Fiscal 2010

Japan Finance Organization for Municipalities

Financial Statements

Japan Finance Organization for Municipalities

Contents
Balance Sheets...............................................................................................................3
Statements of Income.....................................................................................................4
Appropriation of Profit [General Account / Management Account]..................................5
Statements of Changes in Net Assets.............................................................................7
Statements of Cash Flows..............................................................................................9
Notes to Financial Statements......................................................................................102

■ Balance Sheets (As of March 31, 2010 and 2011)

Item

Fiscal
2009(March 31,
2010)

Fiscal 2010
(March 31, 2011)(Millions of Yen) (Thousands of US dollars)

Item

Fiscal
2009(March 31,
2010)

AmountAmountAssetsLoans (Note 4)

Fiscal 2010
(March 31, 2011)

Liabilities¥22,030,227 ¥22,231,856 $267,145,594 Bonds (Note 7 and 8)

Securities (Note 17)984,477

457,590

5,498,561 Other liabilities

Cash and bankdeposits

149,264

516,633

6,208,040 Reserve for bonuses (Note 9)

Other assets

17,15917,033

204,675

Reserve for retirement
35,065 benefits (Note 9 and 12)

Tangible fixed
assets (Note 6)

2,948

2,918

Intangible fixed
assets (Note 6)

921

756

9,095

¥18,534,475 ¥18,327,190 $220,225,787
17,726

17,698

212,666

43

41

501

7

6

83

210

195

2,349

56

27

327

Fund for improvement ofoperations of municipalities

906,939915,823

11,004,853

Basic fund for improvementof operations of municipalities(Note 11)

901,407908,104

10,912,097

Additional fund for
improvement of operations ofmunicipalities (Note 11)

5,531

7,719

92,756

Reserve under special laws

3,664,927

3,896,421

46,820,740

Reserve for interest rate
volatility (Note 10)

440,000

660,000

7,930,786

Management account reserve forinterest rate volatility (Note 10)

3,111,043

3,136,532

37,689,651

Reserve for interest rate reduction

113,883

99,8891,200,303

23,124,384

23,157,405

278,267,306

Capital16,602

16,602

199,497

Retained earnings

5,834

13,860166,555

General account surplus reserve

5,834

13,860166,555

Valuation , translation
adjustments and others(1,340)(8,645)(103,892)

Management account surplus
reserve

39,51747,565571,564

Total net assets

60,61369,382

833,724

Reserve for directors'
bonuses (Note 9)

Reserve for retirement benefits
for directors and corporate
auditors (Note 9)

Total liabilities
Net Assets

Total assets¥23,184,998 ¥23,226,787 $279,101,030 Total liabilities and net assets ¥23,184,998 ¥23,226,787 $279,101,030

3

■ Statements of Income(For the Years Ended March 31, 2010 and 2011 )Item(Millions of Yen) (Thousands of US dollars)

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

Fiscal 2010
(April 1 , 2010 to March 31, 2011)

AmountAmountIncome¥558,528¥539,997$6,488,794

Interest income

558,369

539,8126,486,568

Fees and commissions

140

134

1,620

Other income

18

50

606

Expenses

308,357

292,428

3,513,918

Interest expenses

297,347

283,177

3,402,754

Fees and commissions

271

269

3,242

Other operating expenses

4,641

4,418

53,101

General and administrative expenses

2,365

2,374

28,532Other expenses

3,731

2,187

26,289

3,731

2,187

26,289Ordinary income

250,170

247,569

2,974,876

Special gains

235,010

233,994

2,811,754

Reversal of Management account reservefor interest rate volatility (Note 10)

220,000

220,000

2,643,595

Reversal of reserve for interest rate
reduction

15,01013,994

168,159

Special losses

476,315

465,489

5,593,475

Provision for reserve for interest rate
volatility (Note 10)

220,000

220,000

2,643,595

Provision for Management accountreserve for interest rate volatility (Note 10)

256,315

245,489

2,949,880

8,866¥ 16,074

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

Net income

¥

4

$

193,155

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

1 Profit to be appropriate
Net income–

Accumulated deficit brought down

¥4,539¥4,5392 Profit appropriated4,539

Surplus reserve

4,539

Notes: 1. Profit was appropriated at the end of this fiscal year in accordance with the provisions of Article 39, Section 1 of the Japan 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, 2011)(Millions of Yen)

1 Profit to be appropriatedNet income–

Accumulated deficit brought down

¥8,025¥8,025

2 Profit appropriated8,025

Surplus reserve

8,025(Thousands of US dollars)

1 Profit to be appropriatedNet income
Accumulated deficit brought down
2 Profit appropriatedSurplus reserve–$96,443
96,443$96,443

96,443

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

5

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

1 Profit to be appropriate
Net income–

Accumulated deficit brought down

¥4,326¥4,326

2 Profit appropriated

4,326

Surplus reserve

4,326

Notes: 1. Profit was appropriated at the end of this fiscal year in accordance with the provisions of Article 13, Section 8 of the supplementaryprovisions 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, 2011)(Millions of Yen)

1 Profit to be appropriatedNet income–

Accumulated deficit brought down

¥8,048¥8,0482 Profit appropriated8,048

Surplus reserve

8,048(Thousands of US dollars)

1 Profit to be appropriatedNet income–

Accumulated deficit brought down

$96,712$96,712

2 Profit appropriated96,712

Surplus reserve

96,712

Notes: 1. Profit was appropriated at the end of this fiscal year in accordance with the provisions of Article 13, Section 8 of the supplementaryprovisions 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.

6

■ Statements of Changes in Net Assets(From April 1, 2009 through March 31, 2010)(Millions of Yen)

Stockholders’ equity
Retained earnings
Generalaccount
surplusreserve

Total
retainedearnings¥16,602¥1,295¥1,295¥17,897

–

4,539

4,539

–

–

–
¥16,602

CapitalBalance at end of previous
fiscal year
Changes during accounting
periodNet income
Net changes duringaccounting period in items
other thanstockholders’ equity
Net changes during accounting
periodBalance at March 31, 2010

Valuation,translation
adjustments
and others Management
account
surplus
Unrealized
Total
reserveloss fromstockholders’hedging
equityinstruments–¥35,190¥53,087

4,539

–

4,326

8,866

–

–

(1,340)–(1,340)

4,539

4,539

4,539

(1,340)

4,326

7,525

¥5,834¥5,834¥22,436¥(1,340)¥39,517¥60,613

7¥

Total net
assets(From April 1, 2010 through March 31, 2011)(Millions of Yen)

Stockholders’ equity
Retained earnings
Total
retainedearnings¥16,602¥5,834¥5,834¥22,436¥(1,340)¥39,517¥60,613

–

8,025

8,025

8,025

–

8,048

16,074––––(7,305)–(7,305)

–

8,025

8,025

8,025

(7,305)

8,048

8,768

¥16,602¥13,860¥13,860¥30,462¥(8,645)¥47,565¥69,382

Net income
Net changes duringaccounting period in items
other thanstockholders’ equity
Net changes during accounting
periodBalance at March 31, 2011

(From April 1, 2010 through March 31, 2011)(Thousands of US dollars)

Stockholders’ equity
Retained earnings

Balance at end of previous
fiscal year
Changes during accounting
periodNet income
Net changes duringaccounting period in items
other thanstockholders’ equity
Net changes during accounting
periodBalance at March 31, 2011

Total net
assetsGeneralaccount
surplusreserve

CapitalBalance at end of previous
fiscal year
Changes during accounting
periodValuation,translation
adjustments
and others Management
account
surplus
Unrealized
Total
reserveloss fromstockholders’hedging
equityinstruments

Valuation,translation
adjustments
and others Management
account
surplus
Unrealized
Total
reserveloss fromstockholders’hedging
equityinstruments

Total net
assetsCapitalGeneralaccount
surplusreserve

Total
retainedearnings$199,497$ 70,112$ 70,112$269,609$ (16,105)$474,852$728,356–

96,44396,44396,443–96,712

193,155

–

–

–

–

(87,787)–(87,787)–

96,44396,44396,443(87,787)

96,712

105,368$199,497$166,555$166,555$366,052$(103,892)$571,564$833,724

8

■ Statements of Cash Flows(For the Years Ended March 31, 2010 and 2011)
Item(Millions of Yen) (Thousands of US dollars)

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

Fiscal 2010
(April 1, 2010 to March 31, 2011)

AmountAmountⅠ Cash flows from operating activities
Net income

¥

8,866

¥

16,074$

193,155

294

353

4,250

Interest income(558,369)(539,812)(6,486,568)

Interest expenses

Depreciation and amortization

297,347

283,177

3,402,754

Decrease in reserve for bonuses

(4)

(1)

(19)

Decreas in reserve for directors’ bonuses

(0)

(0)

(3)

Increase /(decrease) in reserve for retirement benefits

7

(14)

(176)

Increase /(decrease) in reserve for retirement benefits for
directors and corporate auditors

5

(28)

(348)

3,731

2,187

26,289

Increase in reserve for interest rate volatility

220,000

220,000

2,643,595

Increase in Management account reserve for interest rate
volatility

36,31525,489306,285

Increase in fund for improvement of operations ofmunicipalities

Decrease in reserve for interest rate reduction(15,010)(13,994)(168,159)

Net (increase)/decrease in loans

185,060(201,628)(2,422,842)

Net decrease in bonds(447,921)(211,245)(2,538,393)

Interest received

557,974

539,475

6,482,522

Interest paid

(293,491)(279,095)(3,353,705)(325)(7,434)(89,337)(5,520)(166,498)(2,000,700)

OthersNet cash used by operating activities
Ⅱ Cash flows from investing activities
Proceeds from redemption of securities

5,536,800

6,711,500

80,647,681

Purchases of securities(5,645,665)(6,184,118)(74,310,487)

(9)

(15)

(192)

Purchases of tangible fixed assets
Purchases of intangible fixed assets
Net cash provided /(used) by investing activities

(463)

(195)

(2,343)(109,338)

527,170

6,334,659

8,576

6,696

80,471

(44)

–

–

8,532

6,696

80,471–––(106,327)

367,368

4,414,430

Ⅲ Cash flows from financing activities
Revenue from contributions made from municipally
operated racing
Refund of contributions made from municipally operated
racingNet 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 Cash and cash equivalents at end of year9

255,591

149,264

1,793,610¥ 149,264¥ 516,633$ 6,208,040

■ 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 Ordinanceon Finance and Accounting of Japan Finance Organization for Municipalities. (Ordinance No.87 of the Ministry ofInternal Affairs and Communications, 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 thefinancial 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, 2011, the final business day of the fiscal year,
which was ¥83.22 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 tooperations, 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
Amortization of intangible fixed assets is calculated by the straight-line method based on the estimateduseful lives and the residual value determined by management. Software for internal use owned by JFM isamortized 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 foreignexchange 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 estimatedbonuses, 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 amountdeemed accrued at the fiscal year-end, based on the projected retirement benefit obligation and fair value ofplan 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 method10Interest rate swaps used to hedge the risk of interest rate fluctuations and which qualify for hedge accounting
and meet specific matching criteria are not measured at fair value, but the differential paid or received under
the swap agreements is recognized and included in interest expense or income. If swap contracts or forward
contracts used to hedge the foreign currency fluctuation qualify for deferral hedge accounting, foreign
currency-denominated assets 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.
As a means of hedging foreign exchange fluctuation risks associated with the receipt of interest andprincipal of foreign currency-denominated bank deposits, we arrange a foreign exchange forward contract at
the time of deposit to hedge the risks.
(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 notassess its effectiveness. Moreover, a periodic assessment of hedge effectiveness for interest rate swaps
and currency swaps and forward contracts which qualify for deferral hedge accounting is omitted when the
exceptional accrual method is applied.
(8) Cash and cash equivalents
Cash and cash equivalents in the 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
improvement of operations of municipalities to reserve contributions as stipulated in Article 32-2 of the Local
Finance Law (Law No. 109, 1948). Also, pursuant to the provisions of Article 46, Section 5 of the Law, income
arising from the investment of the Fund (hereinafter, “investment income”) is used to reduce interest rates ofthe loans to municipalities, and if there is any surplus in the investment income after this interest rates reduction
process, the surplus amount is added to the Fund. Further, pursuant to the provisions of Article 46, Section 6 of
the Law, if there is any shortfall after the interest rates reduction process, the shortfall is covered by withdrawalof 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.
(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 ourbonds (excluding the bonds issued by the former Japan Finance Corporation for Municipal Enterprises) pursuant
to the provisions of Article 38, Sections 1 and 3 of the Law, and Article 9, Section 8 of the supplementaryprovisions of the Law, and is calculated and accounted for based on the provisions of Article 34 of the Ministerial
Ordinance on Finance and Accounting of Japan Finance Organization for Municipalities (Ordinance No. 87 of
the Ministry of Internal Affairs and Communications, 2008; hereinafter, “Ordinance on Finance and Accounting”)
and Article 22 of the Government Ordinance on preparation of relevant government ordinances and provisional
measures for the abolishment of the Japan 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
associated with refinancing of the bonds issued by the former Japan Finance Corporation for MunicipalEnterprise (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 theprovisions of Articles 1 through 3 of the Ministerial Ordinance on the operations of the Management Account at
Japan Finance Organization for Municipal Enterprises (Ordinance No. 2 of the Ministry of Internal Affairs andCommunication, and the Ministry of Finance, 2008; hereinafter, “Management Account Operations Ordinance”)
and Articles 3 and 5 of the supplementary provisions of the above ordinance.

11(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, andis calculated and accounted for based 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 separately from 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. Change of the accounting policy

Effective April 1, 2010, JFM adopted the Accounting Standard for Asset Retirement Obligations (AccountingStandards Board of Japan (ASBJ), Statement No.18 issued on March 31, 2008) and the Implementation Guidanceon Accounting Standard for Asset Retirement Obligations (ASBJ Guidance No.21 issued on March 31, 2008). The
effects of the change are minor.Notes have been omitted since the total amount of asset retirement obligations isimmaterial.

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 4 of the Enforcement Ordinance of the Corporate Income Tax Law (Government Ordinance No. 97, 1965),
and on which accrued interest is not accounted in revenue as there is no expectation of collection of either principal
or interest because they are past due for a considerable period of time or for other reasons (excluding loans on
which bad debts are written off; hereinafter, “Non-accrual loans”).
Non-accrual loans represent loans on which accrued interest is not accounted in revenue, excluding loans tobankrupt 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 formore than 3 months, calculated from the day following the contractual due date, excluding bankrupt loans and nonaccrual loans.
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 ormore).
We extended the due date of payment of interest and principal of loans to 16 organizations (2,543 million yen,
30,562 thousand USD as of March 31, 2011) that had difficulty in processing the payment as a result of the Great
Tohoku Earthquake. We believe that there is little doubt about the collectability of loans to these organizations.

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 establishmentof the Integrated Risk Management Committee, which supervises JFMʼs overall risk management, and the
Risk Management Office, which monitors the risks in each 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 with repayment of interest and principal in equal installments. Therefore, a large maturity gap is createdbetween lending and funding, and JFM is exposed to the interest rate risk associated with bond refinancing.

12

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 and appropriate manner. Specifically, themedium- and long-term management analysis and risk analysis and evaluation are conducted throughscenario 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 ofmethods, such as issuing super-long-term bonds.
(c) Risk Management for Financial Instruments(i) Credit risk
Credit risk is the risk of loss arising from a credit event, such as deterioration in the financial condition ofa borrower, that causes an asset to lose value or become worthless. In addition to credit risk associatedwith 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 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 for individual local governments by including a portion of local government debt servicing
costs in the Standard Financial Needs when calculating local allocation tax.
• Under the consultation system for local government bonds and loans, credit reviews must include
checks on 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 standing of local government bonds and loans ismaintained.
• Under the Law Relating to the Financial Soundness of Local Governments, which was promulgatedin 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 with regard to redemption of local government bonds
and loans, and other operations.
• JFM is not subject to the "Banking Law" (1981, No. 59) or the "Financial Reconstruction Law" (1998,
No. 132) but performs self-assessment of loans made by the former JFM to local government roadcorporations 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 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 and CSA (Credit Support Annex) with allderivatives counterparties to reduce credit risk resulting from fluctuations in the value of derivativetransactions.
(ii) 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 therisk 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 therisk of losses incurred or decrease in profits, which would arise from fluctuations in interest rates when13

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 createsinterest rate risk associated with bond refinance. JFM takes the following measures to address theinterest 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 a duration 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, 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 alsoendeavors 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 withmaturities exceeding 10 years, and by 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 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 upward and 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 aresult of interest rate fluctuations during the time from which JFM raises money through bond issuanceand the point at which the money is loaned to local governments. JFM uses swap transactions tohedge 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 raterisk 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 from price declines and the risk of realized losses on foreign currency-denominated deposits
resulting from fluctuations in foreign exchange rates. Accordingly, in principle JFM minimizes the riskof price fluctuation by holding investments until maturity, and hedges foreign exchange risk by using
foreign exchange contracts.
C. Quantitative information on market risk
In JFM, mainly loans and bonds are affected by interest risk, which is major risk variables among themarket risks.
With respect to General account loans and bonds, JFM establishes a management target anduses the outlier ratio for quantitative analysis in the management of interest rate risk.
Specifically, JFM attempts to achieve roughly below 20% of the outlier ratio from Fiscal 2009 to
Fiscal 2013 by means of issuing bonds of various terms, including super long-term bonds, which havea redemption period of over ten years, considering the composition of remaining period of the bonds
held.
The outlier ratio is calculated under the following conditions.
・Future Cash Flows
With respect to loans, future cash flows regarding such loans are calculated by classificationaccording to type of interest rate of the loans. In addition, the advanced redemption in the future is
not expected by JFM.
With respect to fixed-rate bonds, future cash flows regarding such fixed-rate bonds arecalculated based on the redemption schedule. With respect to floating rate bonds for which hedging
interest rate swaps, quality for hedge accounting and meet specific matching criteria future cash
flows regarding such floating rate bonds are calculated as fixed-rate bonds.

14

・Indicative Interest Rate
For the assessment of loans and bonds, the interest rate of government bonds as of March 31, 2011,is used.
・Calculation of Outlier Ratio
Based on an assumption that variable risk, except for interest rate, are fixed as of March 31, 2011,
the outlier ratio is calculated by dividing the change in fair value in the case where the indicativeinterest rate (government bonds) rises across-the-board by 200 basis points (2.00%) or the change
in fair value in the case such rate falls across-the-board by 200 basis points (2.00%), whichever isgreater, by net assets including reserve for interest rate volatility and the Fund for Improvement of
Operations of Municipalities.
The outlier ratio as of March 31, 2011, is as follows:
The outlier ratio in the case of a rise of 200 basis points of the indicative interest ratio is only
calculated as JFM is aware that the change in fair value in the case of rising interest rate is greaterthan that in the case of falling interest rate.
(100 Millions of Yen) (Millions of US dollars)

Outlier ratio(a)=-(b)/(e)General
Account

14.6%[+6.0%]

Change in fair value when interest rate rises by 200 basis points
Total
Loans
Bonds
(b)=(c)+(d)(c)(d)¥(2,339)[(1,169)]$(2,810)[(1,404)]¥(6,926)[(3,284)]$(8,322)[(3,946)]+¥4,587[+2,116]+$5,511[+2,542]

Net assets including
reserve for interest
rate volatility and theFund for Improvementof Operations ofMunicipalities (e)¥15,976$19,197[+2,296][+2,758]

Note: Amounts posted in “[ ]” are change from the previous fiscal year.

With respect to loans and bonds in Management account, JFM merely continues to raise funds
by the issuance of bonds as necessary in order to manage existing loans until the completion of theirredemption. For this reason, while JFM reports the calculation results of the quantitative information
regarding the interest rate risk to the ALM committee and confirms the status or transition, etc. ofinterest rate risk, JFM does not establish a management target or use the quantitative analysis in
the management of interest rate risk.
With respect to these financial instruments in Management account, on the condition that therisk variables, except for interest rate risk, are firm, if the indicative interest rate as of March 31,
2011 is at 10 basis points higher than the rate, it is assumed that the fair value of the net amount(assets side), after offsetting such financial instruments with the financial liabilities, decline by 68.3
billion yen (820 million US dollars). On the contrary, if the indicative interest rate as of March 31,
2011 is at 10 basis points lower than the rate, it is assumed that the fair value of the net amount(assets side), after offsetting such financial instruments with the financial liabilities, increase to growby 69.3 billion yen (832 million US dollars).
(iii) Liquidity risk
Liquidity risk is the risk that JFM would incur losses because it finds it difficult to secure the necessary
funds or is forced to obtain funds at far higher interest rates than under normal conditions due to amismatch 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 other difficult 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 is carried out based on aquarterly plan for fund management. 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 description on fair value of financial instruments
In addition to the amount based on the market price, the fair value of illiquid financial instruments includes
a value that has been rationally calculated. Since certain assumptions were made when calculating thefair value, the value may differ in the event that the assumptions differ.

15

(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(1) Loans(2) Securities
held-to-maturity securities(3) Cash and bank deposits
Total assets
Bonds
Total liabilities
Derivative transactions(*1)
Qualifying for hedge accounting
Total of derivative transactions

Fair value(Millions of Yen)

Difference¥22,030,227¥23,213,516¥1,183,288

984,477
149,264
23,163,968
18,534,475
18,534,475

984,476
149,264
24,347,256
19,056,723
19,056,723(1)–
1,183,287
522,248522,248

(619)
(619)

(619)
(619)

–
–

The balance sheet amount, fair value and difference between them on March 31, 2011 are as follows.
(Millions of Yen)

Balance sheet amount(1) Loans(2) Securities
held-to-maturity securities(3) Cash and bank deposits
Total assets
Bonds
Total liabilities
Derivative transactions(*1)
Qualifying for hedge accounting
Total of derivative transactions

Fair value

Difference¥22,231,856¥23,462,149¥1,230,293

457,590516,633
23,206,079
18,327,190
18,327,190

457,582
516,633
24,436,365
18,873,549
18,873,549(7)–
1,230,285
546,359546,359

(789)
(789)

(789)
(789)

–
–
(Thousands of US Dollars)

Balance sheet amount(1) Loans(2) Securities
held-to-maturity securities(3) Cash and bank deposits
Total assets
Bonds
Total liabilities
Derivative transactions(*1)
Qualifying for hedge accounting
Total of derivative transactions

Fair value

Difference$267,145,594$281,929,222$14,783,628

5,498,561
6,208,040

5,498,469
6,208,040(92)–

278,852,195

293,635,731

14,783,536

220,225,787

226,791,026

6,565,239

220,225,787

226,791,026

6,565,239(9,488)(9,488)–(9,488)(9,488)–(*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 ( ).

16Note 1. Method for calculating fair value of financial instruments and items related to marketable securities and derivative transactions

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 and 2011.
(2) Securities
All bonds are held until maturity, and the fair value of Treasury discount bills is the market price.
Since all negotiable certificates of deposits are short-term, the fair value is close to the book price. As a result,the book price is deemed to be the fair value.
As of March 31, 2010

(Millions of Yen)Type
Securities with fair values
exceeding the balance
sheet amount

Balance sheet amount
–

¥

¥–

–

–

–

Treasury discount bills
Negotiable certificate ofdeposits

379,977

379,976(1)

604,500

604,500–

Sub total

984,477

984,476(1)¥984,477¥984,476

¥(1)

Total

–

¥

Difference–

Sub total

Securities with fair values
that do not exceed thebalance sheet amount

Fair value

As of March 31, 2011

(Millions of Yen)Type
Securities with fair values
exceeding the balance
sheet amount

Balance sheet amount–¥Sub total
Treasury discount bills
Negotiable certificate ofdeposits

Securities with fair values
that do not exceed thebalance sheet amountSub total
Total

Fair value–¥

Difference
–

¥–

–

–

–

86,99086,982(7)

370,600

370,600–

457,590

457,582(7)¥457,590¥457,582¥(7)(Thousands of US dollars)

Type
Securities with fair values
exceeding the balance
sheet amount

Balance sheet amount–$Sub total
Treasury discount bills
Negotiable certificate ofdeposits

Securities with fair values
that do not exceed thebalance sheet amountSub total
Total–

Fair value$

Difference
–

$ –

–

–

–

1,045,305

1,045,213(92)

4,453,256

4,453,256–

5,498,561

5,498,469(92)$5,498,561$5,498,469$(92)(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.

17

Liabilities
Bonds
The fair value of bonds issued by JFM that have a market price is based on the market price. The fair value ofbonds without a market price is calculated by discounting the future cash flows for the interest rate that would
presumably be applied 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-denominatedbonds is thus calculated using the total of the fair value of that bond and the fair value of the swap transaction.
Hedge accounting is used for interest rate swaps, and the fair value of floating rate bonds is thus calculated
by determining the current value using the total of the 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 asimilar bond.

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

Contract amount

Hedge accounting
methodType of derivativetransactions

Primary
hedgeditems

Fundamental accounting
methodInterest rate swap
transactions Receive/
fixed and pay/floating

Bonds¥272,000

Hedge account forinterest rate swaps

Interest rate swap
transactions Receive/
floating and pay/fixed

Bonds

Deferral hedge
accounting for currency
swaps

Currency swap
transactions

Deferral hedge
accounting for foreignexchange contracts

Foreign exchange
contracts
Total

Fair value

Method for
calculating fairvalue¥272,000¥(619)

Based on pricegiven by financial
institution

80,00080,000(*1)

Foreigncurrencydenominatedbonds

514,900

395,400(*2)

Foreigncurrencydenominateddeposits

60,000–(*2)¥926,900¥747,400¥(619)Of which
1 year or
more

18

For derivative transactions using hedge accounting, the contractual amount or the amount equivalent to theprincipal in the contract for each hedge accounting method as of March 31, 2011 is as follows:(Millions of Yen)

Contract amount

Hedge accounting
methodType of derivativetransactions

Primary
hedgeditems

Fundamental accounting
methodInterest rate swap
transactions Receive/
fixed and pay/floating

Bonds¥100,000

Hedge account forinterest rate swaps

Interest rate swap
transactions Receive/
floating and pay/fixed

Bonds

Deferral hedge
accounting for currency
swaps

Currency swap
transactions

Deferral hedge
accounting for foreignexchange contracts

Foreign exchange
contracts

Fair value

Method for
calculating fairvalue

¥100,000¥(789)

Based on pricegiven by financial
institution

95,00095,000(*1)

Foreigncurrencydenominatedbonds

483,090

483,090(*2)

Foreigncurrencydenominateddeposits

138,000–(*2)¥816,090¥678,090¥(789)Total

Of which
1 year or
more(Thousands of US dollars)

Contract amount

Hedge accounting
methodType of derivativetransactions

Primary
hedgeditems

Fundamental accounting
methodInterest rate swap
transactions Receive/
fixed and pay/floating

Bonds$1,201,634

Hedge account forinterest rate swaps

Interest rate swap
transactions Receive/
floating and pay/fixed

Bonds

Deferral hedge
accounting for currency
swaps

Currency swap
transactions

Deferral hedge
accounting for foreignexchange contracts

Foreign exchange
contracts

Fair value

Method for
calculating fairvalue

$1,201,634$(9,488)

Based on pricegiven by financial
institution

1,141,553

1,141,553(*1)

Foreigncurrencydenominatedbonds

5,804,975

5,804,975(*2)

Foreigncurrencydenominateddeposits

1,658,255–(*2)$9,806,417$8,148,162$(9,488)

Total

Of which
1 year or
more(*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 with the foreign
currency-denominated bond or foreign currency-denominated deposit being hedged, the fair value is posted together with the fair value ofthe relevant bond.

19

Note 2. The repayment schedule from March 31, 2011 for monetary claims and securities with maturity dates is as follows:

Loans(Millions of Yen)

Within 1 year

After 1 year
through
2 years

After 2 years
through
3 years

After 3 years
through
4 years

After 4 years
through
5 years

After 5 years After 10 years After 20 years
throughthroughthrough
10 years
20 years
30 years¥1,579,622¥1,551,565¥1,544,319¥1,510,292¥1,478,709¥6,288,292¥6,911,416¥1,367,638

457,590

–

–

–

–

–

–

–

516,632

–

–

–

–

–

–

–

Securities
Securities held-to-maturity
Deposits(Thousands of US Dollars)Within 1 year

After 1 year
through
2 years

After 2 years
through
3 years

After 3 years
through
4 years

After 4 years
through
5 years

After 5 years After 10 years After 20 years
throughthroughthrough
10 years
20 years
30 years$18,981,286 $18,644,141 $18,557,069 $18,148,192 $17,768,677 $75,562,269 $83,049,951 $16,434,010

Loans
Securities
Securities held-to-maturity
Deposits

5,498,561

–

–

–

–

–

–

–

6,208,036

–

–

–

–

–

–

–

Note 3. The repayment schedule from March 31, 2011 is as follows:

Bonds(Millions of Yen)

Within 1 year

After 1 year
through
2 years

After 2 years
through
3 years

After 3 years
through
4 years

After 4 years
through
5 years

After 5 years After 10 years After 20 years
throughthroughthrough
10 years
20 years
30 years¥2,176,130¥2,030,560¥2,164,070¥1,931,670¥1,680,970¥6,865,040

Within 1 year

After 1 year
through
2 years

After 2 years
through
3 years

After 3 years
through
4 years

After 4 years
through
5 years

After 5 years After 10 years After 20 years
throughthroughthrough
10 years
20 years
30 years$26,149,123$24,399,904$26,004,206$23,211,608$20,199,111$82,492,670¥1,286,338¥211,452(Thousands of US Dollars)

Bonds

20

$15,457,078$2,540,880

6. Tangible and Intangible Fixed Assets

Tangible and intangible fixed assets at March 31,2011 consisted of the following:

Type of assets

Balanceat end ofIncreaseprevious
duringfiscal year
the year(Aquisition
costs)(Millions of Yen)

Accumulated
Balance at
Depreciation Balance at
depreciation
Decrease March 31,
March 31,andandduring2011
2011
amortizationamortization
the year (Aquisition
during the (Net bookat March 31,
costs)
value)
year
2011

Tangible fixed assets
Buildings

¥ 555

¥ 12

¥ –

¥ 568

¥107

¥ 42

¥ 460

Land

2,403

–

–

2,403

–

–

2,403

Other tangible fixed assets

96

43

–

140

85

45

54

Total tangible fixed assets

3,055

56

–

3,111

193

87

2,918

1,219

113

–

1,332

576

264

756

Other intangible fixed assets

13

–

13

0

–

–

0

Total intangible fixed assets¥1,233¥113¥13¥1,332

¥576

¥264

¥ 756

Intangible fixed assets
Software(Thousands of US Dollars)

Type of assets

Balanceat end ofIncreaseprevious
duringfiscal year
the year(Aquisition
costs)

Accumulated
Balance at
Depreciation Balance at
depreciation
Decrease March 31,
March 31,andandduring2011
2011
amortizationamortization
the year (Aquisition
during the (Net bookat March 31,
costs)
value)
year
2011

Tangible fixed assets
Buildings$ 6,674

$ 154

$ –

$ 6,828$1,296$ 506$ 5,532Land

28,878––28,878––28,878Other tangible fixed assets

1,159

527

–

1,686

1,031

541

655

Total tangible fixed assets

36,711681–

37,392

2,327

1,047

35,065

14,6571,359–

16,016

6,922

3,176

9,094

Other intangible fixed assets

163

–

162

1

–

–

1

Total intangible fixed assets$14,820$1,359$162$16,017$6,922$3,176$ 9,095

Intangible fixed assets
SoftwareNotes: 1. Accumulated depreciation of tangible fixed assets amounted to 193 million yen (2,327 thousand dollars) as of March 31, 2011.

21

7.Assets Pledged as Collateral○ At March 31, 2010
Pursuant to the provisions of Article 40, Section 2 of the Law, JFM’s total assets are pledged as general collateral for
JFM bonds for 18,534,475 million yen (222,716,595 thousand dollars).
○ At March 31, 2011
Pursuant to the provisions of Article 40, Section 2 of the Law, JFM’s total assets are pledged as general collateral for
JFM bonds for 18,327,190 million yen (220,225,787 thousand dollars).

8.Bonds

Bonds at March 31, 2011 consisted of the following:(Millions of Yen)(Thousands of US Dollars)

Date of issue

Outstanding amountat March 31, 2011

Couponrate
Maturity(%)

Government-guaranteed bonds (domestic)
1st-22th JFM bonds

6/15/20093/14/2011¥ 1,330,908$15,992,656

0.9
〜 1.5

10Y

Government-guaranteed bonds (international)
1st Global US dollar JFM bonds

1/13/2011

83,170999,399

4.0

10Y

Public offering bonds without government guarantee
1st-4th 5-year bonds

5/25/20102/21/2011

90,0001,081,471

0.423〜 0.639

5Y

Public offering bonds without government guarantee
1st-22nd JFM bonds

6/18/20093/17/2011

605,000

7,269,887

0.976〜 1.648

10Y

Public offering bonds without government guarantee
1st-13th 20-year bonds

6/25/20091/24/2011

355,000

4,265,801

1.752〜 2.266

20Y

Public offering bonds without government guarantee
F-1st-F-52th, F-54th- F-56th JFM bonds

7/22/20092/3/2011

461,000

5,539,534

0.185〜 2.332

3Y 〜
29Y

Public offering bonds without government guarantee
F-53th JFM bonds (Floating Rate Note)

2011/2/1

15,000180,245

Floating
rate

10Y

Private placement bonds without government
guarantee A-1st -14th JFM bonds

7/31/20093/22/2011

680,000

8,171,113

0.99〜 1.5310Y–

3,620,078

43,500,106––

Government-guaranteed bond (domestic)
1st 4-year JMF bond

2/27/2009

299,917

3,603,911

0.7

4Y

Government-guaranteed bonds (domestic)
1st-8th JFM bonds

10/16/20085/25/2009

560,362

6,733,504

1.3
〜 1.6

10Y

Public offering bond without government guarantee
1st 5-year JFM bond

2/24/2009

29,994360,429

1.01

5Y

Public offering bonds without government guarantee
1st-4th JFM bonds

11/25/20085/28/2009

139,962

1,681,836

1.59〜 1.77

10Y

Public offering bonds without government guarantee
1st-2nd 20-year JFM bonds

1/26/20094/30/2009

84,946

1,020,749

2.07〜 2.2920Y

Private placement bonds without government
guarantee A-1st-2nd JFM bonds

4/30/20095/26/2009

120,000

1,441,962

1.69〜 1.73

10Y–

1,235,183

14,842,391––

Type of bondJapan Finance Organization for
Municipalities bonds - Sub-total

Japan Finance Organization for Municipal Enterprises
bonds - Sub-total[US dollars 1,000,000 thousand]22

Government-guaranteed bonds (domestic)
788th-886th former JFM bonds

4/27/20006/19/2008

7,556,867(1,540,760)

90,805,906(18,514,299)

0.5
〜 2.0

10Y

Government-guaranteed bonds (domestic)
1st-5th 15-year former JFM bonds

6/22/20057/18/2007

184,659

2,218,935

1.6 〜
2.2

15Y

Government-guaranteed bonds (international)
4th Euro sterling pound former JFM bond 5th Global Yen former JFM bond

8/9/19996/25/2008

11,102,057(2,403,268)

1.350〜 5.875

10Y 〜
20Y

Public offering bond without government guarantee
1st 5-year former JFM bond

2/29/2008

129,976

1,561,838

1.14

5Y

Public offering bonds without government guarantee
1st-30th former JFM bonds

12/26/20016/16/2008

1,279,829(100,000)

15,378,864(1,201,634)

0.64〜 2.07

10Y

Public offering bonds without government guarantee
1st-25th 20-year former JFM bonds

7/30/20026/16/2008

569,636

6,844,949

1.03〜 2.5820Y

Public offering bonds without government guarantee
1st-10th 30-year former JFM bonds

1/29/20049/20/2006

189,855

2,281,363

2.39〜 2.9530Y

Public offering bond without government guarantee
1st floating rate former JFM bond

10/31/2002

20,000240,327

Floating
rate

15Y

Public offering bonds without government guarantee
1st-2nd inflation-indexed former JFM bonds

3/2/20057/19/2005

40,000480,6540.45〜 0.47

10Y

Public offering bonds without government guarantee
1st-3rd former JFM bonds with scheduled repayment

2/14/20036/9/2004

43,490(2,170)522,591(26,076)

1.39〜 2.01

28Y

Public offering bond without government guarantee
1st CMS-linked floating rate former JFM bond

9/13/2006

20,000240,327

Floating
rate

10Y

Private placement bonds
A series 55th - Special No.1 series 31st former JFM
bonds

4/28/20007/31/2008

2,513,700(333,200)

30,205,479(4,003,846)

0.67〜 2.18

10Y

Former JFM bonds - Sub-total–

13,471,927(2,176,130)

161,883,290(26,149,123)

–

–

Total

–

¥18,327,190(2,176,130)$220,225,787(26,149,123)––

923,913(200,000)[US dollars 3,200,000 thousand][Euro 900,000 thousand][Pound sterling 150,000 thousand]Notes: 1. Pursuant to the provisions of Article 40, Section 2 of the Law, JFM’s total assets are pledged as general collateral for JFM bonds for
18,327,190 million yen(220,225,787 thousand dollars).
2. Amounts posted in brackets “[ ]” in the column of “Outstanding amount at March 31, 2011” for “Government-guaranteed bond(international) - 4th Euro sterling pound former JFM bond - 5th Global Yen former JFM bond” are denominated in foreign currencies.
3. Amounts posted in parentheses “( )” in the column of “Outstanding amount at March 31, 2011” are the amounts to be repaid within
one year.

23

9.Reserves

Reserves at March 31, 2011 consisted of the following:(Millions of Yen)

Decreaseduring the year Decrease during
Balance at(for intended the year (Others) March 31, 2011
purposes)

Balance at endof previous
fiscal year

Increaseduring the year

Reserve for bonuses

¥ 43

¥41

¥43

¥ –

¥ 41

Reserve for directors’
bonuses

7

6

7

–

6

Reserve for retirement
benefits

210

5

10

9

195

Reserve for retirement
benefits for directors andcorporate auditors

56

6

10

24

27

Type of reserve(Thousands of US dollars)

Decreaseduring the year Decrease during
Balance at(for intended the year (Others) March 31, 2011
purposes)

Balance at endof previous
fiscal year

Increaseduring the year

Reserve for bonuses

$ 520

$501

$520

$ –

$ 501

Reserve for directors’
bonuses

87

83

87

–

83

Reserve for retirement
benefits

2,524

66

127

114

2,349

Reserve for retirement
benefits for directors andcorporate auditors

675

82

130

300

327

Type of reserve2410. Reserve for Interest Rate Volatility

Reserve for interest rate volatility at March 31,2011 consisted of the following:

Type of reserve

Balance atendof previous
fiscal year

(Millions of Yen)

Increase during the year

Decrease during the year

AmountprovidedAmountWithdrawn

Balance at
March 31,2011

Reserve for interest rate
volatility¥ 440,000¥220,000¥220,000

Management accountreserve forinterest rate volatility

3,111,043

245,489

245,489

220,000

220,000

3,136,532

Total¥3,551,043¥465,489¥465,489¥220,000¥220,000¥3,796,532¥–¥ 660,000(Thousands of US dollars)

Increase during the year

Decrease during the year

AmountprovidedAmountWithdrawn

Type of reserve

Balance atendof previous
fiscal year

Reserve for interest rate
volatility$ 5,287,191$2,643,595$2,643,595$

Management accountreserve forinterest rate volatility

37,383,366

2,949,880

2,949,880

2,643,595

2,643,595

37,689,651

Total$42,670,557$5,593,475$5,593,475$2,643,595$2,643,595$45,620,437

25–

Balance at
March 31,2011
$ 7,930,786

11. Fund for Improvement of Operations of Municipalities

Fund for improvement of operations of municipalities at March 31,2011 consisted of the following:
Increase during the year

Balanceat end ofprevious
fiscal year

Amount ofreserve

Basic fund for improvementof operations ofmunicipalities¥901,407¥6,696

Additional fund for
improvement of operationsof municipalities

5,531¥906,939

Type of fund

Total

Decrease during the year

AmountMarch 31,2011
Transferred¥(Millions of Yen)

AmountWithdrawn

OthersBalance at
March 31,
2011

–

¥–

¥–

¥908,104

–

2,187

–

–

7,719

¥6,696¥2,187¥–¥–¥915,823(Thousands of US dollars)

Increase during the year

Type of fund

Balanceat end ofprevious
fiscal year

Amount ofreserve

Basic fund for improvementof operations ofmunicipalities$10,831,625$80,472

Additional fund for
improvement of operationsof municipalities

66,467$10,898,092

Total

Decrease during the year

AmountMarch 31,2011
Transferred$

AmountWithdrawn

OthersBalance at
March 31,
2011

–

$–

$–

$10,912,097–

26,289––92,756$80,472$26,289$–$–$11,004,853

Note: 1. The “increase during the year” in the “amount of reserves” for the “Basic fund for improvement of operations of municipalities” is thepayment in the amount stipulated in Article 46, Section 1 of the Law and received in accordance 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 operations of municipalities”
represents the amount which was refunded in accordance with the provisions of Article 2, Section 7 of the supplementary provisionsof 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 operations of municipalities”
represents the amount transferred to Additional fund for improvement of operations of municipalities pursuant to the provisions ofArticle 46,Section 5 of the Law.

26

12. Reserve for Employee Retirement Benefits
As of and for the years ended March 31, 2010
(1) Outline of retirement benefits system employedJFM has a defined benefit plan that contributes to the Employees’ Pension Fund and offers lump-sum payments uponretirement.
(2) Projected benefit obligation
Projected benefit obligation 363 million yen
Plan assets 153 million yen
Reserve for employee retirement benefits 210 million yen(3) Pension expenses
Pension expenses 16 million yen
Pension expenses related to lump-sum payments upon retirement 3 million yen
Pension expenses related to the Employees’ Pension Fund 12 million yen(4) Basis of calculation of projected benefit obligation
Projected benefit obligation is calculated by the simple method.
As of March 31, 2011
(1) Outline of retirement benefits system employedJFM has a defined benefit plan that contributes to the Employees’ Pension Fund and offers lump-sum payments uponretirement.
(2) Projected benefit obligation
Projected benefit obligation 344 million yen (4,141 thousand dollars)
Plan assets 149 million yen (1,793 thousand dollars)
Reserve for employee retirement benefits 195 million yen (2,349 thousand dollars)(3) Pension expenses
Pension expenses 5 million yen (65 thousand dollars)
Pension expenses related to lump-sum payments upon retirement 2 million yen (32 thousand dollars)
Pension expenses related to the Employees’ Pension Fund 2 million yen (33 thousand dollars)(4) Basis of calculation of projected benefit obligation
Projected benefit obligation is calculated by the simple method.

13. Net Income by Account(For the years ended March 31, 2010)
Net income of General account was 4,539 million yen, while net income of Management account was 4,326 million
yen.
(For the years ended March 31, 2011)
Net income of General account was 8,025 million yen (96,443 thousand dollars), while net income of Management
account was 8,048 million yen (96,712 thousand dollars).

27

14.Information by Account (Balance Sheets)

Balance sheets of General account and Management account at March 31, 2011 were as follows:
General accountManagement
Account

Loans¥3,586,125¥18,645,731

Securities

457,590

Cash and bank deposits

516,633

Item

Offset(Millions of Yen)

Total

(Assets)

Other assets

2,420

Tangible fixed assets

2,918

Intangible fixed assets

756

457,590516,633
14,612

Total assets

17,033
2,918
756

827,351

Due from General accountDue to Management account for Fund for
improvement of operations of municipalities¥22,231,856

442,831¥ (827,351)(442,831)

5,009,275

19,487,695(1,270,183)

23,226,787

2,580,904

15,746,285

18,327,190

3,107

14,59017,698(Liabilities)
Bonds
Other liabilities
Reserve for bonuses

41

41

Reserve for directors’ bonuses

6

6

Reserve for retirement benefits

195

195

27

27

915,823

915,823

908,104

908,104

7,719

7,719

Reserve for retirement benefits for directors
and corporate auditors
Fund for improvement of operations ofmunicipalities
Basic fund for improvement of operationsof municipalities
Additional fund for improvement ofoperations of municipalities
Due to Management account827,351(827,351)

Due from General account for Fund for
improvement of operations of municipalities
Reserve under special laws
Reserve for interest rate volatility

442,831660,000

3,896,421

660,000

660,000

Management account reserve for interest
rate volatility

3,136,532

3,136,532

99,889Reserve for interest rate reduction
Total liabilities(442,831)

3,236,421

4,987,458

19,440,129

99,889(1,270,183)

23,157,405(Net Assets)
Capital16,602

16,602Retained earnings

13,86013,860General account surplus reserve

13,86013,860

Valuation,translation adjustments andothers(8,645)(8,645)47,56547,565

21,81647,56569,382¥5,009,275¥19,487,695

Management account surplus reserve
Total net assets
Total liabilities and net assets

28¥(1,270,183)¥23,226,787

(Thousands of US dollars)

General accountManagement
Account

Loans$43,092,107$224,053,487

Securities

5,498,561

5,498,561

Cash and bank deposits

6,208,040

6,208,040

Item

OffsetTotal(Assets)$267,145,594

Other assets

29,086

Tangible fixed assets

35,065

175,589

204,675
35,065Intangible fixed assets

9,095

9,095
9,941,740$ (9,941,740)

60,193,168

234,170,816(15,262,954)

31,013,026

189,212,761

220,225,787

37,343

175,323

212,666

Due from General accountDue to Management account for Fund for
improvement of operations of municipalities

5,321,214

Total assets(5,321,214)
279,101,030(Liabilities)
Bonds
Other liabilities
Reserve for bonuses

501

501

Reserve for directors’ bonuses

83

83

Reserve for retirement benefits

2,349

2,349

327

327

11,004,853

11,004,853

10,912,097

10,912,097

Reserve for retirement benefits for directors
and corporate auditors
Fund for improvement of operations ofmunicipalities
Basic fund for improvement of operationsof municipalities
Additional fund for improvement ofoperations of municipalities
Due to Management account92,75692,756

9,941,740

Due from General account for Fund for
improvement of operations of municipalities(9,941,740)
5,321,214

Reserve under special laws

7,930,786

Reserve for interest rate volatility

7,930,786(5,321,214)

38,889,954

46,820,740
7,930,786

Management account reserve for interest
rate volatility

37,689,651

37,689,651

Reserve for interest rate reduction

1,200,303

1,200,303

Total liabilities

59,931,008

233,599,252(15,262,954)

278,267,306(Net Assets)
Capital199,497

199,497

Retained earnings

166,555

166,555

General account surplus reserve

166,555

166,555

Valuation,translation adjustments andothers(103,892)

Total net assets
Total liabilities and net assets(103,892)
571,564

571,564

262,160

571,564

833,724$60,193,168$234,170,816

Management account surplus reserve29$(15,262,954)$279,101,030

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 isused to conduct administration, collection and other related operations of the assets that JFM inherited from the former Japan
Finance Corporation for Municipal Enterprises (management of the assets of the former Japan Finance Corporation for MunicipalEnterprises).
Management account is separated from the other account (General account) pursuant to the provisions of Article 13, Section 3of 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 provisions of Article 39,
Section 1 of the Law, while “Net income” of Management account is posted as “Management account surplus reserve” in accordancewith 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 ofArticle 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 toManagement account from General account pursuant to the provisions of Article 9, Section 12 of the supplementary provisions of the
Law.

30

15.Information by Account (Statements of Income)Statements of income of General account and Management account from April 1, 2010 through March 31, 2011 was asfollows:(Millions of Yen)

Item
IncomeInterest income

General accountManagement
account¥ 62,302¥512,245

45,152494,659

OffsetTotal¥ (34,280)¥539,997
539,812Fees and commissions

134

134

Other income

5050Administrative fee for Management account

962

(962)

15,730(15,730)

Interest on fund for improvement ofoperations of municipalities
Interest on due from General accountTransfer from General account for Fund for
improvement of operations of municipalities

594

(594)

16,992(16,992)(34,280)

Expenses

54,006

272,702

Interest expenses

29,637

253,540

283,177

Fees and commissions

26

243

269

Other operating expenses

2,303

2,115

4,418

General and administrative expenses

2,264

109

2,374

Other expenses

2,187Transfer to fund for improvement ofoperations of municipalities

2,187

Interest on due to Management account594

Transfer to Management account for fund for
improvement of operations of municipalities

292,428

2,187
2,187
(594)

16,992(16,992)
962

(962)

15,730(15,730)

8,025

239,543–

247,569

Special gains

220,000

233,994(220,000)

233,994

Provision for Management account

220,000

Administrative fee for Management accountInterest on fund for improvement ofoperations of municipalities
Ordinary income(220,000)

Reversal of Management account reserve forinterest rate volatility

220,000

220,000

Reversal of reserve for interest rate reduction

13,994

13,994

Special losses

220,000

Provision for reserve for interest rate volatility

220,000

465,489(220,000)

220,000

Provision for Management account reservefor interest rate volatility

245,489

Transfer to Management account

220,000(220,000)¥ 8,048¥

Net income¥ 8,02531

465,489

245,489–¥ 16,074

(Thousands of US dollars)

Item
IncomeGeneral accountManagement
account$ 745,398$6,155,322

542,573

5,943,995

Interest income
Fees and commissions
Other income

OffsetTotal$ (411,926)$6,488,794
6,486,568

1,620

1,620

606

606

Administrative fee for Management account

11,570Interest on fund for improvement ofoperations of municipalities

189,029(11,570)(189,029)

Interest on due from General accountTransfer from General account for Fund for
improvement of operations of municipalities

7,138(7,138)204,189(204,189)(411,926)

Expenses

648,955

3,276,889

3,513,918

Interest expenses

356,129

3,046,625

3,402,754

Fees and commissions

316

2,926

3,242

Other operating expenses

27,67825,423

53,101

General and administrative expenses

27,216

1,316

28,532Other expenses

26,28926,289Transfer to fund for improvement ofoperations of municipalities

26,28926,289Interest on due to Management account

7,138

Transfer to Management account for fund for
improvement of operations of municipalities(7,138)204,189(204,189)

Administrative fee for Management account

11,570(11,570)

Interest on fund for improvement ofoperations of municipalities

189,029(189,029)

96,443

2,878,433–

2,974,876

Special gains

2,643,595

2,811,754(2,643,595)

2,811,754

Provision for Management account2,643,595

Ordinary income(2,643,595)

Reversal of Management account reserve forinterest rate volatility

2,643,595

2,643,595

Reversal of reserve for interest rate reduction

168,159

168,159

Special losses

2,643,595

Provision for reserve for interest rate volatility

2,643,595

5,593,475(2,643,595)

2,643,595

Provision for Management account reservefor interest rate volatility

2,949,880

Transfer to Management account2,643,595(2,643,595)$$

Net income$

5,593,475

96,44332

96,712

2,949,880–$ 193,155

16.Fair value of Marketable Securities

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

Difference(Millions of Yen)

Unrealized gains

Unrealized
lossesTreasury discount bills¥379,977¥379,976

¥(1)

¥–

¥(1)

Negotiable certificate ofdeposits

604,500

604,500

–

–

–

Total

¥984,477¥984,476

¥(1)

¥–

¥(1)

Marketable held-to-maturity securities at March 31, 2011 consisted of the following:
Balance sheet
amountFair value

Difference(Millions of Yen)

Unrealized gains

Unrealized
lossesTreasury discount bills¥ 86,990¥ 86,982

¥(7)

¥–

¥(7)

Negotiable certificate ofdeposits

370,600

370,600

–

–

–

Total

¥457,590¥457,582

¥(7)

¥–

¥(7)

(Thousands of US Dollars)

Balance sheet
amountFair value

Difference

Unrealized gains

Unrealized
lossesTreasury discount bills$1,045,305$1,045,213

$(92)

$–

$(92)

Negotiable certificate ofdeposits

4,453,256

4,453,256

–

–

–

Total

$5,498,561$5,498,469

$(92)

$–

$(92)

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.

33

17.Derivative Information(1) Types of derivative transactions
Derivative transactions conducted by JFM are interest rate swaps for interest rate related transactions, andcurrency 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 and foreign exchange forward contracts are used to hedge exposure to foreign exchange risk associatedwith issuance of foreign currency-denominated bonds and foreign currency denominated deposits.
Hedge accounting is applied to interest rate swaps, currency swaps and foreign exchange contracts.
(a) Hedge accounting method
Interest rate swaps used to hedge the risk of interest rate fluctuations and which qualify for hedge accounting
and meet specific matching criteria are not measured at market value, but the differential paid or received
under the swap agreements is recognized and included in interest expense or income. If swap contracts
or forward contracts used to hedge the 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 from bond issuances. Hedging instruments are selected for each individual contract.
As a means of hedging foreign exchange fluctuation risks associated with the receipt of interest andprincipal of foreign currency-denominated bank deposits, we conclude a foreign exchange forward contract
at the time of deposit.
(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 andforward 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 areunable 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.
JFM enters into ISDA master agreement and CSA with financial institutions which are its derivativetransactions counterparties to reduce credit risk. Moreover, JFM 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 withthe approval of persons in charge in accordance with the operational guidelines which specify transaction
authority and limits on the transaction amount.
Additionally, the total amount of derivative transactions, the status of risks, the assessed fair value, and thecredit risk on counterparties are reported to the Integrated Risk Management Committee periodically.

34