition, JFM
has added projects for the construction of social welfare facilities. Thus, JFM will continue to meetthe ﬁnancing needs of local governments in a timely and appropriate manner.

16

Japan Finance Organization for Municipalities Annual Report 2010

Operations

Project Categories of JFM Lending
Japan Finance Organization
for Municipal Enterprises

Japan Finance Organization
for Municipalities

Municipal Enterprise-Related Projects

Municipal Enterprise-Related Projects

Municipal Enterprise-Related Projects

・Water Supply

・Water Supply

・Water Supply ・Transportation

・Transportation

・Transportation

・Hospitals ・Sewerage

・Hospitals ・Sewerage

・Hospitals ・Sewerage・Public Housing

・Public Housing

・Public HousingNote 1・Industrial Water Supply

・Industrial Water Supply

・Industrial Water Supply

・Electricity Supply ・Gas Supply

・Electricity Supply

・Electricity Supply

・Port Facilities

・Gas Supply ・Port Facilities

・Gas Supply ・Port Facilities

・Elderly Care Services ・Markets

・Elderly Care Services ・Markets

・Elderly Care Services ・Markets

・Slaughterhouses

・Slaughterhouses

・Slaughterhouses

・Tourism Facilities

・Tourism Facilities

・Tourism Facilities

・Parking Facilities

・Parking Facilities

・Parking Facilities

・Industrial Waste Processing

・Industrial Waste Processing

・Industrial Waste Processing

General Account-Related Projects

General Account-Related Projects

General Account-Related Projects

・Local Road Construction

・Local Road Construction

Local Government bonds

・Improvement of Rivers and・Improvement of Rivers andexcept Municipal Enterprises-

Japan Finance Corporation
for Municipal Enterprises
General Loans

Other Waterways
・High School Construction

Other Waterways
・High School Construction

related ones・Social Welfare Facilities
Construction ProjectsNote 2・Toll Roads
・Residential Land Development

・General Projects
Ineligible

・Urban Redevelopment

・Regional Revitalization Projects
・Disaster Prevention Projects
・Local Road Construction Projects

Loans to Local Government Corporations

・Special Municipal Merger
Projects, etc.

・Local Government Road
Corporation
・Local Government Land
Development Corporation

Ineligible
Extraordinary Financial
Countermeasures Funding

Notes:1. Public Housing is defined as “Municipal Enterprise” in the Japan Finance Organization for Municipalities Law.
2. Projects for the construction of social welfare facilities were made eligible for loans in fiscal 2010.

Japan Finance Organization for Municipalities Annual Report 201017

2. Type of loans
JFM provides long-term ”General Loans” to local governments at low interest rates. Loans arefurther classified into three types: “Long-Term Loans;” “Pre-Consent (Approval) Loans,” which
are provided as bridge loans to cover the period up to disbursement of Long-Term Loans for
projects for which consent (approval) is assured; and “Short-Term Loans” to be repaid within
the same fiscal year.
We also provide ”Entrusted Loans” to local governments, which are entrusted by theJapan Finance Corporation.

3. Interest Rates of Loans
Loan interest rates consist of three types: standard interest rate; special interest rate; and extraspecial interest rate.
1) Standard Interest Rate
The standard interest rate represents the rate at which the discounted present value of cash
flows of the fund raised by JFM to make loans equals the discounted present value of cash
ﬂows to be generated by those loans with their respective terms to maturity, grace periods andrepayment methods.

2) Special Interest Rate
The special interest rate is set at a discount on the standard rate (0.3% below the standard rate)
for projects that are particularly important to the livelihood of residents.

3) Extra-Special Interest Rate
The extra-special interest rate is set at a further discount on the standard rate (0.35% below thestandard rate) and applicable to special projects of greater urgency and necessity to respond
appropriately to the issues of the regional community.

The trend of ﬁscal 2009 loan interest rates is shown on the next page. During this period, extraspecial interest rates were at the same level as the rates of the Fiscal Loan Fund provided by thenational government.
This is because the standard interest rate is within 0.35% over the Fiscal Loan Fund rate throughout
ﬁscal 2009, on the other hand, and the minimum interest rates for JFM loans are set at the samelevel as the interest rates of the Fiscal Loan Fund with the same repayment terms.

18Japan Finance Organization for Municipalities Annual Report 2010

Operations■ Trends in Loan Interest Rates in Fiscal 2009
Month/Year

April ’09

May ’09

June ’09

July ’09

August ’09

September ’09

Interest Rate
Reset Date

4/20

5/25

6/17

7/21

8/19

9/17

Standard
Interest Rate

2.20%

→

2.25%

2.05％

2.20%

2.10%

SpecialInterest Rate

2.00%

2.10%

2.20%

2.00%

2.10%

2.00%

Extra-Special
Interest Rate

2.00%

2.10%

2.20%

2.00%

2.10％

2.00%

Interest Rateof Fiscal Loan
Fund

2.00%

2.10%

2.20%

2.00%

2.10％

2.00%

October ’09

November ’09

December ’09

January ’10

February ’10

March ’10

Interest Rate
Reset Date

10/28

11/26

12/22

1/27

2/24

3/19

Standard
Interest Rate

2.05%

2.15％

2.05%

2.15%

→

→

SpecialInterest Rate

→

2.10%

1.90%

2.10%

→

→

Extra-Special
Interest Rate

→

2.10%

1.90%

2.10%

→

→

Interest Rateof Fiscal Loan
Fund

→

2.10%

1.90%

2.10%

→

→

Month/Year

Notes:1. The ﬁgures for April 2009 and May 2009 represent the interest rates applied to loans made by JFM (ﬁxed interest
rates for loans with 28-year maturity and 5-year grace period).
2. The ﬁgures for June 2009 to March 2010 represent ﬁxed interest rates with 30-year maturity and a 5-year grace
period.
3. Special interest rates and extra-special interest rates are the same as the minimum interest rates set at the level
equal to the interest rates for the Fiscal Loan Fund with the same conditions.

Japan Finance Organization for Municipalities Annual Report 201019

4. Maturities of Loans
The loan maturity, which is set according to the project category of the loan, was previously 28
years at the maximum (25 years on average). As a result of the review of the loan maturity foreach purpose, which was conducted at the time of the reorganization of JFM in June 2009, themaximum term to maturity was extended to 30 years for ﬁscal 2009 loans.
The new loan maturities for major project categories are shown below.
Loans for Fiscal 2010
Project Categories of JFM Lending

General
AccountRelated
Loans

Fixed Interest Rate

Adjustable Interest Rate*

Maturity

Grace
PeriodMaturity

Grace
PeriodPublic Housing

Within25

Within5Within25

Within5Social Welfare Facilities Construction Projects

20

3

20

3

General Projects

20

5

20

5

Regional Revitalization Projects

30

5

30

5

Disaster Prevention Projects

30

5

30

5

Local Road Construction Projects

20

5

20

5

Special Municipal Merger Projects

30

5

30

5

−

−

30

3

Cities, Towns, and Villages

−

−

20

3

Water Supply

30

5

30

5

Transportation

30

5

30

5

Hospitals

30

5

30

5

Sewerage

30

5

30

5

Industrial Water
Supply

30

5

30

5

Electricity Supply

30

5

30

5

Gas Supply

25

5

25

5

Port Facilities

20

5

30

5

Markets

25

5

25

5

Slaughterhouses

20

5

20

5

GeneralProjects
without
State Subsidy

Prefectures
Extraordinary Financial
Countermeasures Funding

Municipal
Enterprise-Related
Loans

Government-Designated Cities*Reviewed every 10 years

20Japan Finance Organization for Municipalities Annual Report 2010

Operations

5. Credit Check System
JFM conducts necessary and appropriate credit scrutiny
for all loans as follows, on the assumption that the details,
legality, and probability of repayment of each project havebeen confirmed during the process of the consultation(1) Check of Local Governments /Municipal Enterprises Applying
for Loans●

Check ﬁnancial and operational status●

Conduct interviews

system for borrowing.
(1) Check the financial and operational status of local
governments and municipal enterprises to which JFM
plans to lend in light of the fiscal indicators stipulated(2) Check at time of Lending●

Verify consent (approval) for loan●

Check loan application documentsin the Law Relating to the Financial Soundness of Local
Governments, and also, if necessary, conduct interviews

Execution of Loan

with the staﬀ in charge at local governments.
(2) Review loan applications submitted by local governments
to determine if conditions such as consent (approval)(3) Subsequent Review

for the loan, resolution of the local assembly andappropriation in the budget are met.

Conduct on-site credit scrutiny(3) After loans are made, conduct on-site credit reviews toverify use of funds, operational status of projects, andﬁnancial and operational status of borrowers.

6. Interest Rate Reduction
Sources of funds to compensate for the interest rate diﬀerentials between special interest rates,
extra-special interest rates, and standard interest rates are investment income on the Fund for
Improvement of Operations of Municipalities, which is comprised of contributions of a portion of
the proceeds from municipally operated racing, and JFMʼs own funds.
Local governments that operate various races (horse racing, bicycle racing, motorcycle
racing, and speedboat racing), contribute a portion of earnings to the Fund for Improvementof Operations of Municipalities from the viewpoint of equal profit sharing among all
local governments.

Japan Finance Organization for Municipalities Annual Report 201021

7. Review of Lending Operations(1) Trends in Lending Operations
In fiscal 2009, we extended long-term loans in the amount of ¥1,290.7 billion (US$13.8 billion),
which is the total amount of loans made by JFM. As of March 31, 2010, the outstanding loanbalance was ¥22,030.2 billion (US$235.4 billion).
As of March 31, 2010, the number of local governments which have borrowed from JFM
totaled 2,027, including all prefectures. Cities and special wards of Tokyo had the highest balanceof ¥15,546.7 billion (US$166.1 billion) and accounted for 71% of the total outstanding loan balance.
Next came prefectures with a balance of ¥4,076.8 billion (US$43.6 billion) or 18% of the total.
Finally, towns, villages, local government associations and others had a balance of ¥2,406.7 billion(US$25.7 billion) and accounted for 11% of the total balance.
(unit: ¥ billion)
Loan Amount

Trends in Loans Made

2,500

Outstanding Loan Balance
by Type of Borrower

Loan Amount (Long-term loans)(As of March 31, 2010)(excluding entrusted loans)
Note: Figures in parentheses
are numbers of borrowers.

2,000

1,500

Local Government
Associations

1,000¥627.8 billion
（207）

500

Towns and Villages

Number of Loans
0

FY 1957

62(unit: ¥ billion)

67¥1,620.0 billion
72

77

82

87

92

97 2002 07

08

09¥ 158.9 billion（38）
Prefectures¥ 4,076.8 billion
（47）

（933）

Total
¥22,030.2 brillion（2,027）

Trends in Outstanding Loan Balance

25,000Local Government
Corporations

20,00015,000

Cities and Special Wards of Tokyo¥15,546.7 billion（802）10,000

5,000

0

22

FY 1957

62

67

72

77

82

87

Japan Finance Organization for Municipalities Annual Report 201092

97 2002 07

08

09

Operations(2) Trends in Lending Operations by Project Type
Looking at JFM's past lending operations by project category, Water Supply, Electricity Supply and Port
Facilities Projects were the primary recipients of loans during the mid-ʻ50s to mid-ʻ60s. The recipients
shifted to Water Supply, Regional Development and Sewerage Projects in the mid-ʻ60s to mid-ʻ70s, andfrom the mid-ʻ70s to the mid-ʻ80s, the major recipients were Sewerage, Water Supply and three typesof Special Projects. Recently, Sewerage and three types of Special Projects accounted for a high share of
the total.
The General Account-Related Projects and Extraordinary Financial Countermeasures Funding became
eligible for funding in ﬁscal 2009, which has signiﬁcantly changed the breakdown by project.
As of March 31, 2010, the outstanding loan balance was ¥22,030.2 billion (US$235.4 billion), andsewerage projects accounted for the largest share at 41.4% , followed by three types of Special Projects
at 21.1% , and Water Supply at 19.2% of the total.

Outstanding Loan Balance by Project Type(As of March 31, 2010)(excluding entrusted loans)
Extraordinary Financial
Countermeasures
Funding
2%（448.8）

Note: Figures in parentheses areoutstanding loan balancesin billions of yen（674.4）
Others 3%
Water Supply
19%（4,236.3）

Three Special
Projects
21%（4,648.2）
PublicHousingIndustrial
Water Supply
1%（262.2）
Total¥22,030.2 billion

3%（616.9）Hospitals
3%（561.2）

Transportation
Sewerage
41%（9,119.2）

7%（1,463.0）

Japan Finance Organization for Municipalities Annual Report 201023

Trends in Long-Term Loans Made by Project Type (excluding entrusted loans)

1957
1962

33％

7.1

5％

7％

9

32

24.2

Port
Electricity Supply Gas Supply Facilities Hospitals

Transportation

Industrial Water Supply

Water Supply

FY (unit: ¥ billion)

4％

31％

3

7％

Residential Land
15

21

Others9％4％

Sewerage668Regional Development
1967

9

43

67.7

6

3

1972
1977

7

43

179.6

5

49

583.2

3

3

23

4

9

Toll Roads

Markets
3

5

18

Transportation
8
2

11

10
Public Housing
6
6

24

Three Special Projects
231982 1,185.9
1987 1,066.6

3

19

6

3

27

7

10

36

5

25

6

23

7

Gas Supply

1992 1,206.8

181997 2,153.2

17

2
1

7
6

1

40

1

6

29

19

5

7

35

6

Hospitals

2002 1,733.0

1412007 1,126.3

14

1

6

5

2008 1,108.8

14

1

5

6

2009 1,290.7

12

4

9

4

1

7

36

3

39

2

41
General Account-Related Projects
32

2
12

23
16

17

13

18

Extraordinary Financial Countermeasures Funding
35
1

Notes: 1. Pre-consent (approval) loans are accounted for in the year when they are converted into long-term loans.
2. Others include refinancing for Municipal Enterprise-Related Projects.
3. Figures may not add up exactly due to rounding off.
4. General Account-Related Projects include Public Housing and Three Special Projects

24Japan Finance Organization for Municipalities Annual Report 2010

6

Operations

8. Lending Operations for Fiscal 2009
(1) Results of Lending Operations
In ﬁscal 2009, we made loans in the total amount of ¥1,290.7 billion (US$13,789.1 million). The loans
for Extraordinary Financial Countermeasures Funding were ¥448.8 billion (US$4,794.8 million) andaccounted for 34.8% of the total.
Next came loans for Sewerage Projects in the amount of ¥406.6 billion (US$4,344.1 million) and a
31.5% share of the total. In addition, loans for ¥158.3 billion (US$1,690.8 million), which accounted for
12.3% of the total, were made for General Account Projects, primarily local road construction.

(2) Lending Operations by Project Type
[Public Housing Projects]
Public housing constructed and managed by local
governments totaled approximately 2.18 million units
at ﬁscal 2008 year-end. The total amount of loans forthese projects was ¥16.4 billion (US$175.0 million) inﬁscal 2009.
City Housing Karo Estate (Tottori City)[General Projects]
General Projects represent those stipulated as
eligible under Article 5 of the Local Finance Law
and, at the same time, not covered under otherspecific projects in the Local Government Bond/
Loan Program. The projects which were previously
eligible for our loans, including improvement ofrivers and other waterways (small and medium-sized
river improvement) and high school construction(reconstruction of old high school buildings) are now

Aomori Higashi High School (Aomori Prefecture)classiﬁed as General Projects in the Local Government
Bond/Loan Program as of fiscal 2009. Loans for
General Projects amounted to ¥15.3 billion (US$163.5
million) in ﬁscal 2009.
Note: The number of projects for each type of project is for ﬁscal 2008. The pictures are examples of existing
loan projects and may not represent projects for which loans were made in ﬁscal 2009.
Japan Finance Organization for Municipalities Annual Report 201025

[Regional Revitalization Projects]
Regional Revitalization Projects represent basic infrastructure development projects conductedby local governments for regional revitalization. Loans for these projects amounted to ¥64 million(US$0.7 million) in ﬁscal 2009.

[Disaster Prevention Projects]
Disaster Prevention Projects represent those implemented by local governments to promotecreation of safe communities that are well prepared for natural disasters. Loans for these projects
amounted to ¥97 million (US$1.0 million) in ﬁscal 2009.

[Special Municipal Merger Projects]
These projec ts represent projec ts based on amunicipal construction plan and implemented by
local governments that merged, and transportation
infrastructure projects for merged local governments
conducted by prefectural governments and deemednecessary due to the merger of the municipalities,
with such mergers serving as the vision for the
prefecture. Loans for these projects amounted to

Municipal Road 32-1 ( Ide Town, Kyoto Prefecture)¥11.4 billion (US$122.2 million) in ﬁscal 2009.

[Local Road Construction Projects]
These are projects carried out independently by local governments to build prefectural roads,
municipal roads, farm roads, and forest roads. Former local road construction projects (constructionof local roads as community roads) that were eligible for our loans have been reclassiﬁed as new
local road construction projects in the ﬁscal 2009 Local Government Bond/Loan Program. Loansfor these projects amounted to ¥115.0 billion (US$1,228.4 million) in ﬁscal 2009.

[Extraordinary Financial Countermeasures Funding]This represents the fund-raising by local governments to cover shortfalls in the local allocation tax
pursuant to the provisions of the Local Finance Law. Loans for these projects amounted to ¥448.8
billion (US$4,794.8 million) in ﬁscal 2009.

26

Japan Finance Organization for Municipalities Annual Report 2010

Operations[Water Supply Projects]
Water Supply (including small-scale water supply) Projects managed by local governments
totaled 2,244, and provided about 18.9 billion cubic meters of water annually for approximately
124.82 million people.
The total amount of loans that we made for these projects was ¥155.1 billion (US$1,657.5
million) in ﬁscal 2009.
(unit: ¥ billion)
Loan Amount
400
350
Loan Amount
300
250
200
150
100
50
Oigawa Wide Area Waterworks Association(Shizuoka Prefecture)

Numberof Loans

0
FY 1957 62

67

72

77

82

87

92

97 2002 07

08

09[Transportation Projects]
Transportation Projects managed by local governments totaled 101, which were operated by 83
entities and used annually by about 4 billion people in total (11.12 million people on an average daily
basis). The number of passengers who used publicly managed transportation systems accounted
for 24.9 % of the total bus services and 72.5 % of the total subway services on an annual basis.
The total amount of loans for these projects was ¥51.1 billion (US$546.4 million) in ﬁscal 2009.
(unit: ¥ billion)
Loan Amount150
High-speed railways

Number of Loans
300

General transportation
200

100
Loan Amount

100

50
Number of Loans
City Loop Line Tramway (Toyama City)0
FY 1957 62

67

72

77

82

87

92

97 2002 07

08

09

Japan Finance Organization for Municipalities Annual Report 201027

[Hospital Projects]
Hospital Projects managed by local governments
totaled 665 with 936 hospitals which included 891
general hospitals, 1 tuberculosis hospital and 44
mental hospitals.
The total amount of loans for these projects was¥53.3 billion (US$569.4 million) in ﬁscal 2009.

Mie Prefectural Mental Medical Center(Mie Prefecture)[Sewerage Projects]
Sewerage Projects managed by local governments totaled 3,687, serving areas with a populationof 98.15 million, or 75.9 % of the total population at the end of ﬁscal 2008.
The total amount of loans for these projects was 406.6 billion (US$4,344.1 million) in fiscal
2009, or 30 % of long-term loans.
(unit: ¥ billion)
Loan Amount
800
700
600
500

Loan Amount

400
300
200
100

Shimizu Area Rural Community Sewerage(Ibigawa Town, Gifu Prefecture)

28

Japan Finance Organization for Municipalities Annual Report 2010

Numberof Loans

0
FY 1957 62

67

72

77

82

87

92

97 2002 07

08

09

Operations[Industrial Water Supply Projects]
Industrial Water Supply Projects managed by local governments totaled 151 with 260 facilities thatprovided approximately 4.7 billion cubic meters of water annually for 6,150 factories and other facilities.
The total amount of loans for these projects was ¥7.7 billion (US$82.3 million) in ﬁscal 2009.
(unit: ¥ billion)
Loan Amount
40
Loan Amount20

Numberof Loans

Ikuta Water Puriﬁcation Plant (Kawasaki City)0
FY 1957

62

67

72

77

82

87

92

97 2002 07

08

09[Electricity Supply and Gas Supply Projects]
Ele c tricit y Supply Proje c t s manage d by l o c al
governments totaled 70 with 388 power plants, which
had a maximum power output of 3.19 million kW andgenerated 10.7 billion kWh annually. The 34 Gas Supply
Projects managed by local governments provided 38.5
billion MJ of gas for 0.94 million households annually.
The total amount of loans for these projects was¥1.7 billion (US$18.6 million) in ﬁscal 2009.
Jinemon-yosui Power Generating Station(Toyama Prefecture)

Japan Finance Organization for Municipalities Annual Report 201029

[Port Facilities Projects]
Port Facilities Projects managed by local governments
totaled 104, which included reclamation, cargohandling machines, sheds, warehouses, lumberyards,
tugboats, etc.
The total amount of loans for these projects was¥4.1 billion (US$43.7 million) in ﬁscal 2009.
Gantry Cranes at Fukuoka Island-City Container
Terminal (Fukuoka City)[Elderly Care Services Projects]
Elderly Care Services Projects managed by local
governments totaled 621. Loans were made forconstruction of day-care centers, intensive carenursing homes and other facilities for the elderly,
and also for machines and equipment required atthose facilities.
The total amount of loans for these projects was¥0.2 billion (US$2.1 million) in ﬁscal 2009.
Mutagawaraguchi Welfare Facility “Otozure”(Hagi City)

30

Japan Finance Organization for Municipalities Annual Report 2010

Operations[Market Projects]
Market Projects managed by local governments
totaled 176, which handled 7.93 million tons ofvegetables, 2.83 million tons of fruit, 4.31 million tonsof seafood, and 0.81 million tons of meat and otherproducts. These projects contributed to modernizationof the distribution system of daily commodities.
The total amount of loans for these projects was¥1.6 billion (US$16.9 million) in ﬁscal 2009.

Central Wholesale Market (Morioka City)[Slaughterhouse Projects]
Slaughterhouse Projects managed by local governments
totaled 74, which processed 4.11 million heads of cattle
and other animals in ﬁscal 2008.
The total amount of loans for these projects was¥59 million (US$0.6 million) in ﬁscal 2009.

Meat Trading Center (Kanazawa City)

Japan Finance Organization for Municipalities Annual Report 201031

[Tourism Facilities Projects (including industrial waste
processing projects)]
To urism Fa cilities Proje c t s manage d by l o c al
governments totaled 390 including 152 recreation
and accommodation facilities, 62 ropeways, and 176
other facilities (hot springs, castles, museums, zoos,
botanical gardens, etc.).
The total amount of loans for these projects was¥423 million (US$4.5 million) in ﬁscal 2009.

Asahiyama Zoo (Asahikawa City)[Parking Facilities Projects]
Parking Facilities Projects managed by local governments
totaled 233 with 681 facilities, which had a total
capacity of approximately 123,000 vehicles, serving an
average of about 175,000 cars per day.
The total amount of loans for these projects was¥1.6 billion (US$17.2 million) in ﬁscal 2009.

Underground Parking Lot at Kawaguchi
Station (Kawaguchi City)

32

Japan Finance Organization for Municipalities Annual Report 2010

Operations

9. Review of Entrusted Loans for Fiscal 2009
JFM makes loans for Public Forest Improvement Projects and Grasslands Development Projects,
which are entrusted to us by the Japan Finance Corporation.
The total amount of entrusted loans made in ﬁscal 2009 was ¥3,452 million (US$36.9 million),including ¥3,294 million (US$35.2 million) for Public Forest Improvement Projects and ¥158 million(US$1.7 million) for Grasslands Development Projects.
Public Forest Improvement
Projects

Grasslands Development
Projects

Number ofloans

AmountNumber ofloans

AmountNumber ofloans

AmountComponent
ratio

Numberof LoansMillionsof YenNumberof LoansMillionsof YenNumberof LoansMillionsof Yen%Prefectures

64

2,215

3

40

67

2,255

65.3

Cities

103

725

1

52

104

777

22.5

70

353

7

67

77

420

12.2

237

3,294

11

158

248

3,452

100.0

Category

Towns andvillages
Associations
and others
Total

Total

Note: Figures may not add up exactly due to rounding oﬀ.

The amounts of loans for 25,818 Public Forest Improvement Projects and 1,586 Grasslands
Development Projects were 337,219 million (US$3,602.8 million) and 22,301 million (US$238.3
million), respectively.

Japan Finance Organization for Municipalities Annual Report 201033

10. Plan of Lending Operations for Fiscal 2010
The fiscal 2010 Local Governments Loan/Bond Program was established to make provisions
addressing the shortfall in local revenue sources as local finances remained extremely tight, andensure the necessary local funding so that local governments could proactively revitalize local
communities and systematically construct basic infrastructure.
As a result, the ﬁscal 2010 Local Governments Bond/Loan Program amounted to ¥15,897.6 billion(US$169.8 billion) (12.1% or ¥1,713.2 billion (US$18.3 billion) increase compared to the loans made inﬁscal 2009), and included JFM loans for ¥2,159 billion (US$23.1 billion).
Based on the fiscal 2010 Local Governments Bond/Loan Program, JFM plans to make generalloans in the total amount of ¥1,933.1 billion (US$20.7 billion) in fiscal 2010. This includes loansfor ¥394.6 billion (US$4.2 billion) for General Account-Related Projects, ¥788.7 billion (US$8.4 billion)
for Extraordinary Financial Countermeasures Funding, ¥719.8 billion (US$7.7 billion) for MunicipalEnterprise-Related Projects, and ¥30 billion (US$0.3 billion) for Reﬁnancing for Municipal EnterpriseRelated Projects.
Additionally, JFM plans to make entrusted loans in the amount of ¥3 billion (US$32.1 million).

11. Prepayment Without Penalty
In a provision lasting from ﬁscal 2007 to ﬁscal 2009, the national government took measures to reduce
local governmentsʼ debt service burdens in the amount of ¥5 trillion (US$53.4 billion), of which theformer JFM implemented measures in the amount of about ¥1,270 billion (US$13.6 billion) over thetwo years from ﬁscal 2007 to ﬁscal 2008. However, in light of the severe stagnation of local economies,
the government has decided to extend this provision by three years as part of its fiscal 2010 local
government ﬁnance measures.
This measure will allow local governments that establish fiscal reform plans and public
enterprise management reform plan and carry out thorough administrative reform andmanagement reforms to make prepayments without compensation on ¥1.1 trillion (US$11.8 billion)
in public funds (loans made by the former Trust Fund Bureau, former Postal Life Insurance, andformer JFM) for a three-year period from ﬁscal 2010. This is intended to reduce the burden of debt
servicing costs on local government debts, which carry high interest rates.
JFM will accept prepayment without penalty on a total of ¥320 billion (US$3.4 billion) or lessin loans (including refinancing) over the three-year period from fiscal 2010 through fiscal 2012 forlocal governments endorsed by the government for their decision to take measures to reduce debt
servicing costs and implementation of administrative reforms and management reforms. In ﬁscal 2010,
JFM will allow prepayment without penalty on about ¥100 billion (US$1.1 billion) in loans (of which¥30 billion (US$0.3 billion) yen in loans for reﬁnancing for Municipal Enterprise-Related Projects).
34

Japan Finance Organization for Municipalities Annual Report 2010

Operations
Operations

Local Government Support Operations

JFM will provide support for local governments to enable them to respond appropriately to thechanging environment and thereby to eﬃciently raise funds in the capital market.
In preparation for the full implementation of the support operations, JFM will establish a local
government support network in conjunction with concerned parties to fulﬁll its function as a hub ofcommunication of various information, and also enhance its resources for these operations, which
includes the addition of experts from the private sector.
Specifically, JFM will carry out studies and research on local governmentsʼ fund-raising, and will
oﬀer information of the results as part of its “Research and Study, and Information Service,” as well as
provide basic knowledge on local administration and budgets, finance, economics and accounting.
In addition, JFM will oﬀer “Knowledge Development Training for Local Government Staﬀ,” which has
been expanded to include skills and expertise for fund-raising operations , and “Administrative Support
for Fund-Raising,” which supports local government staﬀ in raising funds in collaboration with relatedgroups.

Capital Markets,
Investors

Universities, Researchers,
Think Tanks
Collaboration /Cooperation

Information

JFM
・All “information” on local governments fund-raising
・“Personnel” with expertise in the system and administration of local governments fund-raising
・“Know-how” of administration of local governmentsʼ
fund-raising
Collaboration /Cooperation

Information

Support［information service,training for staﬀ,］

administrative support

National Government,
Related Organizations

Local Governments

Japan Finance Organization for Municipalities Annual Report 201035

Operations

Fund-Raising Operations

As a joint fund-raising organization for local governments, JFM raises funds in a stable manner toprovide local governments with low-interest and stable funds, while endeavoring to reduce thecost of funds.

1. Type of JFM Bonds
Basically, JFM issues public offering bonds without government guarantee to raise funds forlending operations. Private placements which are underwritten by the Pension Fund Association
for Local Government Oﬃcials are also used for lending operations.
JFM issues government-guaranteed bonds as well to reﬁnance the former JFM bonds and also tosmoothly manage the former JFMʼs assets that JFM has succeeded to.

Funds

Market

JFM
Issuance of public oﬀering bonds
without government guarantee andprivate placement bonds●Issuance of government-guaranteedbonds to reﬁnance existing
government-guaranteed bonds ofthe former JFM●

36

Japan Finance Organization for Municipalities Annual Report 2010

Operations

2. Basic Stance on Issuance of JFM Bonds
The basic policy for the issuance of bonds is to raise funds in a stable manner, maintaining the solid
conﬁdence of the capital market by proactively disclosing information and thoroughly fulﬁlling
accountability. JFM also endeavors to issue bonds in a timely and ﬂexible manner, responding tomarket conditions and investor needs.
(1) Diversiﬁcation of Fund-Raising Methods
From the viewpoint of stable fund-raising, JFM primarily issues 10-year bonds, and alsoendeavors to issue bonds flexibly with various terms and structures including mediumterm and extra-long-term bonds in response to market conditions and investor needsin order to expand the investor base, while also considering risk management and fundraising costs.
When issuing bonds, JFM endeavors to ensure continuous investor demand throughthe monthly issuance of 10-year bonds in particular, and also issues bonds in a timely andﬂexible manner to meet market needs arising from time to time by utilizing the Flexible
Issuance Program (FLIP).
JFM endeavors to issue bonds in a variety of markets to reduce the cost of fund-raising,closely monitoring conditions of domestic and overseas markets.
For reference: Flexible Issuance Program
JFMʼs own program to issue domestic bonds quickly and ﬂexibly in accordance with investor needs○ Bond maturity: 3 years to 29 years (excluding 5, 10, 20 years, maturities of benchmark bonds)○ Minimum issue amount: ¥3 billion○ JFM will decide quickly whether to issue or not based on the proposal of the nominated dealers(2) Comprehensive Disclosure of Information
From the viewpoint of investor protection, JFM timely discloses information on its
operations, ﬁnancial conditions, and risk management status.
Furthermore, JFM promotes investor relations activities, including meetings with andvisits to investors, in order to help investors correctly understand JFMʼs management andcredit standing, and to secure solid conﬁdence in JFM. JFM also publishes a bond issuanceplan every six months to help investors plan for investment.
(3) Contribution to the Sound Development of Capital Markets
While raising funds in a timely and ﬂexible manner in response to the needs of the capital
market, and maintaining the basic policy of attaching great importance to the capital
market, JFM will further strengthen its role as a leading issuer in the market, and positively
contribute to the sound development of the capital market.

Japan Finance Organization for Municipalities Annual Report 201037

3. Characteristics of JFM Bonds
JFM bonds with the following features, are recognized as extremely high credit standing andstatus, so we call ”Super Local Government Bonds”.
• JFM is a public joint fund-raising organization established by Japan's all local governments.
• As no local government has gone into default, JFMʼs assets can be said to be highly stable.
• JFM has a sound financial foundation. Under the Japan Finance Organization for Municipalities Law, local
governments have the ultimate obligation to repay JFMʼs debts in the event of its dissolution, thus theredemption of JFM bonds is deemed assured.

JFM has received the highest grade credit rating among the Japanese public sector bond issuers
from Standard and Poorʼs (S&P), Moodyʼs Investors Service (Moodyʼs), and Rating and Investment
Information, Inc. (R&I). Furthermore, the risk weight for JFM is in the 10% category.
In addition to JGBs and local government bonds, interest received by foreign investors on
JFM's domestic bonds in book-entry form shall be exempted from Japanese income tax on thefollowing conditions, subject to certain procedural requirements.
Notes:1. Qualiﬁed bonds for tax exemption :JFM bonds* in book-entry form issued in the domestic market on or before March 31,2013* JFM bonds include bonds issued by the former JFM
2. Applicable periods :This tax exemption rule shall apply to the interest which calculation periods starting on or after June 1, 2010,
and the proﬁt from redemption of the bonds acquired on or after June 1, 2010

As of March 31, 2010

S&P：AA
Issuer Rating

Moodyʼs：Aa2
R&I：AAABIS Risk Weight

Rank

38

Non-guaranteed Bonds: 10%(For reference)
Government Guaranteed Bonds : 0%
Government Bonds : 0%
Local Government Bonds : 0%

A holder of the JFM Bonds shall have the right to receive repayment of his or her
claim with respect to the property of JFM in preference to other creditors.
The preferential right speciﬁed in the immediately preceding paragraphshall rank next to after the general preferential rights under the provisions of the
Civil Code. (Article 40 Japan Finance Organization for Municipalities Law)

Japan Finance Organization for Municipalities Annual Report 2010

Operations

4. Trends in Fund-Raising Operations
JFM issues government-guaranteed bonds and non-government guaranteed bonds.
Until fiscal 2000, the former JFM had issued government-guaranteed bonds and private
placement bonds.
As for public oﬀering bonds without government guarantee, the former JFM had issued FILP
Agency bonds since fiscal 2001, and JFM has issued JFM bonds since JFM began operations inﬁscal 2008.
In ﬁscal 2009, the total amount of bonds issued by JFM was ¥1,944.9 billion (US$20.8 billion).

(unit: ¥ billion)
3,000

26,784
2,678.4
2,500
23,0792,307.9

22,8572,285.7
2,150.8
21,5082,066.5
20,665

20,563
2,056.3
2,000

1,944.9
19,4491,818.7
18,187
16,733
1,673.3

16,384
1,638.4
1,555.3
15,553
1,455.6
14,556
1,397.5
13,975

1,500

1,000
Foreign bonds withgovernment guarantee
Domestic bonds withgovernment guarantee
Privateplacement bonds

500

Public oﬀering
bonds without
government guarantee
0

FY 1991

94

97

2000

01

02

03

04

05

06

07

08

09

Japan Finance Organization for Municipalities Annual Report 201039

5. Fund-Raising Operations for Fiscal 2009
In ﬁscal 2009, the amount of public oﬀering bonds without guarantee totaled 721 billion (US$7,703.0
million) (face value), of which ¥305 billion (US$3,258.5 million) were 10-year bonds, ¥230 billion(US$2,457.3 million) were 20-year bonds, and ¥186 billion (US$1,987.2 million) were FLIP. JFM also
issued ¥400 billion (US$4,273.5 million) in 10-year private placement bonds which are underwritten by
the Pension Fund Association for Local Government Oﬃcials.
In addition, JFM issued ¥823.9 billion (US$8,802.5 million) in government-guaranteed bonds toreﬁnance the former JFM bonds with government guarantee.
As a result, the outstanding loan balance of JFM bonds amounted to ¥18,554.9 billion (US$198.2
billion), including the former JFMʼs bonds to which JFM has succeeded, as of March 31, 2010.

Domestic bonds withgovernment guarantee

Private placement bonds¥823.9 billion¥400 billion

10-year bonds

FLIP

10-year bonds¥186 billion
20-year bonds¥230 billion
10-year bonds¥305 billion

JFM public oﬀering bonds
without government guarantee¥721 billion

40

Japan Finance Organization for Municipalities Annual Report 2010

Operations

Oﬀering yields of JFMʼs 10-year non-guaranteed public oﬀering bonds
（％）
1.700

（bp）
35.0

1.600

30.0

1.500

25.0

1.400

20.0

1.300

15.0

1.200

10.0

1.100

5.0

1.000
Spread Over JGBS (bp)

April

May

June

July August September October November December January February March

20.0

15.0

13.0

11.0

10.0

10.0

9.0

8.5

11.0

11.0

9.0

0.0

10.0

JFM Public oﬀering
bonds without govern- 1.650 1.593 1.648 1.406 1.573 1.457 1.395 1.518 1.362 1.453 1.476 1.424
ment guarantee (%)
JGBs (%)

1.353 1.451 1.534 1.357 1.452 1.329 1.257 1.441 1.246 1.339 1.348 1.329

Japan Finance Organization for Municipalities Annual Report 201041

■ Bonds Issued by Former JFM
Type of Bond

Maturity

SeriesIssue Amount(unit: ¥ billion)

Public offering
bonds without
government
guarantee

10 years

3rd

30

1.650

100.0021.4.28

10 years

4th

30

1.593

100.0021.5.28

20 years

2nd

35

2.290

100.0021.4.30

Type of Bond

Maturity

SeriesIssue Amount(unit: ¥ billion)

Privateplacementbonds

10 years

A-1st

60

1.73

100.0021.4.30

10 years

A-2nd

60

1.69

100.0021.5.26

Type of Bond

Maturity

SeriesIssue Amount(unit: ¥ billion)

Domestic bonds
with government
guarantee

10 years

7th

70

1.4

99.65

21.4.15

10 years

8th

70

1.5

100.0021.5.25

Maturity

SeriesIssue Amount(unit: ¥ billion)

10 years

1st

25

1.648

100.0021.6.18

10 years

2nd

25

1.406

100.0021.7.21

10 years

3rd

25

1.573

100.0021.8.20

10 years

4th

25

1.457

100.0021.9.17

10 years

5th

25

1.395

100.0021.10.22

10 years

6th

25

1.518

100.0021.11.24

10 years

7th

20

1.362

100.0021.12.17

10 years

8th

25

1.453

100.0022.1.22

10 years

9th

25

1.476

100.0022.2.19

10 years

10th

25

1.424

100.0022.3.18

20 years

1st

30

2.266

100.0021.6.25

20 years

2nd

35

2.266

100.0021.8.13

20 years

3rd

35

2.120

100.0021.10.16

20 years

4th

30

2.120

100.0021.12.10

20 years

5th

45

2.220

100.0022.1.22

20 years

6th

20

2.242

100.0022.3.18

8 years

F-1st

25

1.141

100.0021.7.2218 years

F-2nd

10

2.077

100.0021.7.23

16 years

F-3rd

10

1.993

100.0021.7.27

21 years

F-4th

5

2.200

100.0021.9.17

Coupon Rate (%) Issue Price (￥)Coupon Rate (%) Issue Price (￥)Coupon Rate (%) Issue Price (￥)Issue Date

Issue Date

Issue Date

■ Bonds Issued by JFM
Type of Bond

Public offering
bonds without
government
guarantee

42

Japan Finance Organization for Municipalities Annual Report 2010

Coupon Rate (%) Issue Price (￥)Issue DateOperations

Type of Bond

Public offering
bonds without
government
guarantee

Type of Bond

Privateplacement
bondsType of Bond

Domestic bonds
with government
guarantee

Maturity

SeriesIssue Amount(unit: ¥ billion)

17 years

F-5th

7

2.016

100.0021.9.30

19 years

F-6th

5

2.138

100.0021.9.25

7 years

F-7th

6

0.960

100.0021.10.27

26 years

F-8th

4

2.317

100.0021.10.29

27 years

F-9th

4

2.327

100.0021.10.29

28 years

F-10th4

2.332

100.0021.10.29

17 years

F-11th4

2.049

100.0021.10.29

12 years

F-12th3

1.682

100.0021.10.30

19 years

F-13th62.160

100.0021.10.30

19 years

F-14th72.186

100.0021.11.24

9 years

F-15th25

1.259

100.0021.12.3

17 years

F-16th10

2.042

100.0022.1.7

12 years

F-17th4

1.625

100.0022.1.29

8 years

F-18th26

1.139

100.0022.2.48 years

F-19th11

1.141

100.0022.3.26

9 years

F-20th101.280

100.0022.3.29

Maturity

SeriesIssue Amount(unit: ¥ billion)

10 years

A-1st

30

1.53

100.0021.7.31

10 years

A-2nd

30

1.48

100.0021.10.30

10 years

A-3rd

40

1.44

100.0021.11.30

10 years

A-4th

60

1.45

100.0022.1.29

10 years

A-5th

60

1.45

100.0022.2.26

10 years

A-6th

60

1.42

100.0022.3.23

Maturity

SeriesIssue Amount(unit: ¥ billion)

10 years

1st

70

1.5

99.25

21.6.15

10 years

2nd

70

1.4

99.90

21.7.15

10 years

3rd

70

1.5

99.90

21.8.17

10 years

4th

70

1.3

99.35

21.9.14

10 years

5th

70

1.2

99.15

21.10.20

10 years

6th

70

1.4

99.15

21.11.18

10 years

7th

70

1.2

99.35

21.12.14

10 years

8th

70

1.3

99.25

22.1.20

10 years

9th

60

1.4

100.0022.2.16

10 years

10th

63.91

1.3

99.40

22.3.15

Coupon Rate (%) Issue Price (￥)Coupon Rate (%) Issue Price (￥)Coupon Rate (%) Issue Price (￥)Issue Date

Issue Date

Issue Date

Japan Finance Organization for Municipalities Annual Report 201043

6. Plan of Fund-Raising Operations for Fiscal 2010
For fiscal 2010, JFM plans to issue public offering bonds without government guarantee in theamount of ¥900 billion (US$9,615.4 million): ¥360 billion of 10-year bonds; ¥240 billion of 20year bonds; ¥200 billion of FLIP bonds and ¥100 billion of other bonds (including 5-year bonds).
Additionally, private placement bonds (10-year maturity) will be issued in the amount of ¥400
billion (US$4,273.5 million).
JFM issues government-guaranteed bonds to reﬁnance the existing bonds with government
guarantee to smoothly manage the former JFMʼs assets which JFM has succeeded to. For fiscal
2010, JFM plans to issue government-guaranteed bonds in the amount of ¥750 billion (US$8,012.8
million), consisting of ¥650 billion (US$6,944.4 million) in domestic bonds and ¥100 billion (US$1,068.4 million) in international bonds.

44

Japan Finance Organization for Municipalities Annual Report 2010

Internal Management System

Internal Management
SystemRisk Management
1. Overall Risk management(1) Integrated Risk Management andRisk Management System ・・・・・・・・・・・・・・・・・・・・・46(2) Characteristics of JFMʼs Risks and Interest Rate
Risk Management ・・・・・・・・・・・・・・・・・・・・・・・・・・・・46
2. Individual Risk Management(1) Credit Risk ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 47(2) Market Risk ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 49(3) Liquidity Risk ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 51(4) Operational Risk ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 52
Internal Control over Financial Reporting ・・・・・・・・・・・・・ 53
Internal Audits ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 54
Compliance ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 55
Disclosure ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 56

Japan Finance Organization for Municipalities Annual Report 201045

Internal Management System

Risk Management

1. Overall Risk Management(1) Integrated Risk Management and Risk Management System
In order to maintain a sound and good financial standing and earn the solid confidence ofcapital markets, JFM needs to appropriately 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 JFMʼsoverall risk management, and the Risk Management Oﬃce, which is independent of otherdepartments. The content of risk management can then be appropriately reflected inmanagement decisions.
Risk Management System
President and CEO

Integrated Risk
Management Committee

Senior Executive
Director in charge

ALM Committee

Risk Management
Oﬃce

Finance
Department

Loan
Department

Administration
Department(2) Characteristics of JFMʼs Risks and Interest Rate Risk Management
JFM raises funds by primarily issuing 10-year bonds, and makes loans with a maximum maturityof 30 years and with repayment of interest and principal in equal installments. Therefore, alarge maturity gap is created between lending and funding, 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 JFMʼs assets and liabilities in a timely andappropriate 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 a variety of methods, suchas issuing super-long-term bonds and utilizing interest rate swaps.

46

Japan Finance Organization for Municipalities Annual Report 2010

Internal Management System

2. Individual Risk Management(1) Credit Risk
Credit risk is the risk of loss arising from a credit event, such as deterioration in the ﬁnancial
condition of a borrower, that causes an asset to lose value or become worthless. In addition tocredit 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 havenever experienced any loan losses.
• The national government includes local government debt servicing costs in the expenditure of the
Local Government Finance Program, and secures the total amount of local allocation tax whichbalances local governmentsʼ total expenditures including debt servicing costs and total revenue.
Thus, the national government eﬀectively secures revenue sources for principal and interest payments
for local governments. The national government also secures revenue sources for debt service forindividual local governments by including a portion of local government debt servicing costs in theStandard Financial Needs when calculating local allocation tax.
• Under the consultation system for local government bonds and loans, credit reviews must include
checks on situations of local government debt servicing, and tax revenue and necessary revenue
sources to be secured. Additionally, under the Early Warning System, the local governments whosedebt 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 inJune 2007, local governments whose ﬁscal indicators exceed the early warning limits must make theirown eﬀorts toward achieving ﬁscal soundness, and local governments whose ﬁscal indicators exceed
the reconstruction limits must take necessary actions to restore their ﬁnances under the oversight of
the national government with regard to redemption of local government bonds and loans, and otheroperations.

(Loans assets)
As of March 31, 2010, JFM's total outstanding loans stood at ¥22,030.2 billion (US$235.4 billion). The
amount of outstanding loans made to local government road corporations by the former JFM was¥158.9 billion (US$1,697.6 billion) which accounted for approximately 0.7% of the total loans.
JFM is not subject to the "Banking Law" or the "Financial Reconstruction Law," but performs selfassessment of loans made by the former JFM to local government road corporations in accordancewith the "Financial Inspection Manual" of the Financial Services Agency (FSA). All of these loans
have been processed as unclassiﬁed assets based on the self-assessment.
The amount of loans made to local governments whose fiscal indicators exceeded the early
warning limits or the reconstruction limits accounted for approximately 0.3% of the total loans.

Japan Finance Organization for Municipalities Annual Report 201047b). Credit risk associated with market transactions
JFM is exposed to the risk of loss arising from credit events, such as deterioration in thefinancial condition of a counterparty, which causes an asset to lose value or become
worthless. However, JFM appropriately manages credit risk of this type by constantly
monitoring counterparties' financial standing and limiting them to financial institutions
that meet the credit rating and other criteria. In addition, JFM enters into ISDA Master
Agreements with all derivatives counterparties CSA (Credit Support Annex) with major
financial institutions to reduce credit risk resulting from fluctuations in the value ofderivative transactions.

48

Japan Finance Organization for Municipalities Annual Report 2010

Internal Management System(2) Market Risk
Market risk is the risk of loss resulting from changes in the value of assets and liabilities due toﬂuctuations 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 price change 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 ininterest 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 these loans is raised mainly through issuance of 10-year bonds,
which creates interest rate risk associated with bond reﬁnance.
JFM takes the following measures to address the interest rate risk resulting from aduration gap between lending and fund-raising.
• JFM maintains necessary reserves for interest rate volatility to cope with the interest rate risk
resulting from a duration gap between lending and fund-raising. The amount of the above
reserves stood at ¥440 billion (US$4.7 billion) in the General account and ¥3,111 billion (US$33.2
billion) in the Management account for a total of ¥3,551 billion (US$37.9 billion) in both accounts at
the end of March 2010.
• As assets and liabilities in JFMʼs General account are expected to expand as a result of the loans
and fund-raising for local governments after JFM was established, JFM carries out an ALM analysisof this account in a timely and appropriate manner to further enhance the effectiveness of its
management of interest rate risk. JFM also endeavors to reduce its exposure to interest rate risk by
setting the following medium-term between ﬁscal 2009 through ﬁscal 2013 management target
by continuously issuing super-long bonds with maturities exceeding 10 years, and by utilizing
interest rate swaps. Since it had only been a year-and-a-half since JFM started its operation, both
assets and liabilities were low compared to the Management account, but the outlier ratio for theend of ﬁscal 2009 was 8.6% and the duration gap was 1.14 years, within the management target.
(1) Keep 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 interest rate shocks (an upwardand downward 200 bp parallel shift of the yield curve).）(2) Keep a duration gap below approximately 2 years.
• The Management account, which manages assets related to money loaned by the former JFM, iscurrently exposed to greater interest rate risk than the General account, but JFM contributes to therequired Reserves for Interest Rate Volatility as described above. The amount of the above reserves
stood at ¥3,111 billion (US$33.2 billion). But in the future, assets and liabilities will contract as time
passes since new loans have not been made after October 2008, and interest rate risk will decline.

Japan Finance Organization for Municipalities Annual Report 201049

(Reference)
Maturity ladder of loans and bonds (General account; as of March 31, 2010)(Billions of Yen)

General account

1,000
800
600
400
200
0
-200
-400

Bond coupon payment
Bond Principal Redemption
Loan Interest Receipt-600

Loan Principal Redemption-800

Gap between cash inflows
and outflows-1,0002010 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38(Year)

・Loan duration 11.63Years and bond duration 10.49Years and duration gap 1.14 Year (YoY change, minus 1.42 years)(Reference) Maturity ladder for loans and bonds (Management account; as of March 31, 2010)(Billions of Yen)

Management account

3,000

2,000

1,000

0
Bond coupon payment-1,000Bond Principal Redemption
Loan Interest Receipt-2,000Loan Principal Redemption
Gap between cash inflows
and outflows-3,0002010 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38(Year)

・Loan duration 7.21Years and bond duration 4.58Years and duration gap 2.63 Years (YoY change, minus 0.25 years)
JFM as a whole, as of March 31, 2010
・Loan duration 7.55Years and bond duration 4.99Years and duration gap 2.56 Years (YoY change, minus 0.39 years)

50

Japan Finance Organization for Municipalities Annual Report 2010

Internal Management System

JFM is also exposed to pipeline risk, whereby losses would be incurred or proﬁts decrease asa result of interest rate ﬂuctuations during the time from which JFM raises money throughbond 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 currencydenominated bonds, interest rate risk related to ﬂoating rate bonds, and risk of ﬂuctuationsin the amounts of principal and interest of inﬂation-indexed bonds.
JFMʼs investments of surplus funds are exposed to the risk of losses on the sale ofsecurities resulting from price declines and the risk of realized losses on foreign currencydenominated deposits resulting from ﬂuctuations in foreign exchange rates. Accordingly, inprinciple JFM minimizes the risk of price ﬂuctuation by holding investments until maturity,and hedges foreign exchange risk by using foreign exchange contracts.

(3) Liquidity Risk
Liquidity risk is the risk that JFM would incur losses because it finds it difficult to secure thenecessary funds or is forced to obtain funds at far higher interest rates than under normal
conditions due to a mismatch between the maturities of assets 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 otherdiﬃcult situations (market liquidity risk).
JFMʼs 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 iscarried 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, andinvests surplus funds only in short-term ﬁnancial products.

Japan Finance Organization for Municipalities Annual Report 201051

(4) Operational Risk
Operational risk is the risk of loss resulting from inadequate operation processes,
inadequate activities by management and staﬀ, and inadequate computer systems, or fromexternal events.
1) Administrative risk
Administrative risk is the risk of loss resulting from the neglect by management and staff
to properly conduct administrative work, accidents caused by them and violation of laws
conducted by them in the course of the administrative work process.
JFM endeavors to mitigate its exposure to administrative risk by preparing
operational manuals, holding educational seminars and reducing operational workload
through systematization.
2) Systems risk
Systems risk is the risk that the confidentiality, integrity and availability of information
assets will be impaired as a result of computer system inadequacies or the fraudulent use ofcomputer systems.
JFM has established and implemented the “Systems Risk Management Policy” and the“Systems Risk Management Standard” to appropriately manage systems risk and ensuresmooth business operations.
JFM has also prepared the “Contingency Plan” to minimize the scope of losses andthe impact on operations and restore normal operations promptly and efficiently in theevent that computer systems break down or cannot be used due to unexpected accidents,
disasters or malfunctions.
3) Other risks
In addition to the aforementioned risks, JFM appropriately identifies and addresses otherrisks, such as legal risk, personnel risk, physical asset risk and reputation risk.

52

Japan Finance Organization for Municipalities Annual Report 2010

Internal Management System

Pursuant to the “Ministerial Ordinance on Finance and Accounting of Japan Finance Organization

Internal Management System

Internal Control over Financial Reportingfor Municipalities” (Ordinance No.87 of the Ministry of Internal Affairs and Communications, 2008;
hereinafter, “Ordinance”), JFM is intended to establish the system of internal control over financial
reporting to ensure the reliability of its financial statements, and also intends to maintain andimplement this system appropriately. In accordance with the Ordinance, from fiscal 2009 JFM will
prepare the Internal Control Report whose base data is the end of the ﬁscal year. This report will be
audited by the external auditors and released together with ﬁnancial statements.
The system of internal control over ﬁnancial reporting will be established to further strengthen
JFMʼs organizational foundation. JFM will maintain and implement this system effectively andeﬃciently to ensure the reliability of ﬁnancial statements which summarize ﬁnancial information on
JFMʼs operations.
In the Auditorsʼ Report on Internal Controls, the accounting editors gave their opinion on the ﬁscal
2009 Internal Control Report̶the ﬁrst that JFM had prepared̶as follows: “We consider this reportto conform to the standards of evaluation for internal controls over financial reporting generally
recognized as fair and appropriate, and have determined that all of the important points in theevaluation of internal controls over ﬁnancial reporting have been appropriately presented” (unqualiﬁed
opinion pursuant to the Ministerial Ordinance No. 32, Article 4, Clause 1).

Japan Finance Organization for Municipalities Annual Report 201053

Internal Management System

Internal Audits

Internal audits are performed by the internal auditor, who is independent from other departments, divisions
and oﬃces, to examine and assess appropriateness and eﬀectiveness of the internal control systems of JFM.
Additionally, internal audits are intended to contribute to ensuring appropriate and eﬃcient operations, andare conducted according to the following procedure.

1. Internal audits are performed by the internal auditor.
2. The internal auditor examines and assesses the following items.
a. Are operations of each division or office conducted in accordance with laws, regulations
and manuals？
b. Are job execution systems eﬃcient？
c. Are risk management systems functioning appropriately and eﬃciently？
d. Are systems for managing, conveying and sharing information functioning eﬀectively？
3. The internal auditor reports the results of an internal audit to the president and CEO when it
is completed.
4. If deﬁciencies are identiﬁed by the internal auditor, the related divisions and oﬃces are required totake necessary corrective actions immediately.
The internal auditor submits to the president and CEO an internal audit report which includes
the status of corrective actions. The internal auditor also performs follow-up audits and reports
the results to the president and CEO.

54

Japan Finance Organization for Municipalities Annual Report 2010

Internal Management System
Internal Management System

Compliance

1. Basic Policy
JFM has prepared the “Compliance Rules” to ensure that operations are conducted in accordancewith laws and regulations, and to show what actions management and staﬀ should take when abreach of laws or regulations is identiﬁed. The rules include the basic policy on compliance, which
is given below.
(1) Management and staﬀ must be aware of JFMʼs social responsibility and public mission, and realizethat a breach of laws or regulations would cause a great hindrance to JFMʼs business operations,such as a loss in credibility of JFM as a whole. Management and staﬀ must also observe laws andregulations, and fulﬁll their duties with integrity and fairness.
(2) Management and staﬀ must strive to earn the conﬁdence of society by appropriately disclosing
information on JFMʼs operations.

2. Compliance System
Based on the Compliance Rules, JFM has established the Compliance Committee.
JFMʼs deputy president serves as the chairman of the committee, with senior executive
directors and department heads serving as committee members. The committee deliberates
on important compliance issues, such as preparation and review of the Compliance Rules, andpreparation of guiding principles and action plans of compliance.

3. Compliance Activities
JFM distributes to management and staﬀ the updated compliance manuals which include points
to note for compliance actions and related laws and regulations. JFM also gives seminars oncompliance and lends educational videos to divisions and oﬃces.

Japan Finance Organization for Municipalities Annual Report 201055

Internal Management System

Disclosure

Basic stance on information disclosure
From the viewpoint of investor protection, JFM strives to ensure the transparency of management of
JFM by disclosing information on its ﬁnancial conditions and other relevant information.

Information disclosed
Pursuant to the provisions of the JFM Law, JFM publishes ﬁnancial statements in an oﬃcial gazette, and also
opens the following materials to the public: ﬁnancial statements, business reports, statements of accounts
and other explanatory materials on business operations, and assets and liabilities (documents similar toﬁnancial reports).
Additionally, JFM discloses its budgets, business plans, funding plans, and medium-term plans on
income and expenditures.
Moreover, JFM discloses information on its own initiative on its home page, including business reports
for each ﬁscal year, bond issuance plans every six months, issuance terms for each bond, bond issuance forthe past ﬁve years, and rating information.

Disclosure materials
The material that JFM publishes in compliance with laws and discloses voluntarily is available on JFMʼshome page.
JFM also publishes pamphlets, disclosure booklet, and an annual report (in English).

http://www.jfm.go.jp/en/

56

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section

Financial Section
Financial Statements
Balance Sheets ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 58
Statements of Income ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 59
Appropriation of Profit[General Account/Management Account] ・・・・・・・・・・・・・・・60
Statements of Changes in Net Assets・・・・・・・・・・・・・・・・・・・・・・ 62
Statements of Cash Flows ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・64
Notes to Financial Statements ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 65
Report of Independent Auditors ・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 87
Supplementary Information
Internal Control Report ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・88
Classiﬁcation of Outstanding Loans as of March 31, 2010
under the Law Relating to the Financial Soundness ofLocal Governments ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 89
Results of Self-Assessment as of March 31, 2010 ・・・・・・・・・・・・90

Japan Finance Organization for Municipalities Annual Report 201057

Financial Section

Financial Statements■ Balance Sheets (As of March 31, 2009 and 2010)

Item

Fiscal 2008
(March 31,
2009)(Millions of Yen) (Thousands of US dollars)

Fiscal 2009
(March 31, 2010)

Item

Fiscal 2008
(March 31,
2009)

AmountAmountLiabilities

AssetsLoans (Note 4)

Fiscal 2009
(March 31, 2010)¥22,215,288 ¥22,030,227 $235,365,678 Bonds (Note 7 and 8)

Securities(Note 17)874,832

984,477

10,517,919 Other liabilities

Cash and bankdeposits

255,591

149,264

Other assets

20,051

17,159Tangiblegfi xedassets (Note 6)

3,010

2,948

for retirement
31,502 Reserve
benefi ts(Note 9 and 12)

Intangiblegfi xedassets (Note 6)

842

921

9,846 for directors and corporate¥18,978,163¥18,534,475 $198,017,900

19,756

17,726

189,383

1,594,703 Reserve for bonuses (Note 9)

47

43

462

for directors’ bonuses
183,328 Reserve(Note 9)

7

7

77

202

210

2,244

51

56

600

Fund for improvementpof operationsof municipalities

894,675

906,939

9,689,522

Basic fund for improvementpof
operations of municipalities(Note 11)892,875

901,4079,630,426

Additional fund for improvementpof
operations of municipalities(Note 11)

1,800

5,531

59,096

Reserve under special laws

3,423,622

3,664,927

39,155,205

Reserve for interest rate
volatility(Note 10)

220,000

440,000

4,700,855

Managementgaccount
reserve for interest rate
volatility(Note 10)

3,074,728

3,111,043 3 3,2 37,6 47

Reserve for interest rate
reduction

128,894

Reserve for retirement benefi ts
auditors(Note 9)

Total liabilities

23,316,529

113,883

1,216,703

23,124,384 247,055,393

Net Assets
Capital16,602

16,602

177,373

Retained earnings

1,295

5,834

62,337

General account surplus
reserve

1,295

5,834

62,337−(1,340)(14,318)

Management account surplus
reserve

35,19039,517422,191

Total net assets

53,08760,613

647,583

Valuation , translation
adjustments and others

Total assets

58¥23,369,616¥23,184,998 $247,702,976 Total liabilities and net assets

Japan Finance Organization for Municipalities Annual Report 2010

¥23,369,616 ¥23,184,998 $247,702,976

Financial Section■ Statements of Income(For the Years Ended March 31,2009 and 2010)

Item(Millions of Yen) (Thousands of US dollars)

Fiscal 2008
(August 1 , 2008 to
March 31, 2009)

Fiscal 2009
(April 1 , 2009 to March 31, 2010)

AmountAmountIncome¥291,330¥558,528$5,967,183

Interest income

291,288558,369

5,965,481

Fees and commissions

33

140

1,505

Other income

8

18

197

Expenses

160,632

308,357

3,294,422

Interest expenses

155,235

297,347

3,176,795

Fees and commissions

134

271

2,904

Other operating expenses

2,233

4,641

49,591

General and administrative expenses

1,203

2,365

25,269Other expenses

1,826

3,731

39,863

Transfer to fund for improvement ofoperations of municipalities(Note 11)

1,800

3,731

39,86326−−

Ordinary income

130,697

250,170

2,672,761

Special gains

307,872

235,0102,510,800

Reversal of Management account reserve forinterest rate volatility(Note 10)
Reversal of reserve for interest rate
reduction

300,000

220,000

2,350,427

7,872

15,010160,373

Special losses

418,14 4

476,315

5,088,837

OthersProvision for reserve for interest rate
volatility(Note 10)
Provision for Management account reservefor interest rate volatility(Note 10)−

220,000

2,350,427

118,14 4

256,315

2,738,410

Payment to national treasury (Note 10)300,000−−

Net income¥20,425¥8,866$94,724

Japan Finance Organization for Municipalities Annual Report 201059

■ Appropriation of Proﬁt [General Account](For the year ended March 31, 2009)(Millions of Yen)

1,295

Ⅰ Profi t to be appropriated

1,295

Net income
Accumulated deficit brought down−

Ⅱ Profi t appropriated1,295

Surplus reserve

1,295

Notes: 1. Proﬁt was appropriated at the end of this ﬁscal year in accordance with the provisions of Article 39, Section 1 of theJapan Finance Organization for Municipal Enterprises Law (Law No. 64, 2007).
2. Surplus reserve appropriated was posted as General account surplus reserve on the Balance Sheet.

■ Appropriation of Proﬁt [General Account](For the year ended March 31, 2010)(Millions of Yen)

4,539

Ⅰ Profi t to be appropriated

4,539

Net income
Accumulated deficit brought down−

Ⅱ Profi t appropriated4,539

Surplus reserve

4,539(Thousands of US dollars)

48,495Ⅰ Profi t to be appropriated48,495

Net income
Accumulated deficit brought down−

Ⅱ Profi t appropriatedSurplus reserve

48,49548,495

Notes: 1. Proﬁt was appropriated at the end of this ﬁscal year in accordance with the provisions of Article 39, Section 1 of theJapan Finance Organization for Municipalities Law (Law No. 64, 2007).
2. Surplus reserve appropriated was posted as General account surplus reserve on the Balance Sheet.

60

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section■ Appropriation of Proﬁt [Management Account](For the year ended March 31, 2009)(Millions of Yen)

19,129Ⅰ Profi t to be appropriated19,129Net income
Accumulated deficit brought down−

Ⅱ Profi t appropriated19,129Surplus reserve

19,129Notes: 1. Proﬁt was appropriated at the end of this ﬁscal year in accordance with the provisions of Article 13, Section 8 of the
supplementary provisions of the Japan Finance Organization for Municipal Enterprises Law (Law No.64, 2007).
2. Surplus reserve appropriated was posted as Management account surplus reserve on the Balance Sheet.

■ Appropriation of Proﬁt [Management Account](For the year ended March 31, 2010)(Millions of Yen)

4,326

Ⅰ Profi t to be appropriated

4,326

Net income
Accumulated deficit brought down−

Ⅱ Profi t appropriated

4,326

Surplus reserve

4,326(Thousands of US dollars)

46,229Ⅰ Profi t to be appropriated46,229Net income
Accumulated deficit brought down−

Ⅱ Profi t appropriatedSurplus reserve46,22946,229Notes: 1. Proﬁt was appropriated at the end of this ﬁscal year in accordance with the provisions of Article 13, Section 8 of the
supplementary provisions of the Japan Finance Organization for Municipal Law (Law No.64, 2007).
2. Surplus reserve appropriated was posted as Management account surplus reserve on the Balance Sheet.

Japan Finance Organization for Municipalities Annual Report 201061

■ Statements of Changes in Net Assets(From August 1, 2008 through March 31, 2009)(Millions of Yen)

Stockholders’ equity
Management
Total
account surplus
stockholders’reserve
General account Total retained
equitysurplus reserveearnings
Retained earnings

CapitalBalance at end of
previous fiscal year

Total net
assets

−

−

−

−

−

−

Contribution to capital

16,602−−

16,602−

16,602

Succession to assets
and liabilities of Japan
Finance Corporation for
Municipal Enterprises

−

−

−

−

16,06016,060Net income

−

1,295

1,295

1,295

19,12920,425

Net changes duringaccounting period

16,602

1,295

1,295

17,89735,19053,087

Balance at March 31,
2009

16,602

1,295

1,295

17,89735,19053,087

Changes duringaccounting period

62

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section(From April 1, 2009 through March 31, 2010)

CapitalBalance at end of
previous fiscal year

(Millions of Yen)

Valuation ,translation
Stockholders’ equity
adjustments andManagement
othersaccount surplus
Retained earnings
reserve
Total
Unrealized loss
General account Total retained stockholders’ from hedging
equityinstruments
surplus reserveearnings

Total net
assets

16,602

1,295

1,295

17,897−35,19053,087

Contribution to capital

−

4,539

4,539

4,539

−

4,326

8,866

Net changes duringaccounting period in
items other thanstockholders’equity−−−−(1,340)−(1,340)Net changes duringaccounting period

−

4,539

4,539

4,539

(1,340)

4,326

7,525

Balance at March 31,
2010

16,602

5,834

5,834

22,436(1,340)39,51760,613

Changes duringaccounting period(From April 1, 2009 through March 31, 2010)

CapitalBalance at end of
previous fiscal year

(Thousands of US dollars)

Valuation ,translation
Stockholders’ equity
adjustments andManagement
othersaccount surplus
Retained earnings
reserve
Total
Unrealized loss
stockholders’
fromhedging
General account Total retained
equityinstruments
surplus reserveearnings

Total net
assets177,373

13,842

13,842

191,215−375,963

567,178

Contribution to capital−

48,49548,49548,495−46,22994,724

Net changes duringaccounting period in
items other thanstockholders’equity−−−−(14,318)−(14,318)

Net changes duringaccounting period−

48,49548,49548,495(14,318)

46,22980,406

Balance at March 31,
2010

177,373

62,33762,337

239,710(14,318)

422,192

647,584

Changes duringaccounting period

Japan Finance Organization for Municipalities Annual Report 201063

■ Statements of Cash Flows(For the Years Ended March 31, 2009 and 2010)

Item(Millions of Yen) (Thousands of US dollars)

Fiscal 2008
August 1, 2008 to
March 31, 2009

Fiscal 2009
April 1, 2009 to
March 31, 2010

AmountAmount（） （）Ⅰ Cash flows from operating activities
Net income
Depreciation and amortization
Interest income
Interest expenses
Decrease in reserve for bonuses
Increase/(Decrease) in reserve for directors’ bonuses
Increase in reserve for retirement benefi ts
Increase in reserve for retirement benefits for directors and corporate auditors
Increase in fund for improvement of operations of municipalities
Increase in reserve for interest rate volatility
Increase in Management account reserve for interest rate
volatility
Decrease in reserve for interest rate reduction
Net (increase)/decrease in loans
Net increase/(decrease) in bonds
Interest received
Interest paid
OthersNet cash provided by operating activities¥ 20,425
123(291,288)
155,235
(5)
6
10
26
1,800
−

¥ 8,866294(558,369)
297,347
(4)
(0)
7
5
3,731
220,000$ 94,724
3,150(5,965,481)
3,176,795
(48)
(8)
79
54
39,8632,350,427

118,144

36,315387,982(7,872)
243,369(363,477)
289,975(151,043)(40)
15,388(15,010)185,060(447,921)
557,974(293,491)(325)(5,520)(160,372)
1,977,145(4,785,488)
5,961,261(3,135,593)(3,474)(58,984)

2,895,550(2,422,893)−(20)
472,635

5,536,800(5,645,665)
(9)
(463)
(109,338)

59,153,846(60,316,941)(102)(4,948)(1,168,145)(300,000)−(10,479)
16,602(16,455)(310,332)−
177,692−
77,898¥255,591

−
8,576
(44)
−
−
8,532
−
(106,327)
255,591−¥149,264−
91,628(473)−−
91,155−(1,135,974)
2,730,677−$1,594,703

Ⅱ Cash flows from investing activities
Proceeds from redemption of securities
Purchases of securities
Purchases of tangible fi xed assets
Purchases of intangible fi xed assets
Net cash provided by investing activities
Ⅲ Cash flows from financing activities
Payment to national treasury
Revenue from contributions made from municipally operated racing
Refund of contributions made from municipally operated racing
Proceeds from contribution to capital
Others(Note 14)
Net cash provided by 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 year
Ⅶ Net increase in cash by succession to assets and liabilities
Ⅷ Cash and cash equivalents at end of year

64

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section■ Notes to Financial Statements
1. Basis of Presentation
Japan Finance Organization for Municipalities (hereinafter, “JFM”) has prepared ﬁnancial statements pursuant to the Japan Finance Organization for Municipalities Law (Law No. 64 of May 30, 2007) and The Ministerial Ordinance on Financeand Accounting of Japan Finance Organization for Municipalities (Ordinance No.87 of the Ministry of Internal Aﬀairs andCommunications, 2008)
Since JFM does not have any subsidiaries or aﬃliates, it does not prepare 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.
The translation of the Japanese yen amounts into U.S. Dollars is included solely for the convenience of readers outside Japan, using the prevailing exchange rate as of March 31, 2010, the ﬁnal business day of the ﬁscal year, which was¥93.60 to US$1.

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 the residual 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
Depreciation of intangible ﬁxed assets is calculated by the straight-line method based on the estimated useful lives
and the residual value determined by management. Software for internal use owned by JFM is depreciated 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 foreign currency ﬂuctuation, are translated at the contracted rate as
the 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 ﬁscal year.
(c) Reserve for directorsʼ bonuses
Reserve for directorsʼ bonuses is provided for payment of bonuses to directors, in the amount of estimated bonuses,
which are attributable to the ﬁscal year.
(d) Reserve for retirement beneﬁts
Reserve for retirement beneﬁts is provided for payment of retirement beneﬁts to employees, in the amount deemed
accrued at the ﬁscal year-end, based on the projected retirement beneﬁt obligation and fair value of plan assets at
the ﬁscal year-end.
(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 ﬁscal year-end based on the internal
policies.
(7) Hedge accouting(a) Hedge accounting method

Japan Finance Organization for Municipalities Annual Report 201065

Interest rate swaps used to hedge the risk of interest rate ﬂuctuations and which qualify for hedge accounting andmeet 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, foreign currency-denominatedassets and liabilities are translated at the contracted rate.
(b) Hedging instruments and hedged items(ⅰ) Hedging instruments・・・Interest rate swap
Hedged items・・・・・・・・・Bonds(ⅱ) Hedging instruments・・・Currency swap
Hedged items・・・・・・・・・Foreign currency-denominated bonds(ⅲ) Hedging instruments・・・Foreign exchange forward contract
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 resulting from bond issuances. Hedged items are identiﬁed by each individual contract.
(d) Assessment of hedge eﬀectivenessJFM designates hedging instruments and hedged items with 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 its 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 isapplied.
(8) Cash and cash equivalents
Cash and cash equivalents in the Statement of Cash Flows consist of “Cash and bank deposits” on the Balance Sheet.
(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 improvementof 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 theFund. Further, pursuant to the provisions of Article 46, Section 6 of the Law, if there is any shortfall after the interest
rates reduction process, the shortfall is covered by withdrawal of the Fund within the limits of the total of the additional portion to the Fund made up to the previous ﬁscal year and the contributions made in the relative ﬁscal year.
As for the current ﬁscal year, JFM refunded the contributions in accordance with the provisions of Article 2, Section 7of the supplementary provisions of the Enforcement Ordinance of the Local Finance Law (Government Ordinance No.
267, 1948), which was subsequently amended by the Government Ordinance on partial revision of the Enforcement
Ordinance of the Local Finance Law (Government Ordinance No. 398, 2007).
(10) Reserve for interest rate volatility and Management account reserve for interest rate volatility
Reserve for interest rate volatility is set aside to prepare for interest rate risk associated with reﬁnancing of our bonds(excluding the bonds issued by the former Japan Finance Corporation for Municipal Enterprises) pursuant to theprovisions of Article 38, Sections 1 and 3 of the Law, and Article 9, Section 8 of the supplementary provisions of theLaw, 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
and Communications, 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 theJapan Finance Corporation for Municipal Enterprises Law (Government Ordinance No. 226, 2008; hereinafter, “Preparation Ordinance”).
Management account reserve for interest rate volatility is set aside to prepare for interest rate risk associatedwith reﬁnancing of the bonds issued by the former Japan Finance Corporation for Municipal Enterprise (hereinafter, “former JFM”) pursuant to the provisions 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 the Management Account at Japan Finance Organization for MunicipalEnterprises (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.

66

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section(11) Reserve for interest rate reduction
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 the Law, and Article 26, Sections 1, 3 and 4 of the Preparation Ordinance, and is calculated and accounted forbased on the provisions of Article 5 of the Management Account Operations Ordinance.
(12) Management account surplus reserve
Proﬁts generated in the Management account are accounted for as Management account surplus reserve separatelyfrom retained earnings in accordance with the provisions of Article 13, Section 8 of the supplementary provisions of
the Law and Article 26, Section 2 of the Preparation Ordinance.
(13) Consumption taxes
National and local consumption taxes are accounted for using the tax-excluded method.

3. Additional Information(1) Notes on ﬁnancial instruments
JFM has applied “Accounting Standards for Financial Instruments” (ASBJ Statement No. 10, March 10, 2008) and“Guidelines for Disclosures about Fair Value of Financial Instruments” (ASBJ Guidelines No. 19, March 31, 2008) fromthe end of the ﬁscal year. In addition to the information on fair value disclosed thus far , JFM also discloses the fairvalue of ﬁnancial instruments not usually traded in the markets. Accordingly, JFM discloses this information under“Notes on Financial Instruments” pursuant to Article 9 , Section 2 , of the Ordinance on Finance and Accounting.
(2) Notes on Investment and Rental Properties
JFM has adopted the “Accounting Standards for Disclosure of Fair Value of Investment and Rental Property” (ASBJ
Statement No. 20, November 28, 2008) and the “Implementation Guidelines for the Accounting Standard for Disclosures on the Fair Value of Investment and Rental Property” (ASBJ Guidelines No. 23, November 28, 2008) in the current
ﬁscal year.
These notes are omitted since the total amount of investment and rental properties is immaterial.

4. Loans
There are no bankrupt loans, non-accrual loans, past due loans (3 months or more), or restructured loans. Since JFM has
never experienced 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 4of 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 a considerable period of time or for other reasons (excluding loans on which bad debts are writtenoﬀ; hereinafter, “Non-accrual loans”).
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 morethan 3 months, calculated from the day following the contractual due date, excluding bankrupt loans and non-accrualloans.
Restructured loans represent loans which are given certain favorable terms and conditions, such as reduction or
exemption of interest, 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).

5. Financial Instruments(1) Status of ﬁnancial instruments(a) Approach to ﬁnancial instruments
In order to maintain a sound and good ﬁnancial standing and earn the solid conﬁdence of capital markets, JFM
needs to appropriately 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 theIntegrated Risk Management Committee, which supervises JFMʼs overall risk management, and the Risk Management Oﬃce, which is independent of other departments. The content of risk management can then be appropriately reﬂected in management decisions.
(b) Detail 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 withJapan Finance Organization for Municipalities Annual Report 201067

repayment of interest and principal in equal installments. Therefore, a large maturity gap is created betweenlending and funding, 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 andmanage JFMʼs 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, andduration analysis, among other methods. In addition, JFM endeavors to lower interest rate risk by narrowing thematurity gap between lending and funding through a variety of methods, such as issuing super-long-term bonds
and utilizing interest rate swaps.
(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,that causes 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 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 governmentsʼ total expenditures including debt servicing costs and total revenue. Thus, the national government
eﬀectively secures revenue sources for principal and interest payments for local governments. The national
government also secures revenue sources for debt service for individual local governments by including a portion of local government debt servicing costs in the Standard Financial Needs when calculating local allocationtax.
• Under the consultation system for local government bonds and loans, credit reviews must include checks on
situations 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 standingof 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
toward achieving ﬁscal soundness, and local governments whose ﬁscal indicators exceed the reconstruction
limits must take necessary actions to restore their ﬁnances under the oversight of the national government
withregard 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 of this type by constantly monitoring counterpartiesʼ ﬁnancial standing and limiting them to ﬁnancial
institutions that meet the credit rating and other criteria. In addition, JFM enters into ISDA Master Agreementswith all derivatives counterparties CSA (Credit Support Annex) with major ﬁnancial institutions 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 price change 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 oflosses 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 the68

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section

funds for these loans is raised mainly through issuance of 10-year bonds, which creates interest rate risk associated with bond reﬁnance. JFM takes the following measures to address the interest rate risk resulting from a duration gap between lending and fund-raising.
• JFM maintains necessary reserves for interest rate volatility to cope with the interest rate risk resulting from aduration gap between lending and fund-raising.
• As assets and liabilities in JFMʼs General account will expand as a result of loans and fund-raising for local governments after JFM was established, JFM carries out an ALM analysis of this account in a timely and appropriatemanner to further enhance the eﬀectiveness of its management of interest rate risk. JFM also endeavors to
reduce its exposure to interest rate risk by setting the following medium-term (between ﬁscal 2009 and ﬁscal
2013) management target, by continuously issuing super-long bonds with maturities exceeding 10 years, andby utilizing interest rate swaps.
a. Keep 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.
2. “Decline in economic value” is the decline of present value after interest rate shocks (an upwardand downward 200 bp parallel shift of the yield curve).
b. Keep a duration gap below approximately 2 years.
The Management account, which manages assets related to money loaned by the former JFM, is currently
exposed to greater 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 resultof interest rate ﬂuctuations during the time from which JFM raises money through bond issuance and thepoint 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, and risk of ﬂuctuations in the amounts of principal and interest of inﬂation-indexed bonds.
JFMʼs investments of surplus funds are exposed to the risk of losses on the sale of securities resulting fromprice 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, and hedges foreign exchange risk by using foreign exchange contracts.
(ⅲ) Liquidity risk
Liquidity risk is the risk that JFM would incur losses because it ﬁnds it diﬃcult to secure the necessary funds or isforced to obtain funds at far higher interest rates than under normal conditions due to a mismatch between thematurities of assets and liabilities or an unexpected outﬂow of funds (funding liquidity risk). It also includes the riskthat 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).
JFMʼs exposure to liquidity risk is extremely low because loans are made to local governments according to apre-set schedule, and the daily cash and liquidity management is carried out based on a quarterly plan for fundmanagement. Moreover, JFM has entered into overdraft agreements with several ﬁnancial institutions to prepare
for the unexpected, 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 valuethat has been rationally calculated. Since certain assumptions were made when calculating the fair value, the value
may diﬀer in the event that the assumptions diﬀer.

Japan Finance Organization for Municipalities Annual Report 201069

(2) Items related to fair value of ﬁnancial instruments
The balance sheet amount, fair value and diﬀerence between them on March 31, 2010 are as follows.

Balance sheet amount

Fair value(Millions of Yen)

Difference

22,030,227

23,213,516

1,183,288

984,477
149,264

984,476
149,264(1)ーTotal assets

23,163,968

24,347,256

1,183,287

Bonds

18,534,475

19,056,723

522,248

Total liabilities

18,534,475

19,056,723

522,248

Derivative transactions (*1)
Qualifying for hedge accounting

(619)

(619)

ー

Total of derivative transactions

(619)

(619)

ー

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

Balance sheet amount

Fair value

Difference

235,365,678

248,007,654

12,641,976(3) Cash and bank deposits

10,517,919
1,594,703

10,517,907
1,594,703(12)
ーTotal assets

247,478,299

260,120,263

12,641,964

Bonds

198,017,900

203,597,476

5,579,576

198,017,900

203,597,476

5,579,576

Derivative transactions
Qualifying for hedge accounting(6,620)(6,620)ー

Total of derivative transactions(6,620)(6,620)ー(1) Loans(2) Securities
Held-to-maturity securities

Total liabilities(*1)(*1) Net assets and liabilities resulting from derivative transactions are presented on a net basis, and items resulting in a net
loss are denoted by ( ).
Notes: 1. Method for calculating fair value of ﬁnancial instruments and items related to marketable securities and derivativetransactions.

70

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section

Assets(1) Loans
The fair value of loans is calculated by discounting future cash flow assuming prepayment by the discount rate
calculated using the Japanese government bond rate as of March 31, 2010.
(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 is close to the book price. As a result, thebook price is deemed to be the fair value.
(Millions of Yen)

Balance sheet
amountTypeーFair value

Difference

ー

ー

ー

ー

ー

ー

Treasury discount bills
Securities with fair
Negotiablecertificate of deposits
values that do not exceed
the balance sheet amountSub total

379,977
604,500

379,976
604,500(1)ー

984,477

984,476

(1)

Total

984,477

984,476(1)

Securities with fairvalues exceeding thebalance sheet amountSub total(Thousands of US dollars)

Balance sheet
amountTypeーSecurities with fairvalues exceeding thebalance sheet amountSub total

Fair value

Difference

ー

ー

ー

ー

ー

ー

Treasury discount bills
Securities with fairvalues that do not exceed Negotiable certificate of deposits
the balance sheet amountSub total

4,059,586
6,458,333

4,059,574
6,458,333(12)
ー

10,517,919

10,517,907

(12)

Total

10,517,919

10,517,907(12)(3) Cash and bank deposits
The book value is used as the market price for deposits without maturities. Since all deposits with maturities areshort-term, the fair value is close to the book price. As a result, the book price is deemed to be the fair value.

Japan Finance Organization for Municipalities Annual Report 201071

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 a market price is calculated by discounting the future cash ﬂows for the interest rate that would presumably beapplied when issuing 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 isthus 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 bydetermining the current value using the total of the interest rate swap in question and the principal and interest
accounted for together and discounting for the interest rate that would presumably be applied when issuing a similarbond.

Derivative transactions
Transactions using hedge accounting
For derivative transactions using hedge accounting, the contractual amount or the amount equivalent to the principal in
the contract for each hedge accounting method as of March 31, 2010 is as follows:(Millions of Yen)

Type of derivativetransactions

Primary
hedged items

Fundamental
accounting method

Interest rate swap
transactions Receive/fi xed and pay/floating

Bonds

Interest rate swap
Hedge account for interest
transactions Receive/
rate swaps
fl oating and pay/fi xed

Bonds

80,00080,000(*1)

Of which 1
year or more

Fair value

272,000(619) given by financial
institution

Currency swap
transactions

Foreigncurrencydenominatedbonds

514,900

395,400(*2)

Deferral hedge accounting
for foreign exchange
contracts

Foreign exchange
contracts

Foreigncurrencydenominateddeposits

60,000ー(*2)

926,900

747,400(619)

Japan Finance Organization for Municipalities Annual Report 2010

Method for
calculating fairvalue
Based on price272,000

Deferral hedge accounting
for currency swaps

Total

72

Contract amount

Hedge accounting
methodFinancial Section(Thousands of US dollars)

Contract amount

Hedge accounting
methodType of derivativetransactions

Primary
hedged items

Fundamental
accounting method

Interest rate swap
transactions Receive/fi xed and pay/floating

Bonds

Hedge account for interest
rate swaps

Interest rate swap
transactions Receive/
fl oating and pay/fi xed

Bonds

854,701

854,701(*1)

Deferral hedge accounting
for currency swaps

Currency swap
transactions

Foreigncurrencydenominatedbonds

5,501,068

4,224,359(*2)

Deferral hedge accounting
for foreign exchange
contracts

Foreign exchange
contracts

Foreigncurrencydenominateddeposits

641,026ー(*2)

9,902,778

7,985,043(6,620)Of which 1
year or more

Fair value

Method for
calculating
fair value
Based on price

2,905,983

2,905,983(6,620) given by financial
institution

Total(*1) Since interest rate swaps using hedge accounting are accounted for together with the bond being hedged, the fair value
is posted 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 withthe foreign currency-denominated bond or foreign currency-denominated deposit being hedged, the fair value is posted
together with the fair value of the relevant bond.
Notes: 2. The repayment schedule from March 31, 2010 for monetary claims and securities with maturity dates is as follows:(Millions of Yen)
Within 1 year
Loans

After 2 years After 3 years After 4 years After 5 years After 10 years After 20 years
After 1 year
through 2 years through 3 years through 4 years through 5 years through 10 years through 20 years through 30 years

1,572,195

1,581,151

1,608,111

1,512,186

1,448,990

984,477
149,264

ー
ー

ー
ー

ー
ー

ー
ー

6,166,151 6,849,565

1,291,874

Securities
Securities held-to- maturity
Deposits

ー
ー

ー
ー

ー
ー

(Thousands of US dollars)Within 1 year
Loans

After 2 years After 3 years After 4 years After 5 years After 10 years After 20 years
After 1 year
through 2 years through 3 years through 4 years through 5 years through 10 years through 20 years through 30 years

16,796,964 16,892,642 17,180,681 16,155,835 15,480,669 65,877,686 73,179,121 13,802,080

Securities
Securities held-to- maturity
Deposits

10,517,919
1,594,701

ー
ー

ー
ー

ー
ー

ー
ー

ー
ー

ー
ー

ー
ー

Japan Finance Organization for Municipalities Annual Report 201073

Note 3. The repayment schedule from March 31, 2010 is as follows:
Within 1 year

2,244,370

Loans(Millions of Yen)

After 1 year
After 2 years After 3 years After 4 years After 5 years After 10 years After 20 years
through 2 years through 3 years through 4 years through 5 years through 10 years through 20 years through 30 years

2,176,130

2,030,560

2,160,070

1,908,670

6,703,240

1,122,600

209,260(Thousands of US dollars)Within 1 year
Loans

After 1 year
After 2 years After 3 years After 4 years After 5 years After 10 years After 20 years
through 2 years through 3 years through 4 years through 5 years through 10 years through 20 years through 30 years

23,978,312 23,249,252 21,694,017 23,077,671 20,391,774 71,615,812 11,993,590

2,235,684

6. Tangible and Intangible Fixed Assets
Tangible and intangible ﬁxed assets at March 31,2010 consisted of the following:

Type of assets(Millions of Yen)

Accumulated
Balance
Increase Decrease Balance at depreciation at Depreciation
at end ofduring the during the March 31, March 31, 2010 during thepreviousor accumulated
year
year
year
2010
fiscal year
amortization

Balance
at March
31,2010

Tangible fi xed assets

551
2,403
91
3,045

Buildings
Land
Other tangible fi xed assets
Total tangible fi xed assets

4

−

−

−

5
9

−

309
13
322

−

−

555
2,403
96
3,055

65

43

−

−

40
106

27
71

311

223

−

−

311

223

489
2,403
55
2,948

Intangible fi xed assets

910
20
931

Software
Other intangible fi xed assets
Total intangible fi xed assets

20
20

1,219
13
1,233

907
13
921

(Thousands of US dollars)

Type of assets

Accumulated
Balance
Increase Decrease Balance at depreciation at Depreciation
at end ofduring the during the March 31, March 31, 2010 during thepreviousor accumulated
year
year
year
2010
fiscal year
amortization

Balance
at March
31,2010

5,888
25,675974
32,537

5,232
25,675595
31,502

9,730
217
9,947

Tangible fi xed assets
Buildings
Land
Other tangible fi xed assets
Total tangible fi xed assets

46

−

−

−

56
102

−

3,302
144
3,446

−

−

5,934
25,675
1,030
32,639

702

469

−

−

435
1,137

291
760

3,331

2,389

−

−

3,331

2,389

Intangible fi xed assets
Software
Other intangible fi xed assets
Total intangible fi xed assets

217
217

13,032
145
13,177

9,701
145
9,846

Notes: 1. Accumulated depreciation of tangible ﬁxed assets amounted to 106 million yen (1,137 thousand dollars) as ofMarch 31, 2010.

7.Assets Pledged as Collateral
Pursuant to the provisions of Article 40, Section 2 of the Law, JFMʼs total assets are pledged as general collateral for JFM
bonds for 18,534,475 million yen (198,017,900 thousand dollars).

74

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section

8. Bonds
Bonds at March 31, 2010 consisted of the following:

Type of bondDate of issue

Government-guaranteed bonds (domestic) 6/15/20091st-10th JFM bonds
3/15/2010
Public offering bonds without government
guarantee
1st-10th JFM bonds
Public offering bonds without government
guarantee
1st-6th 20-year bonds
Public offering bonds without government
guarantee
F1st-F20th JFM bonds
Public offering bonds without government
guarantee
A-1st-6th JFM bonds
Japan Finance Organization for
Municipalities bonds – Sub-total
Government-guaranteed bond (domestic)
1st 4-year JMF bondJapan Finance Organization for MunicipalEnterprises bonds – Sub-total

CouponMaturityrate (%)

1.2$7,269,260

6/18/20093/18/2010

245,000

2,617,521

1.362〜 1.648

10Y

6/25/20093/18/2010

195,000

2,083,333

2.120〜 2.266

20Y

7/22/20093/29/2010

186,000

1,987,179

0.960
7Y〜 2.332 〜 28Y

7/31/20093/23/2010

280,000

2,991,453

1.42〜 1.53

10Y−

1,586,402

16,948,747−−

299,872

3,203,766

0.7

4Y

560,087

5,983,840

2/24/2009

29,993

320,439

11/25/20085/28/2009

139,957

1,495,272

1/26/20094/30/2009

84,943

907,519

4/30/20095/26/2009

120,000

1,282,051−

1,234,854

13,192,888

2/27/2009

Government-guaranteed bonds (domestic) 4/28/1999775th-886th former JFM bonds
6/19/2008
Government-guaranteed bonds (domestic) 6/22/20051st-5th 15-year former JFM bonds
7/18/2007
Government-guaranteed bonds (foreign)
13th Eurodollar former JFM bond 5th Global Yen former JFM bond

Outstanding amountat March 31, 2010

¥680,402

Government-guaranteed bonds (domestic) 10/16/2008/1st-8th JFM bonds
5/25/2009
Public offering bond without government
guarantee
1st 5-year JFM bondPublic offering bonds without government
guarantee
1st-4th JFM bonds
Public offering bonds without government
guarantee
1st-2nd 20-year JFM bonds
Public offering bonds without government
guarantee
A-1st-2nd JFM bonds(Millions of Yen) (Thousands of US dollars)

5/7/19996/25/2008

〜 1.5

1.3
〜 1.6

1.01
1.59
〜 1.772.07〜 2.291.69〜 1.73−9,220,051 98,504,829 0.5〜 2.0(1,666,200) (17,801,282)
1.6
184,637
1,972,623〜 2.2
1,043,458(119,500)
US dollars 3,200,000 thousand
Euro 900,000 thousand
Pound sterling 150,000 thousand

10Y

10Y
5Y
10Y
20Y
10Y
−

10Y
15Y

11,148,063 1.350
10Y(1,276,709) 〜 6.000 〜 20Y

Japan Finance Organization for Municipalities Annual Report 201075

(Millions of Yen) (Thousands of US dollars)

Type of bondPublic offering bond without government
guarantee
1st 5-year former JFM bondPublic offering bonds without government
guarantee
1st-30th former JFM bonds
Public offering bonds without government
guarantee
1st-25th 20-year former JFM bonds
Public offering bonds without government
guarantee
1st-10th 30-year former JFM bonds
Public offering bond without government
guarantee
1st floating rate former JFM bondPublic offering bonds without government
guarantee
1st-2nd inflation-indexed former JFM
bonds
Public offering bonds without government
guarantee
1st-3rd former JFM bonds with scheduled
repayment
Public offering bond without government
guarantee
1st CMS-linked floating rate former JFM
bond
Private placement bonds
A series 52nd – Special No.1 series 31st
former JFM bonds
Former JFM bonds - Sub-total
Total

Date of issue

Outstanding amountat March 31, 2010

CouponMaturityrate (%)

2/29/2008¥129,963$1,388,495

1.14

5Y

12/26/20086/16/2008

1,279,786

13,672,929

0.64〜 2.0710Y

7/30/20026/16/2008

569,611

6,085,598

1.03〜 2.5820Y

1/29/20049/20/2006

189,848

2,028,301

2.39〜 2.9530Y

10/31/2002

20,000213,675

Floatingrate

15Y

3/2/20057/19/2005

40,000427,350

1.248〜 1.408

10Y

2/14/20036/9/2004

45,660(2,170)487,821 1.39
(23,184) 〜 2.01

28Y

9/13/2006

20,000213,675

1.894

10Y

31,732,906 0.67
(4,877,137) 〜 2.18

10Y

7/30/19997/31/2008−−

2,970,200(456,500)

15,713,218 167,876,265(2,244,370) (23,978,312)¥18,534,475 $198,017,900(2,244,370) (23,978,312)

−

−

−

−

Notes: 1. Pursuant to the provisions of Article 40, Section 2 of the Law, JFMʼs total assets are pledged as general collateral for
JFM bonds for 18,534,475 million yen(198,017,900 thousand dollars).
2. Amounts posted in brackets “[ ]” in the column of “Outstanding amount at March 31, 2010” for “Governmentguaranteed bond (foreign) - 13th Eurodollar former JFM bond - 5th Global Yen former JFM bond” are denominatedin foreign currencies.
3. Amounts posted in parentheses “( )” in the column of “Outstanding amount at March 31, 2010” are the amounts tobe repaid within one year.

76

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section

9. Reserves(Millions of Yen)

Reserves at March 31, 2010 consisted of the following:

Type of reserve

Balance at end
Increase duringof previous fiscal
the yearyear

Decreaseduring the year
(for intended
purposes)

Decrease during Balance at Marchthe year (Others)
31, 2010

Reserve for bonuses

47

43

47

ー

43

Reserve for directors’
bonuses
Reserve for retirement
benefi ts
Reserve for retirement
benefits for directors andcorporate auditors

7

7

7

ー

7

202

7

ー

ー

210

51

5

ー

ー

56

(Thousands of US dollars)

Type of reserve

Balance at end
Increase duringof previous fiscal
the yearyear

Decreaseduring the year
(for intended
purposes)

Decrease during Balance at Marchthe year (Others)
31, 2010

Reserve for bonuses

510

462

510

ー

462

Reserve for directors’
bonuses
Reserve for retirement
benefi ts
Reserve for retirement
benefits for directors andcorporate auditors

85

77

85

ー

77

2,166

79

ー

ー

2,245

546

54

ー

ー

600

10. Reserve for Interest Rate Volatility
Reserve for interest rate volatility at March 31,2010 consisted of the following:

Type of reserve

Balance at endof previous
fiscal year

(Millions of Yen)

Increase during the year

Decrease during the year

AmountprovidedAmountwithdrawn

Balance at
March 31, 2010

Reserve for interest
rate volatility
Management account reservefor interest rate volatility

220,000

220,000

220,000ー

3,074,728

256,315

256,315220,000

220,000

3,111,043

Total

3,294,728

476,315476,315220,000

220,000

3,551,043

440,000(Thousands of US dollars)

Type of reserve

Balance at endof previous
fiscal year

Increase during the year

Decrease during the year

AmountprovidedAmountwithdrawn

Balance at
March 31, 2010

Reserve for interest
rate volatility
Management account reservefor interest rate volatility

2,350,428

2,350,427

2,350,427

ー

32,849,664

2,738,410

2,738,410

2,350,427

2,350,427

33,237,647

Total

35,200,092

5,088,837

5,088,837

2,350,427

2,350,427

37,938,502

4,700,855

Note: During Fiscal 2008, Management account reserve for interest rate volatility was reversed in the amount of 300,000
million yen and paid to the national treasury in accordance with the Ministerial Ordinance on determination of
the amount attributable to the national government for ﬁscal 2008 pursuant to the provisions of Article 14 of the
supplementary provisions of the Law (Ordinance No.1 of the Ministry of Internal Aﬀairs and Communications, and theMinistry of Finance, 2009).

Japan Finance Organization for Municipalities Annual Report 201077

11. Fund for Improvement of Operations of Municipalities(Millions of Yen)

Fund for improvement of operations of municipalities at March 31,2010 consisted of the following:

Type of fund

Balance at endof previous
fiscal year

Increase during the year
AmountAmount ofMarch
31, 2010
reservetransferred

Decrease during the year
Amountwithdrawn

Balance at
March 31, 2010

OthersBasic fund for
improvement of operationsof municipalities

892,875

8,576

ー

ー

44

901,407

Additional fund for
improvement of operationsof municipalities

1,800

ー

3,731

ー

ー

5,531

Total

894,675

8,576

3,731

ー

44

906,939(Thousands of US dollars)

Increase during the year
AmountAmount of March 31, 2010
reservetransferred

Decrease during the year

Type of fund

Balance at endof previous
fiscal year

Basic fund for
improvement of operationsof municipalities

9,539,271

91,628ーー

473

9,630,426

Additional fund for
improvement of operationsof municipalities

19,232

ー

39,864ーー

59,096

9,558,503

91,62839,864ー

473

9,689,522

Total

Amountwithdrawn

Balance at
March 31, 2010

Others

Notes: 1. The “increase during the year” in the “amount of reserves” for the “Basic fund for improvement of operationsof municipalities” is the payment in the amount stipulated in Article 46, Section 1 of the Law and received inaccordance with Article 46, Section 2 of the Law.
2. The full amount of “Others” posted in “Decrease during the year” for “Basic fund for improvement of operationsof municipalities” represents the amount which was refunded in accordance with the provisions of Article 2,
Section 7 of the supplementary provisions of the Enforcement ordinance of the Local Finance Law, which was
subsequently amended by the Government Ordinance.
3. “Amount transferred” posted in “Increase during the year” for “Additional fund for improvement of operationsof municipalities” represents the amount transferred to Additional fund for improvement of operations ofmunicipalities pursuant to the provisions of Article 46,Section 5 of the Law.

12. Reserve for Employee Retirement Beneﬁts(1) Outline of retirement beneﬁts system employedJFM has a deﬁned beneﬁt plan that contributes to the Employeesʼ Pension Fund and oﬀers lump-sum payments
upon retirement.
(2) Projected beneﬁt obligation
Projected beneﬁt obligation 363 million yen (3,886 thousand dollars)
Plan assets 153 million yen (1,642 thousand dollars)
Reserve for employee retirement beneﬁts 210 million yen (2,245 thousand dollars)(3) Pension expenses
Pension expenses 16 million yen (175 thousand dollars)
Pension expenses related to lump-sum payments upon retirement 3 million yen (38 thousand dollars)
Pension expenses related to the Employeesʼ Pension Fund 12 million yen (137 thousand dollars)(4) Basis of calculation of projected beneﬁt obligation
Projected beneﬁt obligation is calculated by the simple method.

78

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section

13. Net Income by AccountNet income of General account was 4,539 million yen (48,495 thousand dollars), while net income of Management account was 4,326 million yen (46,229 thousand dollars).

14. Cash Flows(1) Fiscal 2008(a) “Others” in Ⅲ. Cash ﬂows from ﬁnancing activities section
This represents capi t al of the former Japan Finance Corporation for Municipal Enterprises contributed by the national government, and expenses related to Other Liabilities(b) Signiﬁcant non-cash transaction
On October 1, 2008, JFM succeeded to assets and liabilities of the former Japan Finance Corporation for MunicipalEnterprises in accordance with the provisions of Article 9, Section 1 and Article 10, Sections 1 and 2 of the supplementary provisions of the Law.
(2) Fiscal 2009
NA

Japan Finance Organization for Municipalities Annual Report 201079

15. Information by Account(Balance Sheets).
Balance sheets of General account and Management account at March 31, 2010 were as follows:

Item

General accountManagement account

1,761,614
984,477
149,264
1,290
2,948
921

20,268,613(Assets)
Loans
Securities
Cash and bank deposits
Other assets
Tangible fi xed assets
Intangible fi xed assets
Due from General account841,388592,831

Total assets

3,493,347

21,125,870(Liabilities)
Bonds
Other liabilities
Reserve for bonuses
Reserve for directors’ bonuses
Reserve for retirement benefi ts

1,280,894
2,712
43
7
210

17,253,581
15,013

Total

22,030,227
984,477
149,264
17,1592,948
921

15,869Due to Management account for Fund for
improvement of operations of municipalities(841,388)(592,831)(1,434,219)

23,184,998
18,534,475
17,72643
7210

Reserve for retirement benefi ts for
directors and corporate auditors

56

56

Fund for improvement of operationsof municipalities

906,939

906,939

Basic fund for improvement ofoperations of municipalities

901,407901,407

Additional fund for improvement ofoperations of municipalities

5,531

5,531

Due to Management account841,388

Due from General account for Fund for
improvement of operations of municipalities(841,388)
592,831440,000
440,000(592,831)

3,224,927

3,664,927
440,000

Management account reserve forinterest rate volatility

3,111,043

3,111,043

Reserve for interest rate reduction

113,883
21,086,353

113,883
23,124,384

Reserve under special laws
Reserve for interest rate volatility

Total liabilities

3,472,251(Net Assets)
CapitalRetained earnings
General account surplus reserve
Valuation,translation adjustments and others
Management account surplus reserve

16,602
5,834
5,834(1,340)Total net assets

21,096

39,51739,5173,493,347

21,12 5,870

Total liabilities and net assets

80

Offset(Millions of Yen)

Japan Finance Organization for Municipalities Annual Report 2010

(1,434,219)

16,602
5,834
5,834(1,340)39,51760,613(1,434,219)

23,184,998

Financial Section(Thousands of US dollars)

Item

General accountManagement account(Assets)
Loans
Securities
Cash and bank deposits
Other assets
Tangible fi xed assets
Intangible fi xed assets
Due from General account

18,820,664
10,517,919
1,594,703
13,78731,502
9,846

216,545,014

Due to Management account for Fund for
improvement of operations of municipalities

6,333,669

Total assets

37,322,090

225,703,745(Liabilities)
Bonds
Other liabilities
Reserve for bonuses
Reserve for directors’ bonuses
Reserve for retirement benefi ts

13,684,768
28,980
462
77
2,244

184,333,132
160,403

Offset235,365,678
10,517,919
1,594,703
183,328
31,502
9,846

169,541

8,989,190

Total(8,989,190)(6,333,669)(15,322,859)

247,702,976
198,017,900
189,383
462
77
2,244

Reserve for retirement benefi ts for
directors and corporate auditors

600

600

Fund for improvement of operationsof municipalities

9,689,522

9,689,522

Basic fund for improvement ofoperations of municipalities

9,630,426

9,630,426

59,09659,096

Additional fund for improvement ofoperations of municipalities
Due to Management account8,989,190

Due from General account for Fund for
improvement of operations of municipalities(8,989,190)
6,333,669
34,454,350

39,155,205
4,700,855

Management account reserve forinterest rate volatility

33,237,647

33,237,647

Reserve for interest rate reduction

1,216,703
225,281,554

1,216,703
247,055,393

Reserve under special laws
Reserve for interest rate volatility

4,700,855
4,700,855(6,333,669)

Total liabilities

37,096,698(Net Assets)
CapitalRetained earnings
General account surplus reserve
Valuation,translation adjustments and others
Management account surplus reserve

177,373
62,33762,337(14,318)

Total net assets

225,392

422,191
422,191

37,322,090

225,703,745

Total liabilities and net assets(15,322,859)

177,373
62,33762,337(14,318)
422,191
647,583(15,322,859)

247,702,976

Japan Finance Organization for Municipalities Annual Report 201081

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 inheritedfrom the former Japan Finance Corporation for Municipal Enterprises (management of the assets of the former
Japan Finance Corporation for Municipal Enterprises).
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 surplus reserve and Management account surplus reserve“Net income” of General account is posted as “General account surplus reserve” in accordance with the provisionsof Article 39, Section 1 of the Law, while “Net income” of Management account is posted as “Management accountsurplus reserve” in accordance with the provisions of Article 13, Section 8 of the supplementary provisions the Law.
3. Due from General account and Due to Management account
These ﬁgures represent the amount of 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 for Fund for improvement of operations of municipalities.
These ﬁgures represent the amount of cash received for “Fund for improvement of operations of municipalities,”
which was lent to Management account from General account pursuant to the provisions of Article 9, Section 12 of
the supplementary provisions of the Law.

82

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section

16. Information by Account (Statements of Income)Statements of income of General account and Management account from April 1, 2009 through March 31, 2010 was as follows:(Millions of Yen)

Item

General account Management accountIncome45,802557,786

Interest income

20,689537,679

OffsetTotal(45,060)

558,528
558,369

Fees and commissions

140

Other income

18

Administrative fee for Management account

975

(975)

23,978(23,978)

Interest on fund for improvement ofoperations of municipalities

140
0

18

Interest on due from General account

1,018(1,018)Transfer from General account for Fund for
improvement of operations of municipalities

19,088(19,088)(45,060)

Expenses

41,263

312,155

Interest expenses

13,001

284,346

297,347

9

262

271

Other operating expenses

2,185

2,456

4,641

General and administrative expenses

2,229

135

2,365

Other expenses

3,731

3,731

Transfer to fund for improvement ofoperations of municipalities

3,731

3,731

Interest on due to Management account

1,018(1,018)Transfer to Management account for fund for
improvement of operations of municipalities

19,088(19,088)

Fees and commissions

Administrative fee for Management accountInterest on fund for improvement ofoperations of municipalities

975

(975)

23,978(23,978)

Ordinary income

4,539

245,631

Special gains

220,000

235,010

Provision for Management account

220,000

Reversal of Management accountreserve for interest rate volatility
Reversal of reserve for interest rate
reduction
Special losses

220,000

Provision for reserve for interest rate
volatility
Provision for Management account reservefor interest rate volatility

220,000

Net income

250,170(220,000)

220,000

220,000

15,01015,010476,315(220,000)

476,315220,000

220,000
4,539

235,010(220,000)

256,315

Transfer to Management account308,357

4,326

256,315(220,000)
8,866Japan Finance Organization for Municipalities Annual Report 2010

83

(Thousands of US dollars)

General accountGeneral account Management accountIncome489,3425,959,260

Interest income

221,039

5,744,442

Fees and commissions
Other income

Total(481,419)

5,967,183
5,965,481

1,505
196

1,505
1

197

Administrative fee for Management account10,423(10,423)

Interest on fund for improvement ofoperations of municipalities

256,179(256,179)

Interest on due from General account10,881(10,881)Transfer from General account for Fund for
improvement of operations of municipalities

203,936(203,936)(481,419)

Expenses

440,847

3,334,994

Interest expenses

138,9033,037,892

3,176,795

100

2,804

2,904

Other operating expenses

23,347

26,244

49,591

General and administrative expenses

23,817

1,452

25,269Other expenses

39,86339,863

Transfer to fund for improvement ofoperations of municipalities

39,86339,863

Interest on due to Management account10,881(10,881)Transfer to Management account for fund for
improvement of operations of municipalities

203,936(203,936)

Fees and commissions

Administrative fee for Management account10,423(10,423)

Interest on fund for improvement ofoperations of municipalities

256,179(256,179)

48,4952,624,266

Special gains

2,350,427

2,510,800

Provision for Management account2,350,427

Ordinary income

Reversal of Management accountreserve for interest rate volatility
Reversal of reserve for interest rate
reduction
Special losses

2,350,427

Provision for reserve for interest rate
volatility
Provision for Management account reservefor interest rate volatility

2,350,427

Net income

Japan Finance Organization for Municipalities Annual Report 2010

(2,350,427)

2,510,800(2,350,427)
2,350,427

2,350,427

160,373

160,373

5,088,837(2,350,427)

5,088,837
2,350,427

2,350,427
48,495

3,294,422

2,672,761

2,738,410

Transfer to Management account84

Offset46,2292,738,410(2,350,427)
94,724

Financial Section

17. Fair value of Marketable Securities○ Fiscal 2008
1. Marketable held-to-maturity securities at March 31, 2009 consisted of the following:
Balance sheet
amountFair value

Difference(Millions of Yen)

Unrealized gains Unrealized losses

Financial bills

193,958

193,954

(4)

ー

(4)

Treasury discount bills

411,873

411,865

(8)

ー

(8)

Total

605,832

605,819

(12)

ー

(12)

Notes: 1. Fair value is based on market prices at the end of the ﬁscal year.
2. “Unrealized gains” and “Unrealized losses” are components of Diﬀerence.

2. Securities with no available fair value at March 31, 2009 were as follows:(Millions of Yen)

AmountNegotiable certificate
of deposits

269,000○ Fiscal 2009Marketable held-to-maturity securities at March 31, 2010 consisted of the following:
Balance sheet
amountFair value

Difference(Millions of Yen)

Unrealized gains Unrealized losses

Treasury discountbills

379,977

379,976

(1)

ー

(1)

Negotiable certificate
of deposits

604,500

604,500

ー

ー

ー

Total

984,477

984,476

(1)

ー

(1)

(Thousands of US dollars)

Balance sheet
amountFair value

Difference

Unrealized gains Unrealized losses

Treasury discountbills

4,059,586

4,059,574

(12)

ー

(12)

Negotiable certificate
of deposits

6,458,333

6,458,333

ー

ー

ー

Total

10,517,919

10,517,907

(12)

ー

(12)

Notes: 1. The fair value of Treasury discount bills is based on the market price at the end of the relevant ﬁscal year.
2. The balance sheet amount for negotiable certiﬁcates of deposits is the fair value.
3. The “unrealized gains” and “unrealized losses” are components of Diﬀerence.

Japan Finance Organization for Municipalities Annual Report 201085

18. Derivative Information
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 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 operations. Currency swaps andforeign exchange forward contracts are used to hedge exposure to foreign exchange risk associated with issuance of
foreign currency-denominated bonds and foreign cur rencydenominated 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 andmeet 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 tohedge the 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 swap
Hedged items: Bonds(ⅱ) Hedging instrument: Currency swap
Hedged items: Foreign currency-denominated bonds(ⅲ) Hedging instrument: Foreign exchange forward contract
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 frombond issuances. Hedging instruments are selected for each individual contract.
(d) Assessment of hedge eﬀectivenessJFM selects hedges that have hedging instruments and underlying transactions with 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 its eﬀectiveness. Moreover, a periodic assessment of hedge eﬀectiveness for interest rate swaps and currency swaps and forward contracts which
qualify for deferral 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 to
fulﬁll their contracts due to bankruptcy or other reasons.
As for derivative transactions used for hedging purposes, market risk is oﬀset by market risk on underlying transactions.
Regarding credit risk, JFM limits counterparties to the ﬁnancial institutions with high credit standing, constantly
monitors the transactionsʼ 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 theapproval of persons in charge in accordance with the operational guidelines which specify transaction authority andlimits 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 reported to the Integrated Risk Management Committee periodically.

86

Japan Finance Organization for Municipalities Annual Report 2010

Financial Section

ReportReporp t of Independentp
Auditors
Financial Section
Japan Finance Organization for Municipalities Annual Report 201087

Financial Section

Supplementarppy Information■ Internal Control Report【 Type of submission】

Internal Control Report【 Statutory basis】

Ministerial Ordinance on Finance and Accounting of Japan Finance Article 19,
Organization for Municipal Enterprises
Section 1, and Article 28【 Date prepared】

May, 31 2010

【 Organization name】

Japan Finance Organization for Municipalities【 Name of representative
executive】

Yuji Watanabe, President and CEO【 Name of highest-ranking
Not relevantoﬃcial responsible for ﬁnances】【 Address of main oﬃce】

Shisei Kaikan, 1-3 Hibiya Koen, Chiyoda-ku, Tokyo【 Location available forpublic inspection】

Shisei Kaikan, 1-3 Hibiya Koen, Chiyoda-ku, Tokyo

1【Basic framework for internal controls on ﬁnancial reporting】
President and CEO Yuji Watanabe is responsible for the establishment and administration of JFMʼs internal control overﬁnancial reporting, and has established and administers internal controls for ﬁnancial reporting in accordance with thebasic framework for internal controls stipulated in the Business Accounting Councilʼs “Setting the Standards and PracticeStandards for Management Assessment and Audit of Internal Control over Financial Reporting (Council Opinion).”
The internal controls are intended to achieve this objective to a reasonable extent by organically linking each basic
element of internal control to function as an integrated whole. For this reason, there is a chance that the internal controls
over ﬁnancial reporting may not be able to completely prevent or identify any false statements in ﬁnancial reports.

2【Scope of evaluation, evaluation date and evaluation procedures】
The base date for the evaluation of internal controls over ﬁnancial reporting shall be the last date of the ﬁscal year, March
31, 2010. The evaluation shall be based on evaluation standards for internal controls over ﬁnancial reporting that are
generally recognized as fair and appropriate.
This evaluation assessed the internal controls (company-wide internal controls) that have a major impact on JFMʼsﬁnancial reporting overall, and operational processes to be subjected to the evaluation are selected based on the resultsof this evaluation. In the evaluation of these operational processes, the selected operational processes are identiﬁed, andthe eﬀectiveness of the internal controls are evaluated by identifying the key aspects of control that have an important
influence on the reliability of financial reporting and evaluating the establishment and administration of these key
aspects.
The necessary scope of the evaluation of internal controls over financial reporting was decided in terms of theimportance of the impact that a particular process has on the reliability of financial controls. The importance of the
impact on the reliability of ﬁnancial reporting is determined based on the importance of the ﬁnancial and qualitative
impact, and the scope of the evaluation of internal controls over operational processes is decided logically based on theevaluation results of the company-wide internal controls.
Since JFM has one office, it was decided that the operation processes for loans and bonds̶account items
significantly related to JFMʼs objectives̶would be included in the scope of the evaluation of internal controls over
operational processes. Furthermore, operational processes related to projects and operations that involve operational
processes and highly risky transactions related to important account items involving estimates and projections, which
are likely to result in important false statements, were added to the scope of the evaluation as very important operational
processes in light of their impact on ﬁnancial reporting.

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Japan Finance Organization for Municipalities Annual Report 2010

Financial Section

3【Notes on evaluation results】
The results of the aforementioned evaluation demonstrated that JFMʼs current internal control system for financial
report is eﬀective, as of the last day of the ﬁscal period under review (March 31, 2010).

4【Additional notes】
Not applicable.

5【Special notes】
Not applicable.

■ Classiﬁcation of Outstanding Loans as of March 31, 2010 under the Law Relating to the Financial
Soundness of Local Governments
Notes: 1. Outstanding Loans at End-Fiscal 2009 are classiﬁed according to the Law Relating to the Financial Soundness ofLocal Governments.
Notes: 2. The number in parentheses next to the number for local governments is based on the ﬁscal 2007 ﬁnancial
statements.
Notes: 3. Figures may not add up exactly due to rounding oﬀ.

1【 Classiﬁcation of Outstanding Loans under the Law Relating to the Financial Soundness of Local(Millions of Yen)
Governments】
Borrowers at end of fiscal 2009
Number of local
governments

ChangeOutstanding
loans

Share

Outstanding
loans

Share

Outstanding
loans

5,112

0.02%

2,112

0.01%

△ 2,999 △ 0.01%

1.18%

259,823

1.21%

68,3401,760 （ 1,787） 98.77%

21,121,394

98.76%

21,173,101

1,782 （ 1,830）

21,386,329

1（ 3） 0.06%

Local governments withfiscal indicators exceeding
the early warning limit

21

（ 40）

Total

Fiscal 2009

Share

Local governments withfiscal indicators exceeding
the reconstruction limits

Healthy local governments

Fiscal 2008

21,243,553

Share0.32% △191,483 △ 0.89%
99.67%

51,7070.91%△142,776

Notes: 1. The number of local governments refers to the number of prefectural, city, town and village governments, and does
not include local government associations and local government corporations.
2. The amount of loans under self-assessment at the end of ﬁscal 2009 would be ¥22,046,881 when adding ¥627,758
million in loans to local government associations (207), ¥158,916 million in loans to local government roadcorporations (38), and ¥16,653 million in accrued interest to the balance of loans made to local governments.
3. If its fiscal indicators exceed any one or more of the reconstruction limits of the ratios, such as the real deficit
ratio, consolidated real deﬁcit ratio or real debt payment ratio, based on ﬁnancial results of ﬁscal 2008, this local
government will be designated as a "local government with ﬁscal indicators exceeding the reconstruction limits".
4. If its ﬁscal indicators exceed any one or more of the early warning limits of the ratios, such as the real deﬁcit ratio,consolidated real deﬁcit ratio, real debt payment ratio or future burden ratio, based on ﬁnancial results of ﬁscal
2008, this local government will be designated as a "local government with ﬁscal indicators exceeding the early
warning limits".
5. If its fiscal indicators do not exceed any of the early warning limits of the ratios, such as the real deficit ratio,consolidated real deﬁcit ratio, real debt payment ratio or future burden ratio, based on ﬁnancial results of ﬁscal
2008, this local government will be designated as a “local governments with sound ﬁscal indicators.”

Japan Finance Organization for Municipalities Annual Report 201089

2【 Classiﬁcation of Outstanding Loans by Municipal Enterprisesʼ Financial Shortfall Rate】(Millions of Yen)
All projects (18)

Borrowers at end of fiscal 2009
Number of project
operators
Sound management
standard appliedSound companies
Total

27

FiscalFiscalFiscalShare Fiscal 2008 Share Fiscal 2009 Share（ 82） 0.54%

317,726

1.94%

177,599

1.10%

Change△140,127 △ 0.84%

4,928 （ 4,964） 99.46% 16,088,271 98.06%

15,961,216 98.90%△127,055

4,955 （ 5,046）

16,138,815△267,182

16,405,997

Share

0.84%

Notes: 1. The number of project operators indicates the number of local governments presiding over each project. The
number in parentheses is based on ﬁscal 2007 ﬁnancial statements.
2. When adding ¥5,732,496 million for the General account and ¥158,916 million for local government roadcorporations (38) and ¥16,653 million for accrued interest to the outstanding loans for all projects, outstandingloans as the results of self-assessment at the end of ﬁscal 2009 are ¥22,046,881 million.
3. The number of project operators to whom the sound management standard applies is the number of project operatorswith municipal enterprise ﬁnances that exceed the sound management standard based on ﬁscal 2008 ﬁnancial results(ﬁnancial shortfall rate of 20% ); the outstanding loan balance is the balance for the particular ﬁscal period.
4. The number of project operators of sound companies is the number of project operators with municipal enterpriseﬁnances that are below the sound management standard based on ﬁscal 2008 ﬁnancial results (ﬁnancial shortfall
rate of 20% ); the outstanding loan balance is the balance for the particular ﬁscal period.

■ Results of Self-Assessment as of March 31, 2010
Classiﬁcation of borrowers
under self-assessment

Problem assets based on
the Financial Revitalization Law

Bankrupt borrowers
0
Effectively bankrupt borrowers
0Bankrupt andquasi-bankrupt assets
0Potentially bankrupt borrowers
0

Doubtful assets00
Borrowers
requiring caution
13,646 (0.06%)

Substandard assets0Normal borrowers
145,382(0.66%)(Millions of Yen)

Risk-monitored loans
under the Banking Law
Bankrupt loans0Non-accrual0
Past due loans (3 months or more)
Restructured loans

Normal assets

22,046,881(100%)

Non-classified(Local governments)

21,887,853 (99.28%)

Total
22,046,881

Total
22,046,881

Total
0

Notes:1. Assets classiﬁed under self-assessment and the Financial Reconstruction Law include loans and accrued interest
on loans, while risk-monitored loans under the Banking Law include loans only. (A mounts shown are thoseoutstanding at the end of ﬁscal 2009).
2. A ﬁgure in parentheses represents a share of each category.

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Japan Finance Organization for Municipalities Annual Report 201000

Appendices /JFM data

Appendices/JFM data
Appendices
Results of Lending Operations by Project in Fiscal 2009 ・・・ 92
Fiscal 2009 Loans by Group ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ 93
Fiscal 2009 Redemption of Loans ・・・・・・・・・・・・・・・・・・・・・・・・・・94
Long-Term Loan Balance by Project at the End of Fiscal 2009 ・・・ 95
Basics of Local Government Finance and JFM's Role ・・・・・・96
JFM data
Organization History ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・99
JFM Organization ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・100
Executive Oﬃcers and Corporate Auditors/Address・・・・・・101

Japan Finance Organization for Municipalities Annual Report 201091

Appendices

Results of Lendingg Operations
pbyy Project
j in Fiscal 2009

Project

Amount of loans made(Millions of Yen)

○ Public Housing

16,376○ General Projects

15,305Rate of change
(%)

△

91

105.6

1.2

109
2

97

Across-the-board gains

0.0

11

11,440Across-the-board gains

0.9

26

15.4

8.9

1,030

1.0

12.3

1,269

34.8

397

4.3

10.8

1,061

8.9

1.2

366

138.4

0.4

27

△

Sub-Total

158,262△448,795○ Water Supply

139,311○ Small-Scale Water Supply

15,833

Across-the-board gains

△

5,183

○ Urban Rapid Transit Railway

45,964

△

5.8

3.6

22

○ Hospitals

53,296

△

22.0

4.1

291

○ Sewerage

406,610

△

11.3

31.5

3,913

7,706

△

35.8

0.6

57

703

69.8

0.1

7

1,040

18.5

0.1

17

4,090

9.4

0.3

61

87.7

0.0

6

1,578

127.4

0.1

30

○ Slaughterhouses

59

28.3

0.0

5

Tourism Facilities

70

16.7

0.0

3

○ Parking Facilities

1,613

18.3

0.1

1

353

301.1

0.0

2

8.8

52.9

5,869

41.9

100.0

7,535

○ Industrial Water Supply

Municipal
EnterpriseRelated Projects

1.3
0.0

114,980○ Transportation

1.0

Across-the-board gains○ Local Road Construction Projects

Countermeasures Funding

Number of loans
Made (Number)

64○ Regional Revitalization Projects
General
Account-Related ○ Disaster Prevention Projects
Projects○ Special Municipal Merger Projects○ Extraordinary Financial

Share
(%)

○ Electricity Supply○ Gas Supply

Port Facilities○ Elderly Care Services○ Markets

Industrial Waste Processing
Sub-Total
Total

198

683,607
1,290,664△△△

Notes: 1. The “ ○ ” indicates projects eligible for special interest rates (including extra-special interest rates).
2. “General Projects” includes funding for Improvement of Rivers and Other Waterways and High School Constructionthat received consent (approval) for ﬁscal 2008.
3. “Local Road Construction” includes funding for Local Road Construction that received consent (approval) for ﬁscal
2006-2008.
4. The totals of the individual amounts may not add up exactly due to rounding oﬀ.

92

Japan Finance Organization for Municipalities Annual Report 2010

AppendicesFiscal 2009 Loans by
y Groupp
Appendices /JFM data

Results of Lending in Fiscal 2009Classifications
Amount (millions of yen)

Share (%)

Prefectures

383,831

29.7

Government-Designated Cities

211,234

16.4

City and Special Ward589,230

45.7

Towns and Villages

83,768

6.5

Corporate Groups and Associations

22,601

1.7

Total

1,290,664

100.0

Note: The totals of the individual amounts may not add up exactly due to rounding oﬀ.

Japan Finance Organization for Municipalities Annual Report 201093

AppendicesFiscal 2009 Redemption
pof Loans

Principal

Interest

Classifications
Number of loans

AmountNumber of loans

AmountGeneral loans

373,142

1,445,166

450,342

549,439

Loans to local
government
corporations

1,182

18,012

1,239

4,271

Total

374,324

1,463,178

451,581553,710

General loans

242

10,042242

6Loans to local
government
corporations

19

2,505

19

1

Total

261

12,547261

7374,585

1,475,725

451,842553,717

Redemption of pre-consent(approval) loans

–

–

–

–

Redemption of short-term loans

–

–

–

–

Long-term loans
Regular redemption

Long-term loans
Prepayment

Total

Note: The totals of the individual amounts may not add up exactly due to rounding oﬀ.

94

Japan Finance Organization for Municipalities Annual Report 2010

AppendicesLong-Termg
Loan Balance byy Projectj at the End of Fiscal 2009

Amount(millions of yen)
616,914
4,324,601

Improvement of Rivers andOther Waterways

3,690

237,816

1.1

High School Construction

Local Road Construction
ConstructionProjects
Projects ( ※2)

467
4
2
11
26
4

85,7536,840
6498
11,440
176

0.4
0.0
0.0
0.0
0.1
0.0

Extraordinary Financial
Countermeasures Funding

397

448,795

2.0

41,352
46,639
5,556
2,589
187
840
785
296
1,216
2,336
311
465
53
77
20
511

5,732,496
4,069,874
166,454262,227
24,575
1,438,433
67,04442,251
106,689
561,216
25,13289,541
6,413
7,927
10,93591,941

26.0
18.5
0.8
1.2
0.1
6.5
0.3
0.2
0.5
2.5
0.1
0.4
0.0
0.0
0.0
0.4

84

48,9380.2

120,844
182,8099,119,223
16,138,815

41.4
73.3

571

158,9160.7

224,732

22,030,227

100.0

Public Housing

General Projects

General AccountRelated Projects

Regional Revitalization Projects
Disaster Prevention Projects
Special Municipal Merger Projects

Sub-Total
Water Supply
Small-Scale Water Supply
Industrial Water Supply
Transportation
Urban Rapid Transit Railway
Electricity Supply
Gas Supply
Port Facilities

Municipal
Hospitals
Enterprise-Related Elderly Care Services
Projects
Markets

Slaughterhouses
Tourism Facilities
Industrial Waste Processing
Parking Facilities
Regional Development(Notes: 1)

Sewerage
Sub-Total

Local Government
Road Corporation

Appendices /JFM data

Local Road Construction (※1)

Number of loans(number)
5,312
31,439Project

Toll Roads(public corporations)

Total

Share
(%)
2.8
19.6

Notes: 1. Regional Development Projects are land creation projects for regional development that include the creationof coastal industrial lands and other lands along the shoreline, and preparation of inland industrial lands, andlands for distribution parks, and land for offices and shops, and housing lands. These projects also include thepreparation of housing sites undertaken as land readjustment projects.
2. JFMʼs scope of lending does not include toll road projects, urban redevelopment projects, or residential
land development projects. Moreover, JFM does not lend to local government road corporations.
3. The totals of the individual amounts may not add up exactly due to rounding oﬀ.
(※1) Implemented by Japan Finance Organization for Municipal Enterprises.
(※2) Implemented by Japan Finance Organization for Municipalities.
Japan Finance Organization for Municipalities Annual Report 201095

Appendices

Basics of Local Government Finance and JFMʼs Role

JFM formulates its lending program each ﬁscal year based on the Local Government Finance
Program and the Local Government Bond/Loan Program, which are prepared in parallel with thenational budget.

Local Government System in Japan
Local governments are responsible for extensive areas of administration closely related to the daily
lives of citizens, including social welfare, public health, school education, social education, policing
and ﬁre ﬁghting in their respective regions.
Local governments are comprised of prefectures, cities, towns and villages. Cities, towns andvillages are the basic units of local governments, and handle administrative issues related to theirrespective regions. Prefectures are broader-based local governments.
Each local government has an assembly, which consists of popularly elected representatives,and is granted certain legislative powers within its legal rights, in addition to the power to pass its
budget. Local governments are administered by directly elected governors and mayors.
As of March 31, 2010, there were 47 prefectures, 19 government-designated cities, 1,727 cities,
towns and villages, and 23 special wards of Tokyo.
JFM can provide loans only to these local governments and has provided loans to 97% of Japanʼs local governments.

Local Government Finance Program
As local governments play a signiﬁcant role in the national economy, the national government
takes responsibility to provide local governments with the funds required to smoothly implement
necessary measures and policies.
To this end, the national government formulates the Local Government Finance Program eachﬁscal year in parallel with the national budget with a view to giving an overall picture of the ﬁnances of local governments. Under this program, the national government secures revenue sources for
local governments to balance their revenue and expenditures as a whole.
An important source of funds that ﬂows from the national government to local governments is
the local allocation tax grant. Under the local allocation tax system, the national government distributes the money that is necessary to make up for the shortfall to maintain an appropriate levelof public services.
In ﬁscal 2009, the expenditure of local governments under the Local Government Finance Program totaled ¥82.6 trillion (US$882.0 billion), and accounted for 17.4% of gross domestic expenditure (GDE). Further, the local allocation tax grant for ¥15.8 trillion (US$169.0 billion) was distributed
to local governments by the national government.

Local Government Bond / Loan Program
The national government also prepares the Local Government Bond/Loan Program each ﬁscal year,
based on the Local Government Finance Program, to give an overall picture of long-term debts of96

Japan Finance Organization for Municipalities Annual Report 2010

Appendices /JFM data

local governments and to secure necessary revenue sources. The Local Government Bond/Loan
Program sets the amounts of fund-raising by local governments by projects as well as procurement sources.
For ﬁscal 2010, the total amount of the Local Government Bond/Loan Program, or the total
amount of new long-term debts of local governments is ¥15.9 trillion (US$169.8 billion). The breakdown of procurement sources is; JFM 13.6%, national government 27.3%, private sector 59.1%.

Municipal Enterprises
Local governments provide certain areas of services through the municipal enterprises operated
basically upon their revenues, not on money supplied from the general account. Water supply andsewerage services are mainly operated by municipal enterprises.
As of March 31, 2009, all the prefectures and 1,800 cities, towns and villages operated 9,096
municipal enterprises throughout Japan. Total expenditures of these municipal enterprises for ﬁscal 2008 totaled ¥20.3 trillion (US$217.0 billion).
The total capital expenditure of municipal enterprises in ﬁscal 2008 was ¥4.0 trillion (US$42.8
billion), of which ¥1.7 trillion (US$18.1 billion) was procured by borrowing, with ¥0.6 trillion (US$6.6
billion) provived by JFM.

Procedures for Local Governmentsʼ Fund-raising
In principle, borrwings can be approved as revenue sources for expenditures of local governments
only when the proceeds are used for the purposes speciﬁcally provided in the Local Finance Law
and other related regulations, such as the expenses associated with municipal enterprises, and theconstruction of public buildings and facilities. Additionally, the purposes and terms and conditionsof individual local government bonds and loans must be approved by the respective assembly.
To contribute to the sound ﬁscal management of local governments in undertaking bonds andloans, the following consultation system has been established.
1. Local governments must consult with the Minister for Internal Aﬀairs and Communications or
their respective prefectural governors when they undertake bonds and loans.
2. Local governments can borrow public funds, including JFM funds, only when they obtain consent from the Minister for Internal Aﬀairs and Communications or their respective prefectural
governors through consultation.
3. As for local government bonds and loans to which consent has been given by the Minister
for Internal Aﬀairs and Communications or the respective prefectural governors, the national
government incorporates part or the whole of the payment of principals and interests of these
local government debts into the Local Government Finance Program. These debt services arealso included in the computation of local allocation tax grants.

Japan Finance Organization for Municipalities DISCLOSURE 201097

4. If a local government undertakes to borrow money without obtaining consent from the Minister for Internal Aﬀairs and Communications or its respective prefectural governor, the head ofthe local government must report it to its respective assembly in advance.
5. Local governments and municipal enterprises whose deﬁcits exceed certain limits, and local
governments whose debt payment ratios exceed certain limits must obtain approval from
the Minister for Internal Aﬀairs and Communications or their respective prefectural governors
before raising funds.

The Law Relating to the Financial Soundness of Local Governments
The Law Relating to the Financial Soundness of Local Governments, which was enacted and promulgated in June 2007, stipulates that local governments whose ﬁnancial indices exceed certain levels shall
expeditiously restore ﬁnancial soundness. Under the Law, ﬁnancial indices of local governments shallbe disclosed, and the relevant local governments must map out their plans to restore ﬁscal soundness.
The Law is designed to ensure the ﬁscal soundness of local governments through administrative andﬁscal measures that help them execute their plans.
Under the Law, local governments with ﬁnancial indices exceeding the early warning limits or reconstruction limits shall restore their ﬁscal soundness in a carefully planned manner.

98

Japan Finance Organization for Municipalities Annual Report 2010

JFM Data

Organizationg
HistoryyAppendices /JFM data

History of JFM
Fiscal 2008

Established based on the Japan Finance Organization for Municipal Enterprises Law on August 1, 2008.
Succeeded to the assets and liabilities of the former JFM and commenced operations on October 1, 2008.

Fiscal 2009

Reorganized as Japan Finance Organization for Municipalities based on the amendment of the Japan Finance
Organization for Municipal Enterprises Law (June 1, 2009).

History of the former JFM
Fiscal 1957

Established based on the Japan Finance Corporation for Municipal Enterprises Law.

Fiscal 1960

Started making loans entrusted by Agriculture, Forestry and Fisheries Finance Corporation.

Fiscal 1966

Started a lending program that applied special interest rates.

Fiscal 1967

Started receiving subsidies from the national treasury.

Fiscal 1970

Started the program of contributions of proceeds from municipally operated racing, and established the Fundfor Improvement of Operations of Municipal Enterprises.

Fiscal 1972

Started lending to local government road corporations and local government land development corporations.

Fiscal 1978

Included three special projects (General Account-Related Projects, such as Local Road Construction,
Improvement of Rivers and Other Waterways, and High School Construction) in the scope of lending.

Fiscal 1983

Started issuing foreign currency-denominated bonds.

Fiscal 1989

Established the Reserve for Losses on Refinance of Bonds.

Fiscal 1990

Started a lending program that applied extra special interest rates.

Fiscal 1998

Fiscal 2001

Fiscal 2002

Based on the policy titled “Regarding Reorganization and Rationalization of Special Public Institutions,” which wasapproved by the cabinet on September 24, 1997, the following actions were taken.
·added a part-time senior executive director.
·established the Japan Finance Corporation for Municipal Enterprises Management Council.
·addressed the phased abolition of subsidies from the national treasury over a three-year period.
Stopped receiving subsidies from the national treasury, and established the Reserve for Interest
Rate Reduction.
Started providing borrowers with the right to choose fixed or adjustable interest rates.
Established a compensation program for advanced repayments.
Started issuing public offering bonds without government guarantee.
The Basic Law on Special Public Institutions was passed, and the Reorganizations and Rationalization Planfor Special Public Institutions was approved by the cabinet.
The policy titled the “Reform of the Four Highway-related Public Corporations, International Hub Airports
and Policy-based Finance Institutions” was approved by the cabinet.

Fiscal 2005

The “Priority Policy for Administrative Reform,” which included the proposal for abolition of the former
JFM, a new structure utilizing capital markets, and transitional measures to prepare for the abolition, wasapproved by the cabinet.

Fiscal 2006

The Administrative Reform Promotion Law was passed.
The Headquarters for the Promotion of the Reform of Policy-based Finance and the Headquarters for
Administrative Reform set forth the plan titled “System Design for Policy-based Financial Reforms.”
The six associations of local governments submitted the “Local Governments’ proposal” for the design of a
new system after the abolition of the former JFM.

Fiscal 2007

Japan Finance Organization for Municipal Enterprises Law was passed.
The Law Relating to the Financial Soundness of Local Governments was passed.
Introduced the program that allowed advanced repayments without compensation in accordance with thenational government’s policy on reducing local governments’ debt service burden. The program ended infiscal 2008.

Fiscal 2008

Dissolved based on the Japan Finance Organization for Municipal Enterprises Law (October 1, 2008).

Japan Finance Organization for Municipalities Annual Report 201099

JFM Data

JFM Organizationg

The Representative Board is the ultimate authority within JFMʼs organizational structure. Below the
Representative Board, JFM consists of executive oﬃcers such as the president and CEO, deputy president,
senior executive directors, corporate auditors, and four departments, eleven divisions and oﬃces, and aninternal auditor organized in accordance with the following chart.

As of April 1, 2010

Corporate
Planning
Department

President
and CEO
Representative
Board

DeputyPresident
SeniorExecutive
Directors

Personnel andSecretariat… Secretariat, personnel

CorporatepPlanning

Corporate planning, budget control, mattersrelated to the Representative Board and… Supervisory Committee, public relations,communication and coordination withother organizations

Integrated risk management,
Risk Management… ALM operations, systems management
SectionLocal Support
SectionSupport operations for local governmentsʼ
… fund-raising, financial research

General Affairs

General affairs including compensation and… benefits and legal review

Accounting

Budgets, settlement of accounts, matters related
to contributions from municipally operated…
racing, accounting, receipts and disbursements,
external audit

Finance… Fund-raising planning, fund-raising operations, IR

Fundingg
Administration

Funding administration and management of… fund investment

Administration
Department

Corporate
Auditors
Supervisory
Committee

Finance
Department

Lending
Management

Loan
Department

Internal
Auditor100

Japan Finance Organization for Municipalities Annual Report 2010

Planning and control of lending operations,calculation and setting of interest rates, lending… operations (excluding those operations
performed by Loan Administration Division)

Loan
Administration

Lending operations (excluding municipal… enterprises with the exception of public housing),
management of loan receivables, collection of loan
principal and interest, entrusted loan operations

Credit Researchand Analysis…

Credit analysis, credit management, periodic
on-site credit review……………………………… Internal audit

■ Executive Oﬃcers and Corporate Auditors
President and CEO
Deputy President
Senior Executive Directors
Corporate Auditors

Yuji Watanabe
Masamichi Fukunaga
Takeji Takei Yoji Ninomiya Takao Kodama (part-time)
Shuichi Kadowaki Nadamu Takata (part-time)

Yoji Ninomiya
Masamichi Fukunaga
Yuji Watanabe
Takeji Takei
Takao Kodama
Senior Executive Director
President and CEO Senior Executive Director Senior Executive Director
Deputy President(Photo credits: The Tokyo Institute for Municipal Research)■ Address
Shisei Kaikan, 1-3 Hibiya Koen, Chiyoda-ku,
Tokyo 100-0012, Japan
Telehone : 81-3-3539-2697
Facsimile : 81-3-3539-2615
http://www.jfm.go.jp/en

Shuichi Kadowaki
Corporate Auditor

Nadamu Takata
Corporate Auditor

The logo represents the solidarity of local governments in the establishment and management of Japan
Finance Organization for Municipalities (JFM), with a single circle formed by three blocks that symbolize
the senses of “stability,*” ”trust*” and ”conﬁdence*,” all of which are required for the execution of its
business operations. Furthermore, three lines extend outward radially from the inside “triangle” derived
from the “L” of local governments and the “公” of Chinese characters “地方公共団体” meaning local
governments, representing local governments and JFM making a great leap toward the future.
*“Stability” ‒ providing long-term and low-interest funds in a stable manner.
*”Trust” ‒ contributing to the sound ﬁscal management of local governments and the promotion of the welfare of local residents.
*”Conﬁdence” ‒ gaining the conﬁdence of local governments and capital markets.

The color universal design used in this report is certiﬁed by
the non-proﬁt Color Universal Design Organization (CUDO)
as easy to view for a broad range of people and its usability
is not aﬀected by individual diﬀerences in color perception.