Annual Report 2011
Japan Finance Organization for Municipalities

Annual Report 2011
Japan Finance Organization for Municipalities

ProfileName

Japan Finance Organization for Municipalities (JFM)

Establishment

August 1, 2008 (Reorganized on June 1, 2009)

Governing Law

Japan Finance Organization for Municipalities Law(Law No. 64 of May 30, 2007)

Address

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

President and CEO

Yuji Watanabe

Capital¥16.6 billion

Number of Employees

85 (as of April 2011)

Outstanding Loan Amountas of March 31, 2011
Outstanding Bond Amountas of March 31, 2011
Ratings (as of August 31, 2011)¥22,231.8 billion¥18,346.1 billion
S&P: AAMoody’s: Aa3
R&I: AAA

Forward-looking statements including JFM’s plan in this booklet are based on information available
for JFM at this time and involve potential risks and uncertainties. Actual results, therefore, may differ
from those described in this booklet due to changes in a variety of factors, such as market trends,
economic conditions and regulations. Accordingly, readers are advised to use their own discretionand exercise great caution when making investment decisions.
Information contained in this Annual Report is, in general, current as of March 31, 2011, unlessotherwise indicated.

CONTENTS

Review of Operations and Financial
Statements for FY2010 …………………………
Management Plan for FY2011 …………………

5
7

Profile of JFM ............................................... 10
Capital ……………………………………………… 12
Corporate Governance
1. Representative Board ……………………… 13
2. Supervisory Committee …………………… 14
3. Audits by the External Accounting
Auditors ……………………………………… 14
General Account and Management Account …… 15

Risk Management
1. Overall Risk Management …………………
2. Management of Specific Risks ……………
Internal Control over Financial Reporting ………
Internal Audits ……………………………………

54
55
61
62

Compliance
1. Basic Policy ………………………………… 63
2. Compliance System ………………………… 63
3. Compliance Activities ……………………… 63
Disclosure
1. Basic Stance on Information Disclosure … 64
2. Materials for Disclosure …………………… 64

Lending Operations
1. Recipients of Loans ………………………… 18
2. Types of Loans ……………………………… 20
3. Interest Rates of Loans ……………………… 20
4. Maturities of Loans …………………………… 22
5. Credit Check System ……………………… 23
6. Lending Rate Reduction …………………… 23
7. Review of Lending Operations ……………… 24
8. Lending Operations for FY2010 …………… 27
9. Review of Entrusted Loans for FY2010 …… 34
10. Lending Plan for FY2011 ……………………… 35
11. Prepayment without Penalty ……………… 35

Financial Statements …………………………… 66
Report of Independent Auditors ………………… 98

12. Measures to Address the Great
East Japan Earthquake …………………… 36

Appendices / JFM Data .. 97

3. System of the Local Government
Support Operations …………………………… 39
4. Outline of Operations ………………………… 40
5. Local Government Support Operations
Implemented for FY2010 ……………………… 42
Fund-Raising Operations
1. Issue Type …………………………………… 43
2. Basic Fund-Raising Strategies …………… 44
3. Outline of Bonds ……………………………… 45
4. Trends in Fund-Raising Operations ……… 46
5. Fund-Raising Operations for FY2010 ……… 47
6. Fund-Raising Plan for FY2011 ……………… 51

Appendices
Results of Lending Operations by
Business in FY2010……………………………… 100
Loans by Group in FY2010 …………………… 101
FY2010 Redemption of Loans ………………… 102

Appendices/
J F M
D a t a2. Basic Framework of the Local Government
Support Operations ………………………… 38

Financial Section

Financial Section ………… 65

I n t e r n a lManagement System

Operations …………………… 17

Local Government Support Operations
1. Basic Policy …………………………………… 37

Operations

Organization Profile ……… 9Internal Management System …53

Organization Profile

President and CEO’s Message … 2
Management Philosophy ……… 4
Review of Operations

Outstanding Loan Balance byBusiness for FY2010 …………………………… 103
Outline of Local Government
Finance and JFM’s Role ……………………… 104
JFM Data
Organization History …………………………… 106
JFM Organization ……………………………… 107
Directors and Corporate Auditors/Address … 109

Japan Finance Organization for Municipalities Annual Report 20111

Toward Restoration from the Damage Caused by the Great East Japan
Earthquake
The Great East Japan Earthquake, which occurred on March 11, 2011, due to its devastating
magnitude and the subsequent tsunami, caused unprecedented disaster. Many precious lives
were taken and the whereabouts of many people is still unknown. The disaster further led toaccidents at the Fukushima Daiichi nuclear power plant, and many people are still experiencing
difficult and inconvenient lives in the evacuation zones. We express our sincere condolences tothe victims of this disaster.
At the Japan Finance Organization for Municipalities (JFM), we established a disastercountermeasure headquarters immediately after the disaster and set up a consultation office fordisaster-stricken local governments.
Although it will take a long time before the stricken areas are restored to their original state,
we intend to do all that we can to support the disaster-stricken local governments.
We wish for the quick recovery and restoration of the stricken areas.

President and CEO's Message

Review of Fiscal 2010
JFM is a public organization established in August 2008 with capital contributed by all local
governments in Japan (prefectures, cities, wards, towns and villages).
JFM issues bonds to raise funds in the capital markets and then provides local governmentswith long-term loans at low interest rates.
In fiscal 2010, we moved ahead with various initiatives. In lending operations, we addresseda significant increase in loan amounts along with the expansion of project categories for
JFM Lending and implemented measures to reduce local governments’ debt. In fund-raising
operations, in addition to the continuing monthly issuance of JFM bonds, we conducted various
funding measures such as the issuance of JFM’s first international bonds and the Flexible
Issuance Program (FLIP). We also newly launched local government support operations.
Through these measures, our operations proceeded smoothly, and market confidence in
JFM has been increasingly strong.
I would like to offer my sincere gratitude to everyone who has supported us this year.

2

Japan Finance Organization for Municipalities Annual Report 2011

Initiatives in Fiscal 2011
In fiscal 2011, we plan to make loans in theamount of ¥1,843.1 billion based on the Local
Government Borrowing Program FY2011. In
the continuing harsh financial conditions for
local governments, JFM intends to fulfill its role
as a joint fund-raising organization to fund local
government bonds to meet the expectations oflocal governments.
In fund-raising, we will strive to use diverse
fund-raising measures including the issuanceof international bonds without government
guarantees, while raising necessary funds at low
cost in the capital markets in a stable manner,
thereby contributing to the sound developmentof the capital markets.
To meet the needs of local governments,
we will conduct full-fledged local government
operations through four core areas—training for
local government staff, research, administrative
support and information services.

JFM’s Role as an Organizationof Local Governments, by Local
Governments and for Local
Governments
As a joint fund-raising organization of local
governments, by local governments and for
local governments, with all of the management
staff of JFM working as one to accomplish
JFM’s mission, we ask for your continued
understanding and support of our endeavors.

Yuji Watanabe
President and CEO,Japan Finance Organization for Municipalities
June 2011

Japan Finance Organization for Municipalities Annual Report 20113

Management Philosophy
The Japan Finance Organization for Municipalities (JFM), as “a joint
fund-raising organization of local governments, by local governments
and for local governments,” set forth the following three policies as its
management philosophy for business execution.

1

Ensure Corporate Governance Befitting a Joint
Organization of Local Governments
To establish a system for the responsible and autonomous management bylocal governments and ensure corporate governance through appropriate
risk management and checks/audits by the Supervisory Committee andexternal accounting auditors.

2

Proactively Address Local Governments’
Financial Needs
We aim to proactively provide meticulous services, mainly through supplying
long-term and low-interest funds, to address the local governments'
financial needs and the changes in the environment surrounding the local
government funding.

3

Gain the Solid Confidence of the Capital Markets
To gain the solid confidence of the capital markets by maintaining oursound financial standing through appropriate risk management andfulfilling accountability through proper disclosure to the capital markets,
thereby raising funds at advantageous terms in a stable manner. To
contribute to the sound development of the capital markets as a core issuer
in the public bond market.

4

Japan Finance Organization for Municipalities Annual Report 2011

Review of Operations and Financial Statements for FY2010
Review of Operations

1. Review of Operations for FY2010
Based on the fiscal 2010 lending plan, JFM made 8,655 loans to local governments inthe amount of ¥1,832.9 billion with the consent or approval of the Minister for Internal
Affairs and Communications or prefectural governors.
In particular, JFM made nine loans, for a total of ¥1.2 billion, to social welfare
facilities that became eligible for JFM loans in fiscal 2010. We also provided 957
loans, in the amount of ¥766.2 billion, for Extraordinary Financial Countermeasures
Funding to make up for a shortfall in “the Local Allocation Tax,” which is allocatedto local governments by the national government every fiscal year. As such, we
appropriately met the needs of local governments.
To fund these loans, JFM issued ¥900 billion* in JFM bonds (public offering
bonds), ¥400 billion* in bonds underwritten by the Pension Fund Association for
Local Government Officials and ¥735.7 billion* in government-guaranteed bonds torefinance the bonds of the Predecessor to smoothly manage the assets that JFM
assumed from the Predecessor.
In addition, JFM formulated an implementation policy for its local government
support operations and started to provide training for local government staff,
administrative support, research and information services related to local
governments’ fund-raising.
* face value

Japan Finance Organization for Municipalities Annual Report 20115

2. FY2010 Financial Statements(1) Profit/loss statement
In fiscal 2010, JFM posted ¥539.9 billion in income (consisting primarily of ¥539.8
billion in interest income) and ¥292.4 billion in expenses (consisting primarily of¥283.1 billion in interest expenses). As a result, ordinary income amounted to¥247.5 billion in fiscal 2010.
Pursuant to the relevant laws, part of the income generated by refinancing
bonds is provided to the Management Account reserve for interest rate volatility.
As a result of such provisions and other measures, JFM’s net income was ¥16.0
billion for fiscal 2010.
(2) Assets
As of March 31, 2011, JFM’s total assets amounted to ¥23,226.7 billion, up ¥41.7
billion over fiscal 2009.
Assets increased mainly because loans increased ¥201.6 billion despite a¥159.5 billion decrease in the total of securities and cash and bank deposits.
(3) Liabilities
As of March 31, 2011, JFM’s total liabilities stood at ¥23,157.4 billion, up ¥33
billion over fiscal 2009.
Although bonds decreased ¥207.2 billion, the total of the reserve for interest
rate volatility and the Management Account reserve for interest rate volatility
increased by ¥245.4 billion.
(4) Net assets
Net income of the General Account of ¥8.0 billion was posted as “General Accountsurplus reserve” and net income of the Management Account of ¥8.0 billion was
posted as “Management Account surplus reserve,” resulting in total assets of ¥69.3
billion as of March 31, 2011.
(Refer to page 15 for the General Account and the Management Account.)

6

Japan Finance Organization for Municipalities Annual Report 2011

Management Plan for FY2011
Review of Operations

1. Loan Amounts
JFM’s lending plan is formulated based on the amounts of local government
borrowing for which the consent or approval is scheduled to be given by the Minister
for Internal Affairs and Communications or prefectural governors under the Local
Government Borrowing Program (LGBP) FY2011. A JFM fund of ¥1,893 billion has
been earmarked in LGBP for fiscal 2011, down ¥266 billion from a year earlier.
Based on the above, the planned loans for fiscal 2011 amount to ¥1,843.1 billion,
down ¥90 billion from the preceding fiscal year.

Loan Amounts Planned by JFM

Planned Loan
Amounts(Billions of yen)

FY2011(A)

FY2010(B)

Increase/decrease(A) – (B) = (C)Increase/decrease ratio(C) /(B)

1,843.1

1,933.1▲ 90.0▲ 4.7%The JFM Fund under the Local Government Borrowing Program FY2011(Billions of yen)Item

JFM Fund

FY2011(A)

FY2010(B)

Increase/decrease(A) – (B) = (C)Increase/decrease ratio(C) /(B)

1,893.0

2,159.0▲ 266.0▲12.3%

460.8

498.1

▲ 37.3▲ 7.5%

742.2

804.9

▲ 62.7▲ 7.8%

30.0

30.0

0.0

0.0%

660.0

826.0

▲ 166.0▲ 20.1%

Breakdown

General
Account–Related
Loans
Municipal
Enterprise–Related
Loans
Refinancing Loans for
Municipal
Enterprise-related Projects
Extraordinary Financial
Countermeasures Funding

Japan Finance Organization for Municipalities Annual Report 20117

2. Increasingly Diverse Fund-Raising Methods
For fiscal 2011, JFM plans to issue JFM bonds (public offering bonds) of ¥900 billion,
which is the same amount as the previous fiscal year, and private placement bonds
underwritten by the Pension Fund Association for Local Government Officials of ¥300
billion (¥400 billion for the previous fiscal year).
To secure stable fund-raising, JFM issues 10-year bonds every month. 10-yearbonds account for approximately 40 percent of the bonds issued via public offering,and JFM also issues bonds flexibly with various terms and structures including fiveyear bonds and 20-year bonds.
To manage the assets from the Predecessor, JFM plans to issue governmentguaranteed bonds of ¥710 billion.
Flexible Issuance Program (FLIP)
A program, akin to the MTN Program, to issue bonds of a certain range quickly and flexibly withflexible amounts and maturities to address the needs of investors brought in by securities companies
Euro Medium-Term Note (EMTN) Program
A program that enables the issuance of bonds with diverse structures, maturities, currencies
and amounts in the euro markets

3. Risk Management and Internal Control
To maintain a sound and healthy financial standing and gain the solid confidence ofthe capital markets, JFM appropriately manages various risks including interest raterisks, as well as manages and evaluates internal control over our financial reports toensure appropriate financial statements, etc.

4. Local Government Support Operations
In fiscal 2011, JFM begins full-fledged development of local government support
operations in four core areas—training for local government staff, research,administrative support for fund-raising and information services—so that local
governments can accurately cope with changes in the environment for the issuance of
local government bonds and effectively raise funds in the capital markets.

8

Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile
Operations

Organization Profile

Capital ……………………………………………………………………… 12
Corporate Governance
1. Representative Board ………………………………………… 13
2. Supervisory Committee ……………………………………… 14

I n t e r n a lManagement System

Profile of JFM …………………………………………………………… 10

3. Audits by the External Accounting Auditors…………… 14………………

15

Financial Section

General Account and Management AccountAppendices/
J F M
D a t aJapan Finance Organization for Municipalities Annual Report 2011

9

Profile of JFM
Organization Profile

Basic Flow of Lending and Fund-Raising Operations

Japan Finance
Organization for
Municipalities(JFM)
Fund-Raising
Outstanding Bond Account¥18.3 trillion

Borrowers
Capital and Management
Participation

Loans

Capital*¥16.6 billion

Outstanding Loan Account¥22.2 trillion

Capital Markets

Long term, Low interest

Reserve forInterest Rate
Volatility, etc.
¥3.8 trillion

Local
Governments

Reduction of Lending
Rates by Using
Investment Gain

General
Accounting
Municipal
Enterprises
Accounting(Water Supply,
Transportation,
Hospitals,
Sewerage andElectricity
Supply, etc.)

Fund for the
Improvement of
the Operationsof Municipalities¥0.9 trillion
Contribution ofproceeds frommunicipally operated
racing**

Local Government
Support Operations***(as of March 31, 2011)
Notes: *Capitalized by all governments in Japan** Portion of revenues from municipally operated racing (horse, bicycle, motorcycle and speedboat)*** Support for local governments’ fund-raising in capital markets

10 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

Joint Fund-Raising Organization for Local Governments
Given that it takes a long time to recoup the capital expenditures for improvements to local governments’social infrastructure and the burden should be shared across generations, long-term fund-raising is
usually desirable. However, local governments generally raise funds in the capital markets for terms of
10 years or less.

Operations

Because of this, we raise funds by issuing the JFM bonds, which are public-offering bonds that are
not guaranteed by the national government. These bonds thus ensure a stable supply of long-term andlow-interest funds to local governments, thereby providing valuable supplementary measures for each
local government’s fund-raising in the capital markets.

I n t e r n a lManagement System

Sturdy Financial Foundation
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 maturity gap between funding and lending. To copewith the interest rate fluctuation risk associated with the refinancing of bonds (a negative margin causedby the interest payable exceeding the interest receivable), JFM maintains the necessary financial
foundation including the reserve for interest rate volatility.

Financial Section

Reduction of Lending Rates by Utilizing the Fund for the Improvement of
the Operations of Municipalities
JFM receives a portion of the earnings from various racing events (horse, bicycle, motorcycle andspeedboat) operated by local governments, which are directed to the Fund for the Improvement of the
Operations of Municipalities. The investment gains from the fund is used to lower interest rates on loans

Appendices/
J F M
D a t aprovided for local governments.

Japan Finance Organization for Municipalities Annual Report 201111

Capital
Organization Profile

Given the fact that JFM was established by local governments as an autonomously managed
organization, capital participation is limited to local governments.
As of March 31, 2011, JFM had received capital in the amount of ¥16,602.1 million from Japan’s 1,797
local governments encompassing prefectures, cities, towns, villages and special wards of Tokyo.

Towns and villages¥1.03 billion (6.2%)

Cities and special wards of Tokyo(except for government-designated cities)

Capital Contribution
by Type ofLocal Government

Prefectures¥6.4 billion (38.6%)¥ 6.36 billion (38.3%)

Cities and special wards of Tokyo
¥9.17 billion (55.2%)

Government- designated cities¥2.81 billion (16.9%)

Note: The total of contribution amounts does not add up exactly due to rounding off.

12 Japan Finance Organization for Municipalities Annual Report 2011

Corporate Governance
Organization Profile

Organization Profile

JFM ensures responsible corporate governance through the participation of external experts on the
Representative Board and the Supervisory Committee and audits by the external accounting auditors.

Corporate Governance System
Representative Board

Operations

Members:(1) Representatives at local gorernments*(2) The external experts*
Number of Members: 6 (3 from (1) above and 3 from (2) above)
Term of Office: 3 years

Supervisory Committee Consultation and propositions
Report on budgets,business plans
and medium-term plans, etc.

President and CEO,
Deputy President, etc.

Accounting audit

Accounting Auditors

Public Accountants( Certified)
or an audit firm

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

I n t e r n a lManagement System

Members: External experts
Full Number of Members: 6
Term of Office: 2 years

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

Appointment anddismissal of the President
and CEO

Appointment ofmembers

National Government
Note: * elected by the National Association of the governors of prefectures, the mayors of cities, and the head of villages andtowns

1. Representative Board

Financial Section

As an organization autonomously managed by local governments, JFM has the Representative Board
as its supreme decision-making body.
To ensure independence and transparency, the Representative Board consists of one prefectural
governor, one city mayor, one town/village mayor and three members from among experts in local
administration, economics, finance, law or accounting.
The Representative Board has the authority to make decisions on important matters related to theoverall management of JFM, including budgets, settlement of accounts and business plans. As its

Appendices/
J F M
D a t asupervisory function, the Board also has the authority to order the President and CEO to report on theorganization’s business, assets and liabilities, and to address illegal activities.

Representative Board (as of April 1, 2011)
Representatives at Local Governments
Yuichiro Ito* (Governor of Kagoshima Prefecture)
Tamio Mori (Mayor of Nagaoka City, Niigata
Prefecture)
Tadahiko Fujiwara (Mayor of Kawakami Village,
Nagano Prefecture)

External Experts
Junko Obata (Chairperson of the Juries Doctor Program,
Graduate School of Law, Sophia University)
Isao Horiba (Professor, Aoyama Gakuin University)
Tomijiro Morita (Vice Chairman, Nippon Keidanren(Japan Business Federation) and Chairman of the Board,
The Dai-ichi Mutual Life Insurance Company)* denotes the Chairperson.
Japan Finance Organization for Municipalities Annual Report 201113

2. Supervisory Committee
Given that JFM, a lender of funds, was founded by local governments, which are also its borrowers,
highly transparent management that incorporates the objective and unbiased opinions of external
parties and responsible corporate governance is vital. To establish such a managerial structure, theSupervisory Committee has been in place as a deliberative committee comprising external experts.
The Representative Board appoints the members of the Supervisory Committee from amongexperts in local administration, economics, finance, law or accounting, and other experts in theacademic world.
The Supervisory Committee has the function of monitoring the operations of JFM and may
offer its opinions on important matters related to JFM’s operations including budgets, settlement ofaccounts and business plans, etc. The Committee may also, if necessary, request that the President
and CEO report on those matters. The President and CEO must respect and report the Committee’s
opinions to the Representative Board.

Supervisory Committee Members (as of April 1, 2011)
Takuya Kayamori

Yutaka Suzuki(Director, JIJI PRESS LTD.)
Osamu Kurihara(Professor, Graduate School of Professional
Accountancy, Aoyama Gakuin University,(Counsel, Nishimura & Asahi)

Certified Public Accountant)

Yukiko ShinozakiMari Nishino(Professor Emeritus, Meiji University)(Representative Director, URBAN LIFERESEARCH INSTITUTE)

Yoshitsugu Hayashi*(Professor, Kwansei Gakuin University)* denotes the Chairperson

3. Audits by the External Accounting Auditors
As JFM raises funds in the capital markets, the proper disclosure of information and external
checks on accounting procedures are essential in order to earn the confidence of the markets andraise funds at low cost.
From this viewpoint, JFM is required to have its financial statements and statement of accounts
audited not only by corporate auditors but also by external accounting auditors (Certified Public
Accountants or an audit corporation) appointed by the Representative Board.

14 Japan Finance Organization for Municipalities Annual Report 2011

General Account and Management AccountOrganization Profile

Organization Profile

The Japan Finance Organization for Municipalities (JFM) was established on August 1, 2008, withcapital contributed by all local governments in Japan (prefectures, cities, towns, villages and special
wards of Tokyo) as a joint fund-raising organization to fund local government. JFM began operations
after assuming the assets and liabilities of the Predecessor on October 1, 2008.
As a result of the reorganization on June 1, 2009, the General Accounts of local governments also

Operations

became eligible for JFM loans.
New loans made and bonds issued since JFM’s operations began are accounted for in the General
Account of JFM, whereas operations to administer loans carried over from the Predecessor are
accounted for in the Management Account, thereby classifying each accounting.
With regard to the bonds necessary for refinancing government-guaranteed bonds of thePredecessor in the Management Account, the national government can guarantee such bonds. To carry

I n t e r n a lManagement System

out management operations for the assets from the Predecessor, JFM formulates the Management Planfor the Assets from the Predecessor for each fiscal year under the approval of the Minister for Internal
Affairs and Communications and the Minister of Finance.

Established on
August 1, 2008

Established bycapital contributions fromall local governments
in Japan

Reorganized onJune 1, 2009
Japan Finance
Organization for
Municipalities (JFM)

Financial Section

Japan Finance
Organization for
Municipal Enterprises

Began operations on
October 1, 2008

The lending scope was expanded toinclude the General Accounts oflocal governments.
Assumed assets
and liabilities

Established onJune 1, 1957
Abolished(and its capital returned to the national government)

Appendices/
J F M
D a t aJapan Finance Corporation for
Municipal Enterprises(the “Predecessor”)
Special governmental institution(fully owned by the national government)

When JFM was founded, it assumed the Reserve for Losses on the Refinancing of Bonds, etc., in theamount of approximately ¥3.4 trillion to ensure its future stable management.
Of this, the ¥2.2 trillion needed to ensure the future continuity of JFM’s operations was to betransferred to the General Account in equal installments over 10 years, with the remainder to betransferred to the Management Account to ensure a sufficient financial foundation to appropriately
manage the loans that JFM assumed from the Predecessor and the bonds of the Predecessor that JFM
has assumed and prepare for the refinancing risk of the government-guaranteed bonds.

Japan Finance Organization for Municipalities Annual Report 201115

In accordance with the Japan Finance Organization for Municipalities Law, if any assets remain when
the asset management operations of the Predecessor are completed and the Management Account isclosed, those assets shall be returned to the national treasury.

Japan Finance Organization for Municipalities (JFM)
Ensure the financial
foundation needed tosustain the businesses
into the future
Reserve forLosses on the
Refinancing of
Bonds¥3.4 trillion

General AccountReserve forInterest Rate Volatility

Management Account
Ensure a financial
foundation that canwithstand the refinancing
risk posed by thegovernment-guaranteedbonds, etc.

¥2.2 trillion

FY2008—2017¥220 billion
transferred each year

Management AccountReserve for Interest Rate Volatility

Note: Even before the Management Account is closed, in the event that the businesses of JFM are determined to havebeen executed smoothly in light of the condition of the management of JFM, the Minister for Internal Affairs andCommunications and the Minister of Finance shall, if the management account reserves for interest rate volatility, etc.
are determined to exceed the amount necessary for the smooth operation of the asset management operation of thePredecessor in the future, cause the amount that is determined to be in excess to belong to the national treasury.

16 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile
Operations

Operations

1. Recipients of Loans …………………………………………… 18
2. Types of Loans…………………………………………………

20

3. Interest Rates of Loans ……………………………………… 20
4. Maturities of Loans …………………………………………… 22
5. Credit Check System ………………………………………… 23
6. Lending Rate Reduction……………………………………… 23

I n t e r n a lManagement System

Lending Operations

7. Review of Lending Operations …………………………… 24
27………………

34…………………………………

35

9. Review of Entrusted Loans for FY2010
10 Lending Plan for FY2011

11. Prepayment without Penalty ……………………………… 35
12. Measures to Address the Great East Japan
Earthquake ……………………………………………………… 36

Financial Section…………………………

8. Lending Operations for FY2010

Local Government Support Operations
2. Basic Framework of the Local Government Support
Operations ………………………………………………………… 38
3. System of the Local Government Support Operations … 39
4. Outline of Operations ………………………………………… 40
5. Local Government Support Operations Implemented
for FY2010 ………………………………………………………… 42
Fund-Raising Operations
1. Issue Type ………………………………………………………… 43
2. Basic Fund-Raising Strategies ……………………………… 44
3. Outline of Bonds ………………………………………………… 45
4. Trends in Fund-Raising Operations……………………… 46
5. Fund-Raising Operations for FY2010…………………

47

6. Fund-Raising Plan for FY2011……………………………… 51

Japan Finance Organization for Municipalities Annual Report 2011

17

Appendices/
J F M
D a t a1. Basic Policy ……………………………………………………… 37

Lending Operations
Operations▪ Provide loans as “Public Funds” as designated in the Local Government Borrowing Program.
▪ Provide long-term and low-interest funds to local governments to efficiently and effectively
complement their fund-raising in capital markets, thereby contributing to the sound fiscal
management of local governments, as well as the promotion of the welfare of people.
JFM also conducts necessary and appropriate credit checks for all loans.

1. Recipients of Loans
JFM provides loans exclusively to local governments.
The Predecessor provided loans for 21 business categories and local government corporations.
When JFM started operations in October 2008, the number of business categories was reduced to 18
and lending to local government corporations was discontinued.
As a result of the reorganization in June 2009, the businesses/projects that had previously been
eligible mainly for Municipal Enterprise-related loans also became eligible for JFM’s General Accountrelated loans.
Specifically, in fiscal 2009, the Regional Revitalization, Disaster Prevention and Special Municipal
Merger projects and Extraordinary Financial Countermeasures Funding became eligible for JFM loans.
In fiscal 2010, JFM made the construction of social welfare facilities eligible. In fiscal 2011, General
Public Construction Projects, etc., have become eligible.
JFM will continue to meet the financing needs of local governments in a timely and appropriatemanner.

18 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

Transition of Lending Scope

Municipal Enterprise–Related Loans

Municipal Enterprise–Related Loans

Municipal Enterprise–Related Loans• Water Supply• Transportation• Hospitals• Sewerage• Public Housing• Industrial Water Supply• Electricity Supply• Gas Supply• Port Facilities• Elderly Care Services• Markets• Slaughterhouses• Tourism Facilities• Parking Facilities• Industrial Waste
Processing• Water Supply• Transportation• Hospitals• Sewerage• Public Housing• Industrial Water Supply• Electricity Supply• Gas Supply• Port Facilities• Elderly Care Services• Markets• Slaughterhouses• Tourism Facilities• Parking Facilities• Industrial Waste
Processing• Water Supply• Transportation• Hospitals• Sewerage• Public Housing1• Industrial Water Supply• Electricity Supply• Gas Supply• Port Facilities• Elderly Care Services• Markets• Slaughterhouses• Tourism Facilities• Parking Facilities• Industrial Waste
Processing

General Account–Related Loans

General Account–Related Loans

General Account–Related Loans• Local Road Construction• Improvement of Rivers
and Other Waterways• High School Construction• Local Road Construction• Improvement of Rivers
and Other Waterways• High School Construction

Local Government bondsother than those related to
Municipal Enterprises• Loans for General Public
Consruction Projects, etc.2• Social Welfare Facilities
Construction• General Projects• Regional Revitalization• Disaster Prevention• Local Road Construction• Special Municipal Mergers,
etc.

Ineligible

Extraordinary Financial
Countermeasures Funding• Local Government
Road Corporation• Local Government
Land Development
Corporation

Appendices/
J F M
D a t aLoans to Local Government Corporations• Toll Roads• Residential Land
Development• Urban Redevelopment

Financial Section

Japan Finance Organization
for Municipalities

I n t e r n a lManagement System

Japan Finance Organization
for Municipal Enterprises

Operations

General Loans

Japan Finance Corporation
for Municipal Enterprises

Ineligible

Notes:
1. The Public Housing business is defined as “Municipal Enterprises” in the Japan Finance Organization for Municipalities Law.
2. General Public Construction Projects, etc., have become eligible, effective in fiscal 2011.

Japan Finance Organization for Municipalities Annual Report 201119

2. Types of Loans
JFM provides two types of loans as below.
1) General Loans: long-term loans to local governments at low interest rates.
These loans are further classified into three types: “Long-Term Loans”; “Loans with Pre-Approval,”
which are provided as bridge loans to cover the period up to the disbursement of Long-Term Loansfor projects for which consent or approval is assured; and “Short-Term Loans” to be repaid within thesame fiscal year.
2) Entrusted Loans: loans entrusted by Japan Finance Corporation.

3. Interest Rates of Loans
Loan interest rates consist of three types: standard lending rate, special lending rate and extra-special
lending rate.
The standard lending rate represents the rate at which the discounted present value of the cash
flows of the funds raised to make the loans equals the discounted present value of the cash flows
to be generated by those loans with their respective terms to maturity, grace period for principal andrepayment methods.
The special lending rate at a discount on the standard rate (0.3 percentage point below the standardrate) and the extra-special lending rate (0.35 percentage point below the standard rate) are applied toresidential infrastructure reinforcement projects and Extraordinary Financial Countermeasures Funding.
The trend of loan interest rates for fiscal 2010 is shown on the next page. During this period, the special
lending rate and the extra-special lending rate were at the same level as the rates of the Fiscal Loan
Fund provided by the national government.
This is because the minimum interest rates for JFM loans are set at the same level as the interest
rates of the Fiscal Loan Fund with the same repayment terms.

20 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile■ Trends in Lending Rates during FY2010
July
2010

August2010

September
2010

Lending Rate
Reset Date
(Month/Day)

4/21

5/25

6/28

7/28

8/25

9/28

Standard Lending
Rate (%)

2.10

2.05

1.95

1.80

1.65

1.85

Special Lending
Rate (%)

2.10

2.00

1.90

1.80

1.60

1.80

Extra-Special
Lending Rate (%)

2.10

2.00

1.90

1.80

1.60

1.80

Lending Rate of
the Fiscal Loan
Fund (%)

2.10

2.00

1.90

1.80

1.60

1.80

Month/Year
Lending
Rate Type

October2010

November
2010

December
2010

January
2011

February
2011

March
2011

Lending Rate
Reset Date
(Month/Day)

10/27

11/24

12/21

1/26

2/23

3/18

Standard Lending
Rate (%)

1.75

1.85

2.05

2.00

2.05

→

Special Lending
Rate (%)

1.70

→

1.90

→

→

→

Extra-Special
Lending Rate (%)

1.70

→

1.90

→

→

→

Lending Rate of
the Fiscal Loan
Fund (%)

1.70

→

1.90

→

→

→

Appendices/
J F M
D a t aJune
2010

Financial Section

May
2010

I n t e r n a lManagement System

April
2010

Operations

Month/Year
Lending
Rate Type

Notes:
1. The lending rates above represent fixed interest rates of a 30-year maturity loan with a 5-year grace period for principal.
2. Special lending rates and extra-special lending rates are the same because the minimum interest rates are set at a level equal tothe interest rates for the Fiscal Loan Fund provided by the national government with the same conditions.

Japan Finance Organization for Municipalities Annual Report 201121

4. Maturities of Loans
The loan maturity, which is set according to the business category of the loan, was previously amaximum of 28 years (25 years on average). At the time of the reorganization in June 2009, themaximum term was extended to 30 years beginning with loans that were given consent or approval infiscal 2009, thereby extending the loan maturities overall.
The new loan maturities for major business categories are shown below.

Loans for Fiscal 2011
Business Categories of the JFM Lending

Adjustable Lending Rate (Note)

Maturity

Grace Period forPrincipal

Maturity

Grace Period forPrincipal

Within (Years)

Within (Years)

Within (Years)

Within (Years)

20

5

20

5

Public Housing

25

5

25

5

Social Welfare Facilities Construction

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

Self-Funded Projects

Public Projects, etc.
General Account–Related Loans

Fixed Lending Rate

─

─

30

3

─

─

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

Municipal Enterprise–Related Loans

Prefectures andExtraordinary
Government-Designated Cities
FinancialCountermeasures
Cities, Towns and Villages
Funding

Note: Lending rates are reviewed every 10 years.

22 Japan Finance Organization for Municipalities Annual Report 2011

5. Credit Check System
JFM conducts the following necessary and appropriate credit scrutiny for allof each project have been confirmed during the consultation and checking

1. Check of Local Governments/
Municipal Enterprises
Applying for Loans

Organization Profileloans on the assumption that the details, legality and probability of repayment▪ Check financial and operational status▪ Conduct interviews

process to obtain consent/approval of borrowing.
(1) Check the financial and operational status of local governments andmunicipal enterprises to which JFM plans to lend in light of the fiscal
indicators as stipulated in the Act on Assurance of Sound Financial Statusof Municipalities (Law No. 94 of 2007) and, if necessary, conduct interviews▪ Verify the consent or approval
for the loan amount▪ Check the loan application documents

Operations

with the staff of prefectures in charge of cities, towns and villages within their

2. Verification at the Time ofLending

respective areas.
(2) Review loan applications submitted by local governments to determine if
conditions are met such as whether consent or approval was obtained for

Disbursementof the Loanthe loan, any required resolution of the local assembly for borrowing andappropriation in the budget.
provided and conduct an onsite credit review to verify the use of funds, the

3. Subsequent Review
I n t e r n a lManagement System(3) After loans are made, JFM staff visit borrowers for which a loan was

Conduct onsite credit review

operational status of the project/business and the financial and operational
status of the borrower(s).

6. Lending Rate Reduction

Financial Section

The interest rate differentials between special lending rates/extra-special lending rates and standard lending
rates are compensated for by investment gains in the Fund for the Improvement of the Operations ofMunicipalities, which includes contributions of a portion of the proceeds from municipally operated racing andJFM’s own funds.
From the viewpoint of equal profit sharing among all local governments, local governments that operatevarious races (horse, bicycle, motorcycle and speedboat) contribute a portion of the earnings to the Fund forAppendices/
J F M
D a t athe Improvement of the Operations of Municipalities, the investment gains from which is used to reduce loaninterest rates.
Reduction ofinterest rate
difference 0.3%
Standard
Lending Rate(fund-raising costs)
Special lending
rates

0.15%

Reduction using funds such as investment gains

0.20%

0.15%

Reduction using JFM’s own funds

0.15%

General Account–Related Loans• Public housing
Municipal Enterprise–Related Loans• Industrial water supply, Gas supply andElderly care services• Markets, Slaughterhouses and Parking
Facilities

Reduction ofinterest rate
difference 0.35%

General Account–Related Loans(Except for Public Housing)
Extraordinary
Extraordinary Financial Countermeasures
Financial
Funding Municipal Enterprise–Related
Countermeasures
Loans
Funding• Water Supply, Transportation, Hospitals,
Sewerage and Electricity Supply

Note: The minimum interest rates for JFM loans are set at the same level as the interest rates of the Fiscal Loan Fund, which isprovided by the national government with the same repayment terms.
The special lending rate and the extra-special lending rate have been set at the same level as the interest rates for the Fiscal
Loan Fund since JFM was established.
Japan Finance Organization for Municipalities Annual Report 201123

7. Review of Lending Operations(1) Track Record of Lending Operations
At the Predecessor, the outstanding loan balance exceeded ¥1 trillion in 1974, ¥5 trillion in 1981, ¥10trillion in 1986, ¥20 trillion in 1997 and ¥25 trillion in 2004. In October 2008, JFM assumed loans totaling¥22,458.6 billion.
As of March 31, 2011, outstanding loans amounted to ¥22,231.8 billion.
As of March 31, 2011, the number of local governments that have borrowed from JFM totaled 2,030,
including all of the prefectures. Cities and special wards of Tokyo had the highest balance at ¥15,661.0
billion and accounted for 70% of the total outstanding loan balance. Next came prefectures with abalance of ¥4,151.8 billion, or 19% of the total balance, followed by towns, villages, local government
associations and others with a balance of ¥2,419.0 billion and accounting for 11% of the total balance.
Loans Made(Billions of yen)

2,500

(Number of loans)

25,000Loan Amount (Long-term loans)
2,000

20,0001,500

15,0001,000

10,000500

5,000
Number of Loans0

FY1957 62

67

72

77

82

87

92

97 2002 07

08

09

10

08

09

10

Outstanding Loan Balance(Billions of yen)

25,00020,00015,00010,0005,000

0FY1957 62

67

72

77

82

24 Japan Finance Organization for Municipalities Annual Report 20118792

97 2002 07

0Organization Profile(2) Track Record of Lending Operations by Business Type
Looking at the past lending operations by the Predecessor by business category, Water
Supply, Electricity Supply and Port Facilities were the primary businesses/projects for loans from themid-1950s to the mid-1960s. The trend then changed, and the primary businesses/projects
shifted to Water Supply, Regional Development and Sewerage Projects from the mid-1960s to the

Operations

mid-1970s. From the mid-1970s to the mid-1980s, the major businesses/projects for JFM loans
were Sewerage, Water Supply and three types of Special Projects (Local Road Construction,
Improvement of Rivers and Other Waterways and High School Construction). Recently, Sewerage andthree types of Special Projects have accounted for a high share of the total.
The General Account–related businesses and Extraordinary Financial Countermeasures Funding
became eligible for JFM loans in fiscal 2009, thereby significantly changing the breakdown by

I n t e r n a lManagement Systembusiness.
As of March 31, 2011, the outstanding loan balance was ¥22,231.8 billion, of which theSewerage business accounted for the largest share at 40%, followed by the three types of Special
Projects at 19% and Water Supply at 18% of the total.

Outstanding Loan Balance by Business Type

Note: Figures in parentheses show the numbers of borrowers.

Note: Figures in parentheses are outstanding loan balances in billions of yen.

(excluding entrusted loans)

Local Government
Corporations¥140.0 billion (36)

Local Government
Associations¥611.4 billion (210)

Total¥22,231.8
billion

Extraordinary
FinancialCountermeasures
Funding
6% (1,214.7)

Others4% (942.2)
Water Supply
18% (4,106.6)

Three Types ofSpecial Projects
19% (4,187.4)
Total¥ 22,231.8
billionPublicHousing
3% (568.6)
Hospitals
3% (584.2)

Cities and Special Wards of Tokyo¥15,661.0 billion (802)(as of March 31, 2011)

Industrial
Water Supply
1% (248.1)

Transportation
6% (1,413.0)

Sewerage
40% (8,967.0)(as of March 31, 2011)

Japan Finance Organization for Municipalities Annual Report 2011

25

Appendices/
J F M
D a t aTowns and Villages¥1,667.6 billion(935)

Prefectures¥4,151.8 billion (47)(excluding entrusted loans)

Financial Section

Outstanding Loan Balance by Type of Borrower

Long-Term Loans Made by Business Type (excluding entrusted loans)
FY

Total
(Billions of yen)

Water Supply Industrial Water Supply

1957

7.1

33%

62

24.2

32

Transportation

5%

7%

9

3

Electricity Supply Gas Supply

Port Facilities Hospitals

4%

31%

7%

Residential Land

21

6

8

15

Other

9%
4%
Sewerage

6

Regional Development

67

43

67.7

9

6

3

Markets

72

43

179.6

7

3

3

23

4

3

5

18

11

Transportation

77

5

49

583.2

9

Toll Roads

8

10
Public Housing

2

24

6

6

Three Special Projects

23

82 1,185.9319

87 1,066.6

3

6

27

7

10
36

5

25

6

23

7

Gas Supply

92 1,206.8

18

97 2,153.2

17

2
1

7
6

1

40

1

6

29

19

5

7

35

6

Hospitals

2002 1,733.0

14

1

9

1

07 1,126.3

14

1

6

5

08 1,108.8

14

1

5

6

7

36

3

39

2

41

2

General Account–Related Loans

10 1,832.9

4

12

09 1,290.7
8

3

3

4

32
20

12
20

23
16

17

13

18

Extraordinary Financial Countermeasures Funding
35
142

Notes:
1. Loans with pre-consent or approval are accounted for in the year when they are converted into long-term loans.
2. “Other” includes refinancing loans for municipal enterprise-related projects.
3. Figures may not add up exactly due to rounding off.
4. General Account–Related Loans include loans for Public Housing and three types of Special Projects.

26 Japan Finance Organization for Municipalities Annual Report 201164

Organization Profile

8. Lending Operations for FY2010(1) Lending Operations FY2010
In fiscal 2010, JFM made loans totaling ¥1,832.9 billion. The loans for Extraordinary Financial
Countermeasures Funding were ¥766.2 billion, which accounted for 41.8% of the total, followed byOperations

the Sewerage business in the amount of ¥372.2 billion, a 20.3% share of the total. In addition, loans
were made for the Special Municipal Merger Business and other General Account–related businesses/
projects in the amount of ¥361.4 billion, which accounted for 19.7% of the total.
(2) Lending Operations by Business Type
Public Housing BusinessI n t e r n a lManagement System

Public housing constructed and managed by local
governments totaled approximately 2.17 million units at
the end of fiscal 2009.
The total amount of loans extended to the Public
Housing Business was ¥16.2 billion in fiscal 2010.
City Housing Karo Estate (Tottori City, Tottori Prefecture)

Financial Section

General Projects
General Projects represent those stipulated as eligible
under Article 5 of the Local Finance Law (Law No.
109 of 1948) and, at the same time, are not covered
under other specific projects in the Local Government
Borrowing Program. The projects that were previously

Appendices/
J F M
D a t aeligible for loans, including the river (small- and mediumsized river) improvement projects and high school
construction (such as reconstruction of old high schoolbuildings) are now classified as General Projects in the
Local Government Borrowing Program in fiscal 2009.

Aomori Higashi High School (Aomori Prefecture)

Loans extended to General Projects for fiscal 2010
amounted to ¥6.2 billion.
Note: The number of projects for each type of business is for fiscal
2009. The pictures are examples of loan projects and may not
represent projects for which loans were generated in fiscal 2010.

Japan Finance Organization for Municipalities Annual Report 201127

Regional Revitalization Projects
The Regional Revitalization Projects represents basic infrastructure development projects conducted by
local governments for regional revitalization.
Loans extended to these projects amounted to ¥10 billion in fiscal 2010.
Disaster Prevention Projects
Disaster Prevention Projects represent those implemented by local governments to promote thedevelopment of disaster-resistant, secure and safe communities.
Loans extended to the Disaster Prevention Projects amounted to ¥18.6 billion in fiscal 2010.
Special Municipal Merger Projects
The Special Municipal Merger Projects represents projects implemented by merged local governments
based on the municipal construction plan, projects that are necessitated due to the merger ofmunicipalities based on the prefecture’s vision and transportation infrastructure projects conducted by
prefectural governments in merged municipalities.
Loans extended to the Special Municipal Merger Projects amounted to ¥182.9 billion in fiscal 2010.
Local Road Construction Projects
These are projects carried out by local governments
without government subsidy to build prefectural,municipal, farm and forest roads. Former local road
construction projects (construction of local roads ascommunity roads) that were eligible for our loans werereclassified as the Local Road Construction Business inthe fiscal 2009 Local Government Borrowing Program.
Loans extended to these projects amounted to¥126.2 billion in fiscal 2010.

Town Road Uchiike-Minakuchi Line (Hino City, Shiga Prefecture)

Extraordinary Financial Countermeasures Funding
This represents the fund-raising for local governments to cover shortfalls in the Local Allocation Tax
pursuant to the provisions of the Local Finance Law.
Loans extended to these projects amounted to ¥766.2 billion in fiscal 2010.

28 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

Water Supply Business
The Water Supply Business (including small-scale water supply) managed by local governments totaled
2,175 projects and provided about 18.7 billion cubic meters of water annually for approximately 124.93
million people.
The total amount of loans extended to the Water Supply Business was ¥138.3 billion in fiscal 2010.

350(Number of loans)
4,000

3,500

Loan Amount

3,000

250

2,500

200

2,000

150 Number of

1,500

100

Loans

1,000

50

500

0

Oigawa Wide Area Waterworks Association (Shizuoka Prefecture) FY1957 62

67

72

77

82

87

92

97 2002 07

08

09

10

0

Financial Section

Transportation BusinessI n t e r n a lManagement System

300

Operations(Billions of yen)
400

The Transportation Business managed by local governments totaled 100 projects, which were operated
by 82 entities, and public transportation is used annually by about 4 billion people (10.88 million people
on an average daily basis).
Of all passengers using transportation systems, 24.1% use publicly managed bus services and73.1% use publicly managed subway services on an annual basis.
The total amount of loans extended to the Transportation Business was ¥50.0 billion in fiscal 2010.

150(Number of loans)
300

100

200

Appendices/
J F M
D a t a(Billions of yen)

Loan Amount
50

100
Number of Loans

0

City Loop Line Tramway (Toyama City, Toyama Prefecture)

FY1957 62

67

72

77

82

87

92

97 2002 07

08

09

10

0

Japan Finance Organization for Municipalities Annual Report 201129

Hospitals Business
Hospital Projects managed by local governments totaled
659 with 916 hospitals, which included 874 general
hospitals, one tuberculosis hospital and 41 mental
hospitals.
The total amount of loans extended to these projects
was ¥53.4 billion in fiscal 2010.

Mie Prefectural Mental Medical Center (Mie Prefecture)

Sewerage Business
The Sewerage Business managed by local governments totaled 3,635 projects, serving areas with apopulation of 99.45 million, or 76.9% of the nation’s total population at the end of fiscal 2009.
The total amount of loans extended to these projects was ¥372.2 billion in fiscal 2010, or about 20%
of long-term loans.

(Billions of yen)

(Number of loans)

800

8,000

700

7,000
Number of Loans

600
500
400

5,000

Loan Amount

4,000

300

3,000

200

2,000

100

1,000

0

FY1957 62
Shimizu Area Rural Community Sewerage (Ibigawa Town, Gifu Prefecture)

30 Japan Finance Organization for Municipalities Annual Report 2011

6,000

67

72

77

82

87

92

97 2002 07

08

09

10

0

Organization Profile

Industrial Water Supply Business
The Industrial Water Supply Business managed by local governments totaled 152 projects with 261
facilities that provided approximately 4.5 billion cubic meters of water annually for 6,166 factories andother facilities.
The total amount of loans extended to the Industrial Water Supply Business was ¥9.9 billion in fiscal 2010.
(Number of loans)
400
Loan Amount

200

20

0

FY1957 62

67

72

77

82

87

92

97 2002 07

08

09

10

0

Electricity Supply and Gas Supply BusinessI n t e r n a lManagement System

Number of Loans

Ikuta Water Purification Plant (Kawasaki City, Kanagawa Prefecture)

Operations(Billions of yen)
40

The Electricity Supply Business managed by local

Financial Section

governments totaled 67 projects with 366 power plants,
which had a maximum power output of 2.9 million
kW and generated 9.2 billion kWh annually. Local
governments operate 32 gas supply businesses, which
provide 36.9 billion MJ of gas extended to 0.91 million
households annually.
Jinemon-yosui Power Generating Station (Toyama Prefecture)

and Gas Supply Business was ¥5.1 billion in fiscal 2010.
Port Facilities Business
The Port Facilities Business managed by local
governments totaled 101 projects, which includedr e c l a m a t i o n , c a r g o - h a n d l i n g m a c h i n e s, sh e d s,
warehouses, lumberyards and tugboats.
The total amount of loans extended to the Port
Facilities Business was ¥4.0 billion in fiscal 2010.
Gantry Cranes at Fukuoka Island-City Container Terminal(Fukuoka City, Fukuoka Prefecture)

Japan Finance Organization for Municipalities Annual Report 2011

31

Appendices/
J F M
D a t aThe total amount of loans for the Electricity SupplyElderly Care Services Business
The Elderly Care Services Business managed by local
governments totaled 603 projects. JFM made loans
for the construction of daycare centers, intensive carenursing homes and other facilities for the elderly, which
are run on nursing-care benefits, and for the machines
and equipment required at those facilities.
The total amount of loans extended to the Elderly
Care Services Business was ¥0.3 billion in fiscal 2010.
Mutagawaraguchi Welfare Facility “Otozure” (Hagi City)

Markets Business
The Markets Business managed by local governments
totaled 175 projects, which handled 7.77 million tonsof vegetables, 2.82 million tons of fruit, 4.03 million
tons of seafood and 0.79 million tons of meat andother products. These projects contributed to themodernization of the distribution system of daily
commodities.
The total amount of loans extended to the Markets
Business was ¥3.8 billion in fiscal 2010.

Central Wholesale Market (Morioka City, Iwate Prefecture)

Slaughterhouse Business
The Slaughterhouse Business managed by local
governments totaled 74 projects, which processed 4.23
million heads of cattle and other animals in fiscal 2009.
The total amount of loans extended to the
Slaughterhouse Business was ¥0.2 billion in fiscal 2010.

Meat Trading Center (Kanazawa City, Toyama Prefecture)

32 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

Tourism Facilities Business (including the Industrial
Waste Disposal Business)
The Tourism Facilities Business managed by local
governments totaled 370 projects, including 141
recreation and accommodation facilities, 59 ropeways

Operations

and 170 other facilities (e.g., hot springs, castles,
museums, zoos, botanical gardens).
The total amount of loans extended to the Tourism
Facilities Business was ¥0.3 billion in fiscal 2010.
Asahiyama Zoo (Asahikawa City, Hokkaido Prefecture)

I n t e r n a lManagement System

Parking Facilities Business
The Parking Facilities Business managed by local
governments totaled 234 projects with 694 facilities,
which had a total capacity of approximately 124,000
vehicles, serving an average of about 174,000 cars
per day.

Financial Section

The total amount of loans extended to the Parking
Facilities Business was ¥0.8 billion in fiscal 2010.

Underground Parking Lot at the East Exit of Kawaguchi
Station (Kawaguchi City)

Appendices/
J F M
D a t aJapan Finance Organization for Municipalities Annual Report 201133

9. Review of Entrusted Loans for FY2010
JFM makes loans for Public Forest Improvement Projects and Grasslands Development Projects,
which are entrusted to JFM by Japan Finance Corporation.
The total amount of entrusted loans made in fiscal 2010 was ¥2,826 million, including ¥2,715 million
for Public Forest Improvement Projects and ¥111 million for Grasslands Development Projects.

Public Forest Improvement
Projects

Grasslands Development
Projects

Number of
Loans

Amount(Millions of yen)

Number of
Loans

Amount(Millions of yen)

Number of
Loans

Prefectures

56

1,814

3

52

59

1,866

66.0

Cities

87

618

2

10

89

628

22.2

Towns andvillages

58

284

3

49

61

333

11.8

201

2,715

8

111

209

2,826

100.0

Total

Category
AmountComponent(Millions of yen) Ratio(%)

Associations
and others

Total

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

The outstanding amounts of entrusted loans for 24,534 Public Forest Improvement Projects and 1,469
Grasslands Development Projects were ¥329,955 million and ¥20,218 million, respectively, totaling¥350,173 million for 26,003 projects.

34 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

10. Lending Plan for FY2011
The Local Government Borrowing Program FY2011 was formulated to address the shortfall in local
revenue sources in the severe environment for local governments’ finance to ensure the necessary
funding. Moreover local governments could provide necessary services for the region and conduct
focused investments in priority fields, while continuing to promote the narrowing of priority areas inwhich to direct public funds and local government funding in the markets.

Operations

As a result, under the Local Government Borrowing Program FY2011, the loan amounts totaled¥13,734.0 billion (down ¥2,163.6 billion, or 13.6%, compared with the loans made in fiscal 2010), which
included JFM loans for ¥1,893.0 billion.
Based on the Local Government Borrowing Program FY2011, JFM plans to make general loans
in the total amount of ¥1,843.1 billion in fiscal 2011. This includes loans for ¥438.7 billion for General
Account–related loans, ¥729.8 billion for Extraordinary Financial Countermeasures Funding, ¥644.6

I n t e r n a lManagement Systembillion for Municipal Enterprise–Related Projects and ¥30 billion for refinancing loans for municipal
enterprise-related projects.
In addition, JFM plans to make entrusted loans in the amount of ¥2.7 billion.

11. Prepayment without Penalty
In a provision effective from fiscal 2007 to fiscal 2009, the national government took measures to reduce

Financial Section

local governments’ debt burden in the amount of ¥5 trillion, of which the Predecessor implemented suchmeasures in the amount of about ¥1,270 billion in fiscal 2007 and 2008. However, in light of the severe
stagnation of local economies, the national government has decided to extend this provision by three
years as part of its fiscal 2010 local government finance measures.
This measure allows local governments, if they establish a “Financial Soundness Plan” or a “PublicEnterprise Management Reform Plan” and carry out thorough administrative and management reforms,

Appendices/
J F M
D a t ato make a prepayment without penalty on ¥1.1 trillion in public funds (loans from the former Trust Fund
Bureau, the former Postal Life Insurance and the Predecessor) for a three-year period from fiscal 2010.
The Prepayment without Penalty measure is intended to reduce local governments’ burden on debt withhigh interest rates.
Responding to the national government’s decision to reduce local governments’ debt burden, JFM
will accept a prepayment without penalty on a total of up to ¥320 billion in loans (including refinancing)over the three-year period from fiscal 2010 through fiscal 2012 for local governments endorsed by thenational government on condition that such municipalities implement administrative and management
reforms. In fiscal 2010, JFM allowed a prepayment without penalty on loans of approximately ¥130.2
billion, of which ¥67.1 billion was for refinancing loans for municipal enterprise-related projects.
For fiscal 2011, JFM will allow a prepayment without penalty on loans of approximately ¥100.0 billion,of which ¥30.0 billion is for refinancing loans for municipal enterprise-related projects.
Japan Finance Organization for Municipalities Annual Report 201135

12. Measures to Address the Great East Japan Earthquake
The Great East Japan Earthquake, which occurred on March 11, 2011, caused serious damage to thenortheastern and surrounding areas. At JFM, we quickly established a countermeasure headquarters
headed by the President and CEO, implemented specific measures to support the local governments inthe afflicted areas.
On March 15, we set up an office to address consultation from afflicted local governments withregard to funding as well as repayment methods, that is open seven days a week including national
holidays. We also revised the lending system for short-term loans to accurately meet the needs ofafflicted organizations.
Given the fact that the disaster occurred immediately before the regular repayment date, which
was March 22, under the internal rules of JFM and the special provision of the loans, JFM extended
the repayment date to September 20, 2011, which is the next regular repayment date, for 32 local
governments that had a problem with the repayment procedure due to the temporary malfunction of
their administrative or financial system and/or damage to public infrastructure because of the disaster, inthe total amount of principal and interest of ¥7,286.82 million.
Along with the recovery of the afflicted local governments’ administrative function, repayments
are also being made steadily. As of March 31, 2011, unpaid amounts of principal and interest were¥2,543.44 million for 16 organizations, whereas as of May 31, 2011, unpaid amounts were reduced to¥51.61 million for two organizations. The remainder is foreseen to be redeemed steadily.
To support the restoration of local governments in the areas affected by the Great East Japan
Earthquake, JFM wishes to fulfill its role through providing long-term and low-interest funds.

36 Japan Finance Organization for Municipalities Annual Report 2011

Local Government Support Operations
Operations

Organization Profile

Harnessing its financial knowledge and experience gained in the capital markets, in partnershipwith related organizations, JFM provides the support to meet the needs of local governments
to effectively raise funds in the capital markets. Our major support areas are training for local
government staff, research, administrative support for fund-raising and related information

Operations

services.

1. Basic Policy
JFM is a joint fund-raising organization of local governments that raises funds in the capital markets andI n t e r n a lManagement System

as a core lender of public funds to local governments.
Harnessing its financial knowledge and experience gained in the capital markets, JFM provides
the support to meet the needs of local governments so that they can efficiently raise funds in thecapital markets.

Financial Section

Fund-raising

Local
Governments

SupportFund-raising

JFM

Appendices/
J F M
D a t aCapitalMarkets

Loans

Japan Finance Organization for Municipalities Annual Report 201137

2. Basic Framework of the Local Government Support Operations(1) Framework of the Local Government Support Operations
The Local Government Support Operations is JFM’s new business under the Japan Finance
Organization for Municipalities Law enacted in 2007.
Toward the full-fledged development of the Local Government Support Operations beginning infiscal 2011, we formulated the “Local Government Support Operations Implementation Policy” in
October 2010. The Local Government Support Operations consist of training for local government
staff, research, administrative support for fund-raising and information services. JFM provides the
support to meet the needs of local governments.
(2) Structure of Local Government Support Operations
JFM staff with work experience at private financial institutions in this section work as financial
advisers to municipalities to meet the needs of those local governments that require professional
financial knowledge.
In January 2011, we newly deployed a Chief Research Fellow to promote comprehensive
research on the finances of local governments.
(3) Partnership with Related Organizations
JFM works in partnership with the national government, think tanks, universities, researchers andrelated agencies, thereby offering the support that local governments need.

Local Governments
Support

JFM
Partnership

Partnership
Information

National Government,
Related Organizations

Universities, Researchers andThink Tanks, etc.
Capital Markets andInvestors, etc.

38 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

3. System of the Local Government Support Operations
JFM’s Local Government Support Operations consist of four core areas ― training for local government
staff, research, administrative support for fund-raising and information services.

Operations(1) Training for Local Government Staff
We provide seminars not only on the basic knowledge of local finances, financing and accounting but
also on fund-raising–related administrative skills and knowledge.
(2) Survey and Research
JFM conducts surveys and research on local governments’ fund-raising, the results of which are fed

I n t e r n a lManagement Systemback to local governments through our operations.
(3) Administrative Support for Fund-Raising
JFM staff with financial knowledge offer advice on fund-raising in response to the specific needs of
local governments.
(4) Information Services

Financial Section

JFM offers financial knowledge and data, etc., and provides case studies on other local governments’fund-raising.

Training for Local
Government Staff

Surveys andResearch

Administrative
Support for
Fund-Raising

Offering
Information

Fund-Raising–Related
Surveys and Research

Financial
Advisers

Financial
Knowledge

Lectures on
DemandHolding Forums

Dispatching
Professionals

Case Studies

Textbooks on
the Administrative
Process forFund-Raising

Appendices/
J F M
D a t aCosponsoring
SeminarsFinancial Data

Japan Finance Organization for Municipalities Annual Report 201139

4. Outline of Operations(1) Training for Local Government Staff
1) Cosponsoring Seminars
In cooperation with the Japan Academy for Municipal Personnel and the Japan Intercultural
Academy of Municipalities, JFM holds seminars specializing in basic knowledge for fund-raising
staff of local governments to enhance their fund-raising and management skills.
2) Lectures on Demand
JFM dispatches its staff to local governments to give lectures catered to the region’s situation andthe level of the audience.
3) Textbooks on the Administrative Process for Fund-Raising
JFM publishes textbooks about the basic knowledge of fund-raising for fund-raising staff.
(2) Surveys and Research
1) Fund-Raising–Related Surveys and Research
As a joint organization of local governments, JFM conducts surveys and research such ascontinual analyses of the funding of local governments and fixed-point observation that requires
financial knowledge.
2) Holding Forums
JFM conducts comprehensive research activities concerning the administration and finances of
local governments and continues to cosponsor forums with the University of Tokyo, the results ofwhich are provided to local governments through its operations.
(3) Administrative Support for Fund-Raising
Financial advisors for municipalities with professional knowledge and experience offer support
according to the specific needs of local governments.
With regard to the themes that require special knowledge, we dispatch professionals with
sufficient knowledge and skills.
1) Advice
We offer professional advice to address questions and concerns about fund-raising. We also
conduct analyses of market trends and offer information to meet clients’ needs.
2) Participation in Seminars as an External Expert
When local governments engage in continuing surveys and research, forming specific workgroups and holding seminars and workshops on particular themes related to fund-raising fora certain period, JFM participates in such seminars and workshops as an external expert.

40 Japan Finance Organization for Municipalities Annual Report 20113) Educational Training Support

Organization Profile

To improve the financial ability of clients’ fund-raising staff, JFM provides classroom-styletraining or one-on-one training.
We also lecture at the seminars for local organizations.
4) Information Liaison
In response to specific requests from local governments, JFM provides information on the casestudies of fund-raising in a similar situation for the local government on condition that we obtain
the relevant organization’s permission to share such information.

Operations5) Accumulation and Dispatch of Information
We store information obtained through specific administrative support for fund-raising andmaintain a database, which is used in our Local Government Support Operations-related
information services and offered widely through leaflets and other means.
6) Onsite Administrative Support―Administrative Support for the Issuance of Local Government
Bonds Publicly Offered in the Markets with the Participation of the Residents

I n t e r n a lManagement System

To help diversify local governments’ fund-raising methods, we conduct the following businesses
for local organizations that are new to the issuance of Local Government Bonds Publicly Offeredin the Markets with the Participation of the Residents (“Bonds Publicly Offered to Residents”).
A. Onsite Support for the Issuance of Bonds Publicly Offered to Residents
We dispatch municipal financial advisers who have worked for private financial institutions andare knowledgeable about the issuance of bonds such as those publicly offered to residents to

Financial Section

provide meticulous support for the issuance of Bonds Publicly Offered to Residents.
B. Support for Public Relations and Other Costs Related to the Issuance of Bonds
We help organizations that receive onsite support for the issuance of bonds as mentioned above interms of public relations and other costs for the issuance of Bonds Publicly Offered to Residents.

Appendices/
J F M
D a t a(4) Information Services
1) Financial Knowledge
Using seminars and other opportunities, based on the current reality of local governments, we
provide easy-to-understand explanations on financial knowledge and terminology that fundraising local government employees should know.
2) Case Studies
We provide information on case studies to local governments that need such information on condition
that we obtain permission from the relevant entity to share such information.
With regard to cases that provide a good reference for many organizations, upon permission of
the relevant entities, we offer the information using leaflets and other means.
3) Financial Data
We offer financial data via links on our Web site.
Japan Finance Organization for Municipalities Annual Report 201141

5. Local Government Support Operations Implemented for FY2010
Aiming for full-fledged business development in fiscal 2011 and thereafter, we positioned the period
until March 31, 2011, as a period to establish the foundation for the development of Local Government
Support Operations and developed various types of businesses.
(1) Training for Local Government Staff
Cosponsoring with the Japan Academy for Municipal Personnel, in November, 2010, we held a seminar,“Seminar for Fund-Raising Measures,” to provide basic financial knowledge for fund-raising staff.
JFM staff visited training sessions for city, town and village employees conducted by prefectures andexplanatory meetings held by prefectures at their cities, towns or villages and gave five lectures on demand.
(2) Surveys and Research
JFM and the University of Tokyo share recognition that it is important to reinforce research andeducation on ideal future funding methods for municipalities, promote the significance and roles offinancing in local governments’ finances and nurture human resources conducive to the developmentof the field of local governments’ finances. Under such common recognition, in October 2010, JFM
and the University of Tokyo jointly established a lecture course as a contribution at the Faculty of
Economics of the University of Tokyo.
In addition to the lecture course, JFM conducts surveys and research as to the fund-raising of local
governments and actively holds symposiums and forums to facilitate a better understanding of local
governments’ finances, the results of which are provided to local governments.
(3) Administrative Support for Fund-Raising
JFM provided advice and educational training support for 17 organizations and 19 cases, mainly about
the following content in fiscal 2010.
▪ Support for the Spread Analysis of Interest Rates for Borrowing▪ Advice on the Diversification of Maturity for Borrowing▪ Advice on Conducting Public Bidding on Borrowing▪ Advice on Fund-Raising by the Issuance of Bonds(4) Information Services
In November 2010, we updated the Web page on our Local Government Support Operations, where
textbooks for fund-raising–related administration and financial data are posted.
(5) Bonds Publicly Offered to Residents at Merged Local Governments
As part of our Local Government Support Operations related to fund-raising, we conducted appropriate
information services and personnel support related to the issuance of bonds for two merged municipalorganizations and helped them with costs for public relations and IR businesses.

42 Japan Finance Organization for Municipalities Annual Report 2011

Fund-Raising Operations
Operations

Organization Profile

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

Operations

1. Issue Type
Basically, JFM issues public offering bonds without a government guarantee to raise funds for lending
operations. Private placement bonds that are underwritten by the Pension Fund Association for Local

I n t e r n a lManagement System

Government Officials are also used for lending operations.
JFM issues government-guaranteed bonds only for refinancing the existing government-guaranteedbonds of the Predecessor in order to manage the Predecessor’s assets that JFM has assumed.

Financial Section

Funds

Market

JFM• JFM bonds

Appendices/
J F M
D a t a• Public offering bonds• Private placement bonds that are underwrittenby the Pension Fund Association for Local Government Officials• Issuance of government-guaranteed bonds torefinance existing government-guaranteed bonds of
the Predecessor
Note: JFM bonds are bonds without a government guarantee issued by JFM. Under Article 40, Paragraph 2, of the Japan Finance
Organization for Municipalities Law, JFM bonds and government-guaranteed bonds are secured by general collateral and are
repaid in preference to other general debts.

Japan Finance Organization for Municipalities Annual Report 201143

2. Basic Fund-Raising Strategies
To raise funds at low cost and in a stable manner, JFM promotes the diversification of fund-raising methods
and strives to gain solid confidence in the capital markets by proactively disclosing information andthoroughly fulfilling accountability. JFM also endeavors to issue bonds in a flexible manner, responding to themarket environment and market needs.
(1) Diversification of Fund-Raising Methods
From the viewpoint of stable fund-raising, JFM endeavors to issue bonds flexibly with various
maturities and structures including medium-term and super-long-term bonds in response to themarket environment and market needs in order to expand the investor base, while also consideringrisk management.
Our basic means for fund-raising is the issuance of bonds. With regard to 10-year bonds, in particular,
JFM endeavors to ensure continuous investor demand through regular issuance. JFM also strives tomeet market needs and loan needs in a timely and flexible manner by issuing bonds under the Flexible
Issuance Program (FLIP) and the Euro Medium-Term Note (EMTN) Program, as well as borrowing
money as necessary.
JFM endeavors to issue bonds in a variety of markets to reduce the cost of fund-raising, closely
monitoring the domestic and international markets.
(2) Thorough Disclosure of Information
From the viewpoint of investor protection, JFM timely discloses information on its operations, financial
conditions and risk management status.
Furthermore, JFM actively promotes investor relations activities, including explanatory meetings forand visits to investors, in order to help investors correctly understand JFM’s management and JFM’s
bonds, and to secure solid confidence in JFM. For the issuance of bonds in international markets, we
actively promote investor relations activities targeting foreign investors. JFM also publishes a bondissuance plan every six months to help investors plan for investment.
(3) Contribution to the Sound Development of the Capital Markets
While raising funds in a flexible and dynamic manner in response to the needs of the capital markets,and maintaining the basic policy of placing great importance on the capital markets, JFM will further
strengthen its role as a leading issuer in the market and positively contribute to the sound development of
the capital markets.

Outline of the Euro Medium-Term Note (EMTN) Program○ Listing: London Stock Exchange (Main Market)○ Currency : Multi-Currencies○ Guarantee : Without Government Guarantee

44 Japan Finance Organization for Municipalities Annual Report 2011

3. Outline of Bonds
Organization Profile

JFM bonds with the following features are recognized as having high credit standing and status―ashigh as that of local government bonds―and have become known as “Super Local Government Bonds”
in Japan.

▪ JFM is a public fund-raising organization established jointly by local governments throughout Japan.
▪ Given that JFM borrowers are local governments, and no local governments have experienced

Operations

default, JFM’s assets can be deemed to be highly stable.
▪ JFM has a solid and sound financial foundation, exemplified by the reserve for interest rate volatility.
▪ Under the Japan Finance Organization for Municipalities Law, local governments have theobligation to bear all of the cost to satisfy the obligation in full in the event of its dissolution; thus,
the redemption of JFM bonds is deemed assured.

JFM has received the highest credit rating among the Japanese public-sector bond issuers fromI n t e r n a lManagement System

Standard and Poor’s (S&P), Moody’s Investors Service (Moody’s) and Rating and Investment
Information, Inc. (R&I). Furthermore, the risk weighting for JFM is 10% for yen-denominated bonds and
20% for bonds denominated in foreign currencies.
In addition to JGBs and local government bonds, interest received by foreign investors (non-residents,
foreign corporations, etc.) on JFM’s domestic bonds in book-entry form and JFM’s international bonds(both of which include the bonds with government guarantee) shall be exempted from Japanese income

Financial Section

tax, subject to certain procedural requirements.
*The risk weightings mentioned are values for investors in Japan. For foreign investors, values are determined by the respective
country’s authority. The risk weighting for government-guaranteed bonds is 0% for either yen-denominated bonds or bonds
denominated in foreign currencies.
*The tax exemption rule shall apply to the interest and other profit on JFM’s domestic bonds to be issued in book-entry form by
March 31, 2013, for which the calculation period starts on or after June 1, 2010, and to the interest and other profit on JFM’s
international bonds (both of which bonds include these with government guarantee) .

Appendices/
J F M
D a t a(as of August 31, 2011)
Credit Rating

S&P
Moodyʼs
R&I: AA: Aa3
: AAA
(For reference) Government-Guaranteed
Bonds: 0%
Government Bonds, Local
Government Bonds: 0%

BIS Risk Weighting

JFM bonds : 10% (denominated in yen)
20% (denominated in foreign
currencies)

General Collateral

A holder of the JFM bonds (including government guaranteed bonds) shall have the right toreceive repayment of his or her own claim from the property of JFM in preference to othergeneral creditors (see Article 40, Paragraph 2, of the Japan Finance Organization for
Municipalities Law). Article 40, Paragraph 3 of the same law provides that this statutory lien
shall rank next to the general statutory lien (ippan sakidori tokken) provided in the Civil Code.

Japan Finance Organization for Municipalities Annual Report 201145

4. Trends in Fund-Raising Operations
JFM issues JFM bonds (public offering bonds and private placement bonds that are underwritten by thePension Fund Association for Local Government Officials) and government-guaranteed bonds.
As for public offering bonds without a government guarantee, the Predecessor had issued FILP*
Agency bonds since fiscal 2001 and JFM has issued JFM bonds since JFM began operations in fiscal
2008.
In fiscal 2010, the total amount of bonds was ¥2,035.7 billion.
*FILP : Fiscal Investment and Loan Program(Billions of yen)
3,000

2,678.4
2,500
2,307.9

2,285.7
2,150.8

2,066.5

2,056.3

2,035.7
1,944.9

2,000
1,818.7
18,187
1,673.3

1,638.4

1,555.3
15,553
1,455.6
1,397.5
13,975

1,500
Government-guaranteedinternational bonds
Government-guaranteed
1,000
domestic bonds
JFM bonds(Private placement bondsthat are underwrittenby the Pension Fund
500
Association for Local
Government Officials)
FILP Agency bonds
JFM bonds(public offering bonds)

0

FY1991 94

10
08
09
*
*The amount for fiscal 2008 was a total of the Predecessor’s bonds and the bonds of the Japan Finance Organization for Municipal
97

Enterprises.

46 Japan Finance Organization for Municipalities Annual Report 2011

2000

01

02

03

04

05

06

07

Organization Profile

5. Fund-Raising Operations for FY2010
In fiscal 2010, the amount of JFM bonds (public offering bonds) totaled ¥900 billion (face value), which
included ¥360 billion in 10-year bonds, ¥160 billion in 20-year bonds, ¥90 billion in 5-year bondsand ¥290 billion in FLIP. JFM also issued ¥400 billion in 10-year private placement bonds, which are

Operations

underwritten by the Pension Fund Association for Local Government Officials.
In addition, JFM issued ¥735.7 billion in government-guaranteed 10-year bonds (of which ¥652.53
billion were in domestic bonds and ¥83.17 billion were in international bonds) to refinance thePredecessor’s bonds with a government guarantee.
As a result, the outstanding balance of JFM’s bonds as of March 31, 2010, amounted to ¥18,346.2
billion, including the Predecessor’s bonds that JFM assumed.

I n t e r n a lManagement System(Billions of yen)
JFM bonds (public offering bonds)

900

Government-guaranteedinternational bonds

83.17

bonds

360

20-year bonds

10-year bonds

652.53Financial Section

10-yearGovernment-guaranteed
domestic bonds

10-year bonds

160

5-year bonds
FLIP
10-year bonds

90

290

Appendices/
J F M
D a t a

JFM bonds(Private placement bonds that are underwrittenby the Pension Fund Association
for Local Government Officials)

400

Outline of FLIP
JFM’s original system, akin to the MTN Program, to issue bonds flexibly and quickly to meet investors’
needs such as maturities and amounts○Bond maturities:

3 to 30 years(Except for 5-year, 10-year and 20-year fixed-rate bullet bonds)○Amount of bonds to be issued at one time:¥3 billion or more

Japan Finance Organization for Municipalities Annual Report 201147

(Reference) Yields and Spreds of JFM bonds (10-year) (FY2010)(%)
1.5(basis points)
20

1.2

16

0.9

12

0.6

8

0.3

4

0

April

May

June

July

August September October November December January February MarchSpread over JGBs
(basis points)

8.0

8.0

5.0

6.0

7.0

5.0

8.0

10.0

7.0

8.0

8.0

5.0

Spread over yield curve(basis points)1

7.0

5.0

5.0

5.0

5.0

5.0

7.0

7.5

7.0

7.0

6.0

5.0

JFM bonds (%)

1.465 1.380 1.278 1.174 1.093 1.164 0.976 1.066 1.274 1.280 1.365 1.340

JGBs (%)2

1.397 1.321 1.283 1.116 1.060 1.049 0.839 0.968 1.189 1.214 1.236 1.310

1. Spread over yield curve ratios are theoretical values calculated by JFM.
2. JGBs (%) is the average bid yield (simple interest) for the relevant month.

48 Japan Finance Organization for Municipalities Annual Report 20110

Organization Profile

1 . JFM Bonds(1) Public offering bonds
Issue price (¥)
100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00Issue date (YY/MM/DD)
10/04/22
10/05/25
10/06/17
10/07/22
10/08/19
10/09/21
10/10/25
10/11/18
10/12/20
11/01/24
11/02/21
11/03/17
10/04/22
10/06/17
10/07/22
10/08/19
10/10/20
10/12/13
11/01/24
10/05/25
10/09/21
10/11/18
11/02/21
10/04/28
10/05/10
10/05/12
10/05/12
10/05/13
10/05/19
10/05/27
10/07/29
10/07/29
10/07/29
10/07/29
10/07/29
10/07/29
10/07/29
10/07/29
10/07/29
10/07/29
10/08/02
10/08/02
10/08/02
10/10/28
10/10/28
10/10/28
10/11/04
10/11/04
10/11/08
10/11/08
11/01/27
11/01/27
11/01/31
11/01/31
11/01/31
11/02/01
11/02/03
11/02/03
11/02/03

Appendices/
J F M
D a t aCoupon rate (%)
1.465
1.380
1.278
1.174
1.093
1.164
0.976
1.066
1.274
1.280
1.365
1.340
2.202
2.043
1.927
1.752
1.851
2.092
2.132
0.525
0.423
0.424
0.639
0.435
1.050
1.075
1.681
1.255
0.855
1.235
1.753
1.347
0.504
1.022
0.268
0.620
0.785
0.962
0.986
1.597
0.567
0.808
0.185
0.869
1.284
1.525
0.647
1.520
1.539
2.095
1.245
2.332
1.123
2.000
1.781
*1
1.588
1.773
2.160

Financial Section*1. 6-month JPY LIBOR

Issue amount (Billions of yen)
35.0
30.0
30.0
30.0
30.0
30.0
30.0
30.0
30.0
30.0
30.0
25.0
30.0
30.0
20.0
20.0
20.0
20.0
20.0
20.0
30.0
20.0
20.0
20.0
6.0
9.0
3.0
7.0
5.0
25.0
3.5
3.0
25.0
25.0
3.0
3.0
3.0
3.0
10.0
3.0
5.0
5.0
4.0
25.0
4.0
3.5
16.0
3.5
3.0
3.0
25.0
3.0
3.0
3.0
3.0
15.0
3.0
3.5
3.0

I n t e r n a lManagement System

Series
11th
12th
13th
14th
15th
16th
17th
18th
19th
20th
21st
22nd
7th
8th
9th
10th
11th
12th
13th
1st
2nd
3rd
4th
F-21stF-22nd
F-23rd
F-24th
F-25th
F-26th
F-27th
F-28th
F-29th
F-30th
F-31stF-32nd
F-33rd
F-34th
F-35th
F-36th
F-37th
F-38th
F-39th
F-40th
F-41stF-42nd
F-43rd
F-44th
F-45th
F-46th
F-47th
F-48th
F-49th
F-50th
F-51stF-52nd
F-53rd
F-54th
F-55th
F-56thOperations

Tenor
10 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
20 years
20 years
20 years
20 years
20 years
20 years
20 years
5 years
5 years
5 years
5 years
4 years
8 years
8 years
13 years
9 years
7 years
9 years
17 years
12 years
6 years
9 years
4 years
7 years
8 years
9 years
9 years
15 years
7 years
8 years
3 years
9 years
13 years
15 years
8 years
15 years
15 years
29 years
9 years
25 years
9 years
18 years
15 years
9 years
13 years
15 years
22 years+0.022%
Japan Finance Organization for Municipalities Annual Report 201149

(2) Private placement bonds that are underwritten by the Pension Fund Association for Local
Government Officials
Tenor

SeriesIssue amount (Billions of yen)

Coupon rate (%)

Issue price (¥)

Issue date (YY/MM/DD)

10 years

A-7th

60.0

1.48

100.0010/04/27

10 years

A-8th

60.0

1.42

100.0010/05/24

10 years

A-9th

30.0

1.20

100.0010/07/28

10 years

A-10th30.0

0.99

100.0010/10/27

10 years

A-11th40.0

1.16

100.0010/11/26

10 years

A-12th60.0

1.33

100.0011/01/27

10 years

A-13th60.0

1.42

100.0011/02/24

10 years

A-14th60.0

1.40

100.0011/03/22

2 . Government-Guaranteed Bonds(1) Domestic bonds
Tenor

SeriesIssue amount (Billions of yen)

Coupon rate (%)

Issue price (¥)

Issue date (YY/MM/DD)

10 years

11th

60.0

1.4

99.75

10/04/19

10 years

12th

60.0

1.3

99.45

10/05/24

10 years

13th

60.0

1.3

100.0010/06/14

10 years

14th

60.0

1.1

99.45

10/07/20

10 years

15th

60.0

1.0

99.30

10/08/16

10 years

16th

50.0

1.0

99.30

10/09/14

10 years

17th

50.0

0.9

100.0010/10/21

10 years

18th

50.0

0.9

99.30

10/11/17

10 years

19th

50.0

1.2

100.0010/12/14

10 years

20th

50.0

1.2

99.60

11/01/20

10 years

21st

50.0

1.2

99.40

11/02/15

10 years

22nd

52.53

1.3

99.80

11/03/14(2) International bonds
Tenor

SeriesIssue amount

Coupon rate (%)

Issue price (%)

Issue date (YY/MM/DD)

10 years

1st
Globaldollar bonds$1,000 million(¥83.17 billion)

4.000

99.17

11/01/13

50 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

6. Fund-Raising Plan for FY2011
To raise the funds for lending operations, JFM issues mainly public offering bonds, as well as private
placement bonds that are underwritten by the Pension Fund Association for Local Government Officials.
In fiscal 2011, JFM plans to issue JFM bonds (public offering bonds) in the amount of ¥900 billion:

Operations¥360 billion in 10-year bonds, ¥160 billion in 20-year bonds, ¥80 billion in 5-year bonds, ¥200 billion
in FLIP bonds and ¥100 billion in EMTN and other bonds. In addition, private placement bonds thatare underwritten by the Pension Fund Association for Local Government Officials will be issued in theamount of ¥300 billion (10-year bonds).
JFM issues government-guaranteed bonds to refinance the existing bonds with a government
guarantee to manage the Predecessor’s assets that JFM assumed. For fiscal 2011, JFM plans to issue

I n t e r n a lManagement Systemgovernment-guaranteed bonds in the amount of ¥710 billion, consisting of ¥510 billion in 10-year bondsand ¥200 billion in 6-year bonds.
Note: The planned amounts may change, subject to the market condition and the lending operations.

Bond Issuance Plan Fiscal 2011
1. JFM Bonds
Issue Type

Financial Section(1) Public Offering Bonds
Amounts to be issued annually (Billions of yen)

10-year bonds

360

20-year bonds

160

5-year bonds

80

FLIP

200

EMTN and other

100

Total

900

Appendices/
J F M
D a t aNotes: ▪ We plan to issue 10-year bonds every month, in principle.
▪ We plan to issue 20-year bonds three to four times every six months.
▪ We plan to issue 5-year bonds quarterly.
▪ The issuance of FLIP, EMTN and other bonds will be flexibly made within the issuance range.

(2) Private placement bonds that are underwritten by the Pension Fund Association for Local Government Officials
Issue Type

Amounts to be issued annually (Billions of yen)

10-year bonds

300

2. Government-Guaranteed Bonds
Issue Type

Amounts to be issued annually (Billions of yen)

10-year bonds

510

6-year bonds

200

Total

710

Japan Finance Organization for Municipalities Annual Report 201151

52 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

1. Overall Risk Management(1) Risk Management System ……………………… 54(2) Characteristics of JFM’s Risks …………………… 54
2. Management of Specific Risks(1) Credit Risk ………………………………………… 55(2) Market Risk ………………………………………… 57(3) Liquidity Risk ……………………………………… 59

Internal Control over Financial Reporting……………… 61

Internal Audits ……………………………………………… 62

Financial Section………………………………… 60(5) Contingency Measure …………………………… 60(4) Operational Risk

I n t e r n a lManagement System

Risk Management

Operations

Internal Management
SystemCompliance3. Compliance Activities ………………………………… 63
Disclosure
1. Basic Stance on Information Disclosure …………… 64
2. Materials for Disclosure ……………………………… 64

Japan Finance Organization for Municipalities Annual Report 2011

53

Appendices/
J F M
D a t a1. Basic Policy …………………………………………… 63
2. Compliance System …………………………………… 63

Risk Management
I n t e r n a l

M a n a g e m e n t

S y s t e m

1. Overall Risk Management(1) Risk Management System
To maintain a sound and good financial standing and gain the solid confidence of the 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 theestablishment of the Integrated Risk Management Committee, which supervises JFM’s overall risk
management, and the Risk Management Office to ensure comprehensive management of the risks.
Risk management can then be appropriately reflected in management decisions.

Risk Management System
Integrated Risk
Management Committee

President and CEO

Senior Executive Director in Charge

ALM Committee

Corporate Planning Department
Risk Management OfficeFinance Department

Loan Department

Administration Department(2) Characteristics of JFM’s Risks
JFM raises funds primarily by issuing 10-year bonds and making loans with a maximum maturity of 30
years with repayment of interest and principal in equal installments. Therefore, a maturity gap is createdbetween lending and funding, and JFM is exposed to the interest rate risk associated with bond refinancing(the risk of the negative margin caused by the interest payable exceeding the interest receivable).
JFM has set aside reserves for interest rate fluctuations (the Reserve for Interest Rate Volatility)and has set up the ALM Committee to comprehensively analyze and manage JFM’s assets andliabilities in a timely and appropriate manner. Specifically, the medium- and long-term management
analysis and risk analysis are conducted through scenario analysis, VaR analysis and duration
analysis, among other methods. In addition, JFM endeavors to lower interest rate risk through avariety of methods such as issuing super-long-term bonds.

54 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

2. Management of Specific Risks(1) Credit Risk
Credit risk is the risk of loss arising from deterioration in the financial condition of a borrower andother situations, which could cause an asset to lose value or become worthless.

Operations

1) Credit risk associated with 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 Predecessor have neverexperienced any loan losses since the Predecessor was established in 1957.

▪ The national government includes local government debt servicing costs (repayment of principal
I n t e r n a lManagement System

and interest for local government borrowings) in the budgetary expenditure under the Local
Government Finance Program and guarantees the revenue source necessary for principal andinterest repayments for local government borrowings by securing a total “Local Allocation Tax” tobalance local governments’ total expenditures and total revenue.
When calculating the “Local Allocation Tax”, the national government also secures revenue
sources for debt service for each local government by including a portion of local government
debt servicing costs.

Financial Section▪ Under the consultation system for local government borrowings, credit reviews must include checks
on the local governments’ situation of debt repayments, tax revenue and necessary revenue sources
to be secured. Furthermore, under the Early Warning System, the local governments for which thecosts for principal and interest payments and financial deficits exceed a certain level must apply forprior approval for the issuance of bonds, so that the credit quality of local government bonds andloans is maintained.

Appendices/
J F M
D a t a▪ Under the Act on Assurance of Sound Financial Status of Municipalities, local governments for which thefiscal indicators exceed the early warning limits must make their own efforts to achieve fiscal soundness,and local governments for which the fiscal indicators exceed the financial reconstruction limits must takenecessary actions to restore soundness of their finances under the oversight of the national government
with regard to redemption of local government bonds and loans, and other operations.

The Great East Japan Earthquake that occurred on March 11, 2011, caused serious damage.
With regard to the organizations that had problem with repayment procedures due to the disaster,JFM extended the principal and interest repayment date in the total amount of more than ¥7.2 billion for
32 accounts. As the administrative functions of these afflicted organizations are recovering, ¥51.61 million
had already been redeemed as of May 31, 2011. The remainder is foreseen to be redeemed steadily.

Japan Finance Organization for Municipalities Annual Report 2011

55

(Loan assets)
As of March 31, 2011, JFM’s total outstanding loans stood at ¥22,231.8 billion, of which¥140.0 billion, or 0.6%, is the amount of outstanding loans made to local government
road corporations by the Predecessor.
The amount of loans made to local governments for which the fiscal indicators
exceeded the early warning limits or the financial reconstruction limits accounted forapproximately 0.2% of the total loans.
2) 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 could cause an asset to lose value or become
worthless.
To manage this risk appropriately, JFM constantly monitors counterparties’ financial
condition, limits transactions to those with financial institutions that meet the credit rating
and other criteria, and limits each transaction amount within the credit line that has been
determined for each counterparty.
In addition, JFM entered into the ISDA Master Agreement and the CSAs (Credit
Support Annexes) with its derivatives counterparties to reduce the credit risk resulting
from fluctuations in the value of derivative transactions.

56 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile(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 fluctuation risk.

Operations

1) Interest rate risk
Interest rate risk is the risk of loss resulting from fluctuations in interest rates.
JFM makes loans to local governments. The maximum term to maturity is 30 years. The
majority of the funds for these loans is raised mainly through the 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

I n t e r n a lManagement System

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¥660 billion in the General Account and ¥3,136.5 billion in the Management Account for a total of¥3,796.5 billion in both accounts at the end of March 2011.
▪ As assets and liabilities in JFM’s General Account are expected to increase as a result of the loans

Financial Section

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 set the following medium-term management target (forfive years starting with the fiscal year ended 31 March 2010) to reduce its exposure to interest raterisk by setting (1) the outlier ratio (the ratio of the interest risks (a 200-basis-point upward or downward
parallel shift in the yield curve) to net assets including reserves for interest rate volatility and the Fund

Appendices/
J F M
D a t afor Improvement of Operations of Municipalities) to be below approximately 20% and (2) the duration
gap to be below approximately two years, thereby issuing super-long-term bonds. Because it is only
two and a half years since JFM started its operation, whereas the size of assets and liabilities were
small compared to the Management Account, whereas the outlier ratio for the end of fiscal 2010 was
14.6% and the duration gap was 1.12 years, which are within the management target.
▪ Although the Management Account, which manages assets transferred from the Predecessor, iscurrently exposed to more interest rate risk than the General Account, JFM is required Reserves
for Interest Rate Volatility as described above. The amount of the above reserves stood at ¥3,136.5
billion at the end of March 2011. But in the future, assets and liabilities of the Management Accountwill decline over time and interest risk decline because new loans have not been made since October
2008, which will reduce the interest rate risk.

Japan Finance Organization for Municipalities Annual Report 201157

Maturity Ladder of Loans and Bonds
General Account
1,000(as of March 31, 2011)

800
600

Billions of yen

400
200
0
-200

Loan Interest Receipt
Loan Principal Redemption-400

Bond Principal Redemption-600

Bond Coupon Payment-800

Gap between Cash Inflows
and Outflows-1,000FY2011 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 39 40• Loan duration• Bond duration• Duration gap

10.66 years
9.54 years
1.12 years (YoY change: +0.02 years)

Management Account
3,000(as of March 31, 2011)

Billions of yen

2,000

1,000

0
Loan Interest Receipt-1,000Loan Principal Redemption
Bond Principal Redemption
Bond Coupon Payment-2,000Gap between Cash Inflows
and Outflows-3,000FY2011 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• Loan duration• Bond duration• Duration gap

6.99 years
4.49 years
2.50 years (YoY change: +0.13 years)

JFM as a whole• Loan duration• Bond duration• Duration gap

7.55 years
5.19 years
2.36 years (YoY change: +0.20 years)

58 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

JFM is also exposed to pipeline risk, whereby losses would be incurred or profits decreased as aresult of interest rate fluctuations during the time from JFM raising funds through bond issuance to thefunds being loaned to local governments. JFM uses swap transactions to hedge against pipeline risk.
2) Foreign exchange and other risks

Operations

Various risks associated with bond principal and interest payments are generally hedged by swap
transactions. These risks include foreign exchange risk related to foreign currency denominatedbonds, interest rate risk related to floating rate bonds and the risk of fluctuations in the amounts ofprincipal and interest of inflation-indexed bonds. JFM’s investments of surplus funds are exposedto 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 price fluctuation risk by holding investments

I n t e r n a lManagement System

until maturity and hedges foreign exchange risk by using forward foreign exchange contracts.
(3) Liquidity Risk
Liquidity risk is the risk that JFM would incur losses because it becomes difficult to secure thenecessary funds or is forced to raise funds at far higher interest rates than under ordinary conditions
due to a gap between the investment period and the funding period or an unexpected outflow of

Financial Section

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 turmoil or other difficult situations (market liquidity risk).
JFM’s exposure to liquidity risk is very low because loans are made to local governments
according to a pre-set schedule, and the daily cash and liquidity management is carried out basedon a quarterly plan for fund management. Moreover, JFM has entered into overdraft agreements withseveral financial institutions to prepare for the unexpected fund short falls, and invests surplus funds

Appendices/
J F M
D a t aonly in short-term financial products.

Japan Finance Organization for Municipalities Annual Report 201159

(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 from external events.
1) Administrative risk
Administrative risk is the risk of loss resulting from neglect by management and staff in notproperly conducting administrative work, accidents and/or violation of laws caused by them in thecourse of the administrative work process.
JFM endeavors to mitigate its exposure to administrative risk by preparing operational
manuals, holding educational seminars and training sessions, and reducing operational workload
through systematization.
2) Systems risk
Systems risk is the risk of the confidentiality, integrity and availability of information being impaired
as a result of computer system inadequacies or the fraudulent use of computer systems.
JFM has established and implemented the “Systems Risk Management Policy” and the“Systems Risk Management Standard” to appropriately manage systems risk and ensure smoothbusiness operations.
3) Other risks
In addition to the aforementioned risks, JFM appropriately identifies and addresses other risks,such as legal risk, personnel risk, physical asset risk and reputation risk.
(5) Contingency Measures
JFM has prepared the “Contingency Plan” to minimize the scope of losses and the impact on
operations and restore normal operations promptly and efficiently in the event that computer systems
break down or cannot be used due to unexpected accidents, disasters or malfunctions.
Furthermore, to prepare for a contingency, JFM has a backup server outside JFM so that its
business can be continued despite an emergency.

60 Japan Finance Organization for Municipalities Annual Report 2011

Internal Control over Financial ReportingI n t e r n a l

M a n a g e m e n t

S y s t e mOrganization Profile

Pursuant to the “Ministerial Ordinance on Finance and Accounting of the Japan Finance Organization
for Municipalities” (Ordinance No. 87 of the Ministry of Internal Affairs and Communications, 2008;
hereinafter the “Ordinance”), JFM is required to have a system of internal control over financial reporting
to ensure the reliability of its financial statements, and maintain and implement this system appropriately.
In accordance with the Ordinance, JFM prepares the Internal Control Report, the base date of which

Operations

is the end of the fiscal year, and it is audited by the external auditors and released together with thefinancial statements.
JFM has a system of internal control over financial reporting in place to further strengthen its
organizational foundation. JFM maintains and evaluates this system effectively and efficiently to ensure
the reliability of the financial statements.
In the fiscal 2010 Internal Control Report, we viewed our internal control on financial reporting
as effective. In the Auditors’ Report on Internal Controls, the accounting auditors gave their opinion

I n t e r n a lManagement System(unqualified audit opinion pursuant to Ministerial Ordinance Article 32, Paragraph 5, Clause 1) on thefiscal 2010 Internal Control Report as follows: “We consider this report to conform to the standards ofevaluation for internal controls over financial reporting generally recognized as fair and appropriate,and have determined that all of the important points in the evaluation of internal controls over financial
reporting have been appropriately presented”.

Financial Section
Appendices/
J F M
D a t aJapan Finance Organization for Municipalities Annual Report 201161

Internal Audits
I n t e r n a l

M a n a g e m e n t

S y s t e m

Internal audits are performed by the internal auditor, who is independent from other departments,
sections and offices, to examine and assess the appropriateness and effectiveness of the internal
control systems of JFM, thereby contributing to ensuring appropriate and efficient operations. Internal
audits are 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 the operations conducted in accordance with laws, regulations and rules?
b. Are the operations conducted efficiently?
c. Are the risk management systems functioning appropriately and efficiently?
d. Are the 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.
4. If deficiencies are identified by the internal auditor, the related sections and offices are
required to take necessary corrective actions immediately.
The internal auditor submits to the president and CEO an internal audit report that includes
the status of corrective actions. The internal auditor also performs follow-up audits and reports
the results to the president and CEO as necessary.

62 Japan Finance Organization for Municipalities Annual Report 2011

ComplianceI n t e r n a l

M a n a g e m e n t

S y s t e mOrganization Profile

1. Basic Policy
JFM has prepared the “Compliance Rules” to ensure that operations are conducted in accordance withlaws and regulations and indicate what actions management and staff should take when a breach oflaws or regulations is identified. The rules include the following basic policy on compliance.

Operations▪ Management and staff must be aware of JFM’s social responsibility and public mission andrealize that a breach of laws or regulations would cause a great hindrance to JFM’s business
operations, such as a loss in credibility of JFM as a whole. Management and staff must also
observe laws and regulations and fulfill their duties with integrity and fairness.
▪ Management and staff must strive to earn the trust of society by appropriately disclosing

I n t e r n a lManagement System

information on JFM’s operations.

2. Compliance System

Financial Section

Based on the Compliance Rules, JFM has established the Compliance Committee.
JFM’s deputy president serves as the chairman of the committee, with senior executive directors anddepartment heads serving as committee members. The committee deliberates on important complianceissues, such as the formulation, revision and abolition of compliance-related rules and regulations andthe preparation of guidelines and action plans for compliance.

Appendices/
J F M
D a t a3. Compliance Activities
JFM distributes to management and staff updated compliance manuals, which include points to notefor compliance actions and related laws and regulations. JFM also provides opportunity for training toemployee such as seminars.

Japan Finance Organization for Municipalities Annual Report 201163

Disclosure
I n t e r n a l

M a n a g e m e n t

S y s t e m

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

2. Materials for Disclosure
1) Materials for disclosure pursuant to laws and regulations
Explanatory documents based on Article 36, Paragraph 3, of the Japan Finance Organization for
Municipal Enterprises Law(Documents corresponding to securities reports of private company, the Internal Control Report)
Business reports
Financial statements
Statements of accounts
2) Other documents for disclosure
Budgets, business plans, funding plans and medium-term plans on income and expenditures
Management plan
Bond issuance plan
Brochure
Annual Report (Japanese and English)

Web site (http://www.jfm.go.jp/en/)

64 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

Balance Sheets ……………………………………………66

I n t e r n a lManagement System

Financial Statements

Operations

Financial Section

Statements of Income ……………………………………67[General Account/Management Account] ………………68
Statements of Changes in Net Assets …………………70
Statements of Cash Flows ………………………………72
Notes to Financial Statements ……………………………73
Report of Independent Auditors ……………………………98

Financial Section

Appropriation of Profit

Appendices/
J F M D a t aJapan Finance Organization for Municipalities Annual Report 201165

Financial Statements
Financial Section■ 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

66 Japan Finance Organization for Municipalities Annual Report 2011

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

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

AmountAmount$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¥$

Appendices/
J F M D a t a¥539,997

Financial Section¥558,528

I n t e r n a lManagement System

IncomeOperations

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

193,155

Japan Finance Organization for Municipalities Annual Report 201167

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

¥4,5391 Profit to be appropriate¥4,539Net income
Accumulated deficit brought down–

2 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)

¥8,025

1 Profit to be appropriated¥8,025

Net income
Accumulated deficit brought down–

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–
96,44396,443

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.

68 Japan Finance Organization for Municipalities Annual Report 2011

(Millions of Yen)

¥4,326

1 Profit to be appropriate¥4,326

Net income
Accumulated deficit brought down

Organization Profile■ Appropriation of Profit [Management Account](For the year ended March 31, 2010)–

2 Profit appropriated

4,326

Operations

4,326

Surplus reserve

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)

¥8,048

1 Profit to be appropriatedAccumulated deficit brought down

I n t e r n a lManagement System¥8,048Net income–

2 Profit appropriated8,048

Surplus reserve

8,048(Thousands of US dollars)$96,712

1 Profit to be appropriated$96,712Net income
Accumulated deficit brought down–

Surplus reserve

96,712Financial Section

2 Profit appropriated96,712

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.

Appendices/
J F M D a t aJapan Finance Organization for Municipalities Annual Report 201169

■ 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¥60,61370 Japan Finance Organization for Municipalities Annual Report 2011¥

Total net
assets(Millions of Yen)

Stockholdersʼ equity
Retained earnings¥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 changes duringaccounting period in items
other thanstockholders’ equity
Net changes during accounting
period(From April 1, 2010 through March 31, 2011)(Thousands of US dollars)

Stockholdersʼ equity

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

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

Japan Finance Organization for Municipalities Annual Report 2011

Appendices/
J F M D a t a

Net income

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

Financial Section

Retained earnings

Balance at end of previous
fiscal year
Changes during accounting
periodI n t e r n a lManagement System

Total
retainedearnings

Net income

Balance at March 31, 2011

Total net
assetsOperations

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

Generalaccount
surplusreserve

CapitalOrganization Profile(From April 1, 2010 through March 31, 2011)71

■ 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)

Increase in fund for improvement of operations ofmunicipalities

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

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 year

72 Japan Finance Organization for Municipalities Annual Report 2011

255,591

149,264

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

Organization Profile■ Notes to Financial Statements
1. Basis of Presentation

Operations

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

Financial Section
Appendices/
J F M D a t aJapan Finance Organization for Municipalities Annual Report 2011

I n t e r n a lManagement System(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 method73

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.

74 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile
Operations(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.

I n t e r n a lManagement System

4. Loans

Financial Section

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.

Appendices/
J F M D a t a

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.

Japan Finance Organization for Municipalities Annual Report 201175

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 when

76 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile
I n t e r n a lManagement System

Financial Section
Appendices/
J F M D a t aJapan Finance Organization for Municipalities Annual Report 2011

Operations

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.

77

・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.

78 Japan Finance Organization for Municipalities Annual Report 2011

Balance sheet amount(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)

–
–

Operations(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

Organization Profile(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.

I n t e r n a lManagement System

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

Balance sheet amount

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)

–
–

Financial Section(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(Thousands of US Dollars)

Balance sheet amount

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)–

Appendices/
J F M D a t a(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(*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 ( ).

Japan Finance Organization for Municipalities Annual Report 201179

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.

80 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

Liabilities

Operations

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:

I n t e r n a lManagement System(Millions of Yen)

Contract amountPrimary
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
moreJapan Finance Organization for Municipalities Annual Report 2011

Appendices/
J F M D a t aType of derivativetransactions

Financial Section

Hedge accounting
method81

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.

82 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

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

Loans

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
30 years
20 years
10 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
Deposits

Operations

Securities held-to-maturity(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 held-to-maturity
Deposits

5,498,561

–

–

–

–

–

–

–

6,208,036

–

–

–

–

–

–

–

I n t e r n a lManagement System

Securities

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

Bonds

Within 1 year

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

Financial Section(Millions of Yen)
After 1 year
through
2 years¥211,452(Thousands of US Dollars)$15,457,078

Appendices/
J F M D a t a

Bonds$2,540,880

Japan Finance Organization for Municipalities Annual Report 201183

6. Tangible and Intangible Fixed Assets
Tangible and intangible fixed assets at March 31,2011 consisted of the following:(Millions of Yen)

Type of assets

Balanceat end ofIncreaseprevious
duringfiscal year
the year(Aquisition
costs)

Accumulated
Balance at
Depreciation Balance at
depreciation
Decrease March 31,
March 31,
and
and
2011
during2011
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,
and
and
2011
during2011
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.

84 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

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).

Operations○ 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)

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––

Japan Finance Organization for
Municipalities bonds - Sub-total

Japan Finance Organization for Municipal Enterprises
bonds - Sub-total[US dollars 1,000,000 thousand]Japan Finance Organization for Municipalities Annual Report 2011

Appendices/
J F M D a t a

Couponrate
Maturity(%)

Financial Section

Outstanding amountat March 31, 2011

I n t e r n a lManagement System

Date of issue

Type of bond85

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.

86 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

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)

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

Operations

Balance at endof previous
fiscal year

Type of reserve

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

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

Financial Section

Balance at endof previous
fiscal year

Type of reserve

I n t e r n a lManagement System(Thousands of US dollars)

Appendices/
J F M D a t aJapan Finance Organization for Municipalities Annual Report 201187

10. Reserve for Interest Rate Volatility
Reserve for interest rate volatility at March 31,2011 consisted of the following:(Millions of Yen)

Type of reserve

Balance atendof previous
fiscal year

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

88 Japan Finance Organization for Municipalities Annual Report 2011–

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

Organization Profile

11. Fund for Improvement of Operations of Municipalities
Fund for improvement of operations of municipalities at March 31,2011 consisted of the following:(Millions of Yen)

Increase during the 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¥

AmountWithdrawn

Balance at
March 31,
2011

Others–¥–¥–¥908,104

–

2,187

–

–

7,719

¥6,696¥2,187¥–¥–¥915,823

Operations

Balanceat end ofprevious
fiscal year

I n t e r n a lManagement System(Thousands of US dollars)

Increase during the 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

Balance at
March 31,
2011

Others–$–$–$10,912,097–

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

Financial Section

Type of fund

Balanceat end ofprevious
fiscal year

Japan Finance Organization for Municipalities Annual Report 2011

Appendices/
J F M D a t aNote: 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.

89

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).

90 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

14.Information by Account (Balance Sheets)
Balance sheets of General account and Management account at March 31, 2011 were as follows:(Millions of Yen)

Item

General accountManagement
Account¥3,586,125¥18,645,731

OffsetTotal(Assets)
Loans

457,590

Cash and bank deposits

516,633

Other assets

2,420

Tangible fixed assets

2,918

Intangible fixed assets

756

17,0332,918
756

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

14,59017,698I n t e r n a lManagement System

Total assets

516,633
14,612

827,351

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

457,590

Operations

Securities¥22,231,856(Liabilities)
Bonds
Other liabilities

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

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

442,831660,000(442,831)

3,236,421

3,896,421

660,000

Management account reserve for interest
rate volatility

660,000
3,136,532

3,136,532

99,889Reserve for interest rate reduction
Total liabilities(827,351)

4,987,458

Appendices/
J F M D a t a

Reserve under special laws

Financial Section

Reserve for bonuses

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¥(1,270,183)¥23,226,787

Japan Finance Organization for Municipalities Annual Report 201191

(Thousands of US dollars)

Item

General accountManagement
Account$43,092,107$224,053,487

OffsetTotal(Assets)
Loans$267,145,594

Securities

5,498,561

5,498,561

Cash and bank deposits

6,208,040

6,208,040

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 reserve

92 Japan Finance Organization for Municipalities Annual Report 2011$(15,262,954)$279,101,030

Organization Profile
Operations

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 theLaw.

I n t e r n a lManagement System

Financial Section
Appendices/
J F M D a t aJapan Finance Organization for Municipalities Annual Report 201193

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¥ 8,025

94 Japan Finance Organization for Municipalities Annual Report 2011

465,489

245,489–¥ 16,074

Organization Profile(Thousands of US dollars)

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

542,573

5,943,995

Interest income
Fees and commissions

Total$ (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)

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(7,138)(204,189)
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
2,643,595

2,643,595

Reversal of reserve for interest rate reduction

168,159

168,159

2,643,595

Provision for reserve for interest rate volatility

2,643,595

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

2,949,880

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

$

$

$

96,443

5,593,475
2,643,595

Provision for Management account reservefor interest rate volatility

Net income

Appendices/
J F M D a t a(2,643,595)

Reversal of Management account reserve forinterest rate volatility

Special losses

Financial Section

204,189

Administrative fee for Management accountOrdinary income

I n t e r n a lManagement System

Expenses

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

Operations

Other income

Offset

96,712

2,949,880–$ 193,155

Japan Finance Organization for Municipalities Annual Report 201195

16.Fair value of Marketable Securities

Marketable held-to-maturity securities at March 31, 2010 consisted of the following:(Millions of Yen)

Balance sheet
amountFair value

Difference

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:(Millions of Yen)

Balance sheet
amountFair value

Difference

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.

96 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

17.Derivative Information

I n t e r n a lManagement System

Financial Section
Appendices/
J F M D a t aJapan Finance Organization for Municipalities Annual Report 2011

Operations(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.

97

Report of Independent Auditors
Financial Section

98 Japan Finance Organization for Municipalities Annual Report 2011

Organization Profile

Results of Lending Operations by Business in FY2010 … 100

I n t e r n a lManagement System

Appendices

Operations

Appendices / JFM Data

Loans by Group in FY2010 …………………………… 101
Outstanding Loan Balance by Business for FY2010…… 103
Outline of Local Government Finance and JFM’s Role… 104
JFM Data
Organization History …………………………………… 106
JFM Organization ……………………………………… 107

Financial Section

FY2010 Redemption of Loans ………………………… 102

Directors and Corporate Auditors/Address ………… 109

Appendices/
J F M
D a t aJapan Finance Organization for Municipalities Annual Report 201199

Results of Lending Operations by Business in FY2010
Ap p e n d i c e s

Project

Amount ofloans made(Millions of yen)

Change (%)

Number ofloans madeShare (%)

16,235

△ 0.9

0.9

121

○ Social Welfare Facilities
Construction

1,217

Across-theboard gains

0.1

9○ General Projects

6,243△ 59.20.3

74○ Public Housing¥

GeneralRegional Revitalization
Account-Related ○Loans○ Disaster Prevention

9,984

15,500.0

0.5

143

18,59819,073.2

1.0

206○ Special Municipal Merger Projects

182,937

1,499.1

10.0

624○ Local Road Construction

126,191

9.8

6.9

871

Subtotal

361,405

128.4

19.7

2,048

766,236

70.7

41.8

957

○ Water Supply

125,652

△ 9.8

6.9

815

○ Small-Scale Water Supply

12,647△ 20.1

0.7

372○ Transportation

3,838△ 26.00.2

9○ Urban Rapid Transit Railway

46,180

0.5

2.5

23

○ Hospitals

53,396

0.2

2.9

231

○ Sewerage

372,245

△ 8.5

20.3

3,470

9,913

28.6

0.5

68

529

△ 24.8

0.0

5

4,524

335.0

0.2

22

3,958

△ 3.2

0.2

69

312

57.6

0.0

12

3,764

138.5

0.2

30

○ Slaughterhouses

151

155.9

0.0

6

Tourism Facilities39△ 44.30.0

2○ Parking Facilities780△ 51.6

0.0

1

251

△ 28.90.0

2

638,177

△ 6.6

34.8

5,137

67,077

Across-theboard gains

3.7

513

¥1,832,895

42.0

100.0

8,655

○ Extraordinary Financial

Countermeasures Funding○ Industrial Water Supply
Municipal
EnterpriseRelated Loans○ Electricity Supply○ Gas Supply
Port Facilities○ Elderly Care Services○ Markets

Industrial Waste Disposal
Subtotal○ Refinancing loans for Municipal EnterpriseRelated projects

Total

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

100 Japan Finance Organization for Municipalities Annual Report 2011

Loans by Group in FY2010
Appendices

Organization Profile

Amount of loans made in Fiscal 2010
Classification
Amount (Millions of yen)

Share (%)

24.5

Government-Designated Cities

266,533

14.5

Cities* and Special Wards of Tokyo

951,000

51.9

Towns and Villages

147,805

8.1

Corporate Groups and Associations

18,9101.0¥1,832,895

100.0

Total

Operations¥ 448,646

Prefectures

Note: The totals of the individual amounts may not add up exactly due to rounding off.
* Cities excluding goverment-designated cities.

I n t e r n a lManagement System

Financial Section
Appendices/
J F M
D a t aJapan Finance Organization for Municipalities Annual Report 2011101

FY2010 Redemption of Loans
Ap p e n d i c e s

Principal
Classification

Interest

Number of loans

Amount(Millions of yen)

Number of loans

Amount(Millions of yen)

General loans

383,831¥1,474,979

456,560¥532,281

Loans to local
government
corporations

1,073

17,212

1,109

3,551

Total

384,904

1,492,191

457,669

535,832

General loans

1,321

137,400

1,318

50

Loans to local
government
corporations

17

1,675

17

1

Total

1,338

139,075

1,335

51

386,242¥1,631,266

459,004¥535,883

Redemption of loans with pre-consent
or approval

−

−

3

4

Redemption of short-term loans

−

−

−

−

Regular redemptionof loans

Prepayment of loans

Total

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

102 Japan Finance Organization for Municipalities Annual Report 2011

Outstanding Loan Balance by Business for FY2010
Appendices

Public Housing

5,342

Local Road Construction
Improvement of Rivers
and Other Waterways

31,1633,900,914

17.5

3,649

209,8760.9High School Construction

444

76,583

0.3

General Projects

77

12,8350.1

Regional Revitalization145

10,0450.0

Disaster Prevention

217

18,6450.1

Special Municipal Merger Projects

650

193,536

0.9

Local Road Construction

832

123,213

0.6

9

1,217

0.0

1,354

1,214,734

5.5

43,882

6,330,217

28.5

Water Supply

45,802

3,931,036

17.7

Small-Scale Water Supply

5,923

175,5540.8

Industrial Water Supply

Subtotal

1.1

167

21,7540.1

Urban Rapid Transit Railway

824

1,391,265

6.3

Electricity Supply

736

59,6380.3

Gas Supply

293

41,303

0.2

Port Facilities

1,209

98,591

0.4

Hospitals

2,407

584,184

2.6

Elderly Care Services

315

23,9000.1

Markets

466

84,4100.4

Slaughterhouses

59

6,015

0.0

Tourism Facilities

74

6,442

0.0

Industrial Waste Processing

22

9,231

0.0

Parking Facilities

494

79,4870.4

Regional Development (Note 1)

64

33,7190.2

122,022

8,967,000

40.3

183,303

15,761,610

70.9

516

140,0290.6

227,701¥22,231,856

100.0

Sewerage
Subtotal
Loan for Local Government
Road Corporation

Toll Roads (Public Corporations)
Total

Appendices/
J F M
D a t a248,081

Financial Section

2,426

Transportation

I n t e r n a lManagement System

2.6

Extraordinary Financial
Countermeasures Funding¥

Share (%)

568,619

Social Welfare Facilities Construction

Municipal EnterpriseRelated Loans

Amount (Millions of yen)

Operations

General AccountRelated Loans

Number of loans

Organization Profile

Project

Notes: 1. Regional Development Projects are land creation projects for regional development that include the creation of coastal industrial
land and other land along the shoreline, the preparation of inland industrial land, and land for distribution parks, offices, shops andhousing (including land for related facilities), as well as residential land development projects for land readjustment.
2. JFM’s 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.
Japan Finance Organization for Municipalities Annual Report 2011103

Outline of Local Government Finance and JFM’s RoleAp p e n d i c e s

JFM formulates its lending plan each fiscal year based on the Local Government Finance Program and the Local
Government Borrowing Program, which are prepared in parallel with the national 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 and sanitation, school and social education, policing and fire fighting in theirrespective regions.
Local governments comprise prefectures, cities, towns, villages and special wards of Tokyo.
Cities, towns, villages and special wards of Tokyo are the basic units of local governments and handle administrative
issues related to their respective regions.
Prefectures administer broader areas than those that cities, towns, villages and special wards of Tokyo are in charge of.
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 or mayors.
As of March 31, 2011, there were 47 prefectures, 19 government-designated cities 1,727 cities, towns and villages
nationwide and 23 special wards of Tokyo.
JFM makes loans exclusively to local governments. JFM, since the time of its Predecessor, has not experienced any
default on loans it has made to date.

Local Government Finance Program (LGFP)
As local governments play an important role in the national economy, the national government takes responsibility toprovide local governments with the funds required to smoothly implement necessary measures and policies.
To this end, the national government formulates the LGFP each fiscal year in parallel with the national budget with aview 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 theirrevenue and expenditures as a whole.
An important source of funds from the national government to local governments is the “Local Allocation Tax (LAT)”.
Under the LAT System, the national government allocates a certain portion of the funds that the national government
collects as national taxes so that local governments can make up for the shortfall to maintain an appropriate level of
public services.
In fiscal 2011, the expenditures of local governments under the LGFP totaled ¥82.5 trillion, which accounted for about
17.3% of GDP.*
Furthermore, LAT of ¥17.4 trillion was distributed to local governments by the national government.

Local Government Borrowing Program (LGBP)The national government also prepares the LGBP each fiscal year, based on the LGFP for the year, to give an overall
picture of the local government's borrowing and to secure necessary revenue sources.
The LGBP sets the amounts of local government's borrowing each year by project and by funding source.
For fiscal 2010, the total amount of the LGBP, or the total amount of new borrowing of local governments, is ¥11.5
trillion.
The breakdown of funding sources is JFM 13.8%, the national government 27.2% and the private sector 59.1%.

Municipal Enterprises
Local governments provide certain areas of services through the municipal enterprises operated basically on theirrevenues other than funds from the General Account.
Water supply and sewerage services are mainly operated by municipal enterprises.
As of March 31, 2010, 1,794 local governments including all prefectures operated 8,903 municipal enterprises
throughout Japan. The total expenditures of these municipal enterprises for fiscal 2009 were ¥18.5 trillion.
The total capital expenditures of municipal enterprises in fiscal 2009 was ¥3.8 trillion, of which ¥1.6 trillion was
procured by borrowing, with ¥0.6 trillion provided by JFM.

104 Japan Finance Organization for Municipalities Annual Report 2011

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.

4. If a local government undertakes bonds and loans without obtaining consent from the Minister for Internal Affairs
and Communications or its respective prefectural governor, the head of the local government must report it to its
respective assembly in advance.
5. Local governments and municipal enterprises with deficits exceeding certain limits, and local governments withdebt payment ratios exceeding certain limits, must obtain approval from the Minister for Internal Affairs andCommunications or their respective prefectural governors before borrowing.

*GDP: Annual Nominal GDP (fiscal year 2011); Department of National Accounts, Economic and Social Research Institute, Cabinet Office

Japan Finance Organization for Municipalities Annual Report 2011

105

Appendices/
J F M
D a t aThe Act on Assurance of Sound Financial Status of Municipalities, which was enacted and promulgated in June 2007,
stipulates that local governments with financial indices exceeding certain levels shall expeditiously restore financial
soundness. Under the Law, local governments shall disclose their financial indices, and, according to the indices, such
local governments must map out their appropriate plans to restore fiscal soundness.
The Act is designed to ensure the fiscal soundness of local governments through administrative and fiscal measuresthat 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.

Financial Section

Act on Assurance of Sound Financial Status of Municipalities

I n t e r n a lManagement System

3. As for local government bonds and loans to which consent has been given by the Minister for Internal Affairs andCommunications or the respective prefectural governors, the national government incorporates the payment ofprincipal and interest of these local government debts into the LGFP. These debt services are also included in thecomputation of LAT.

Operations

In principle, local governments can borrow only as revenue sources for the expenditures for the purposes specificallystipulated in the Local Finance Law and other related regulations, such as the expenses associated with municipal
enterprises, and the construction of public facilities.
In addition, the purposes and terms and conditions of individual local government bonds and loans shall be in linewith the budget approved by the respective assembly.
To contribute to the sound fiscal management of local governments in undertaking bonds and loans, the following
consultation system has been established by the national government.

Organization Profile

Procedures for Local Governmentsʼ Borrowing

Organization History
JF M D a t aHistory of JFM
Fiscal Year

Event

2008

The Japan Finance Organization for Municipal Enterprises (the Predecessor of JFM) was established based on the Japan
Finance Organization for Municipal Enterprises Law on August 1, 2008.
Succeeded the assets and assumed the liabilities of the Predecessor and commenced operations on October 1, 2008.

2009

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

History of the Predecessor
Fiscal Year

Event

1957

Established based on the Japan Finance Corporation for Municipal Enterprises Law (June 1, 1957).

1960

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

1966

Started a lending program that applied special lending rates.

1967

Started receiving subsidies from the national treasury.

1970

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

1972

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

1978

Included three General Account–related special projects (Local Road Construction, Improvement of Rivers and Other
Waterways and High School Construction) in the scope of lending.

1983

Started issuing foreign currency–denominated bonds.

1989

Established the Reserve for Losses on Refinancing of Bonds

1990

Started a lending program that applied extra special lending rates.

1998

Based on the policy titled “Regarding Reorganization and Rationalization of Special Public Institutions,” which wasapproved by the Cabinet on September 24, 1997, one part-time senior executive director was added; the Japan FinanceCorporation for Municipal Enterprises Management Council was established; and we addressed the phased abolition ofsubsidies from the national treasury over a three-year period.

2001

Subsidies from the national treasury were abolished and the Reserve for Interest Rate Reduction was established.
Started providing borrowers with the right to choose fixed or adjustable interest rates.
Established a compensation program for advanced repayments. Started issuing FILP Agency Bonds.
The Special Public Institutions Reform Basic Law was passed, and the Reorganizations and Rationalization Plan for Special
Public Institutions was approved by the Cabinet.

2002

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.

2005

The “Priority Policy for Administrative Reform,” which included the proposal for abolition of the Predecessor in fiscal 2008, a
new structure utilizing capital markets, and transitional measures to prepare for the abolition, was approved by the Cabinet.

2006

The Administrative Reform Promotion Law was passed.
The Headquarters for the Promotion of the Reform of Policy-Based Finance and the Cabinet Headquarters for the Promotionof Administrative Reform (HQPAR) set forth the plan titled “System Design Regarding the Reform of Policy-Based Finance.”
The six associations of local governments submitted the “Local governments’ draft proposal for designing a new systemafter the abolition of the Predecessor.”

2007

The Japan Finance Organization for Municipal Enterprises Law was passed. The Act on Assurance of Sound Financial
Status of Municipalities was passed.
Implemented prepayment without penalty and other measures in accordance with the national government’s policy on
reducing local governments’ debt service burden. The program ended in fiscal 2008.

2008

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

106 Japan Finance Organization for Municipalities Annual Report 2011

JFM Organization
JFM D a t a

As of April 1, 2011

Corporate Planning … Corporate planning, budget control,
matters related to the Representative Board andthe Supervisory Committee, planning for ALM operations,public relations, communication and coordination withother organizations, ALM Planning
Risk Management … Integrated risk management, systems management
Local government… Support operations for local governments’ fund-raising,
Supportfinancial research

Representative
Board

President and CEO
Deputy President
Senior Executive
Directors

General Affairs… Budgets, settlement of accounts, matters related tocontributions from municipally operated racing,accounting, receipts and disbursements, external audit

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

Finance Department
Funding Administration … Funding administration and management of fund investment

Loan Department

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 Research … Credit analysis, credit management,
and Analysis
periodic on-site investigation
Internal Auditor ……………………………… Internal audit, Internal control

Japan Finance Organization for Municipalities Annual Report 2011

107

Appendices/
J F M
D a t aLending Management … Planning and control of lending operations,calculation and setting of lending rates, lending
operations (excluding operations by Loan Administration)

Financial Section

Accounting

Corporate
Auditors
Supervisory Committee… General affairs including compensation and benefits andlegal review

Administration
Department

I n t e r n a lManagement System

Corporate Planning
Department
Chief Research Fellow… Secretariat, Personnel

Operations

Personnel andSecretariat

Organization Profile

Organization Structure108 Japan Finance Organization for Municipalities Annual Report 2011

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

Yuji Watanabe
Masamichi Fukunaga
Takeji Takei, Sadaji Hiranuma, Keiichi Hikita (part-time)
Katsuhiko Hara, Nadamu Takata (part-time)(From left, S. Hiranuma, Senior Executive Director; M. Fukunaga, Deputy President; Y. Watanabe, President andCEO; T. Takei, Senior Executive Director; and K. Hikita, Senior Executive Director)

Photo provided by The Tokyo Institute for Municipal Research■ Address:
Shisei Kaikan, 1-3 Hibiya Koen, Chiyoda-ku,
Tokyo 100-0012, Japan
http://www.jfm.go.jp/(From left, K. Hara, Corporate Auditor, and Nadamu Takata, Corporate
Auditor)

The logo represents the solidarity of local governments in the establishment and management ofJapan 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 theinside “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 agreat leap toward the future.
*“Stability” ‒ providing long-term and low-interest funds in astable 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 andcapital markets.

Japan Finance Organization for Municipalities Annual Report 2011109