014 00 03 .indd 14/0 / 6 10:18

FY 2016 Debt Management Policies

Ⅰ

This part provides the most recent updates onFY 2016 Debt Management Policy.

Ⅰ　FY 2016 D ebt Management Policies

1 Trends of JG

B M

arket in FY2015

8

Trends of J GB Market in FY2015

(1) Yields continued a downtrendA m oderate downtrend f or the JGB y ield continued with a sm ooth JGB auction at the beginning of FY2015 under the continuation of “ uantitative and ualitative Monetary Easing” by the BOJ. However, the JGB yield rose in late April with the long-term (10-year) JGB yield rising above 0.5 briefly, following the steep rise in the European government bond y ield due to a larger increase in Germ an consum er prices than m ark et ex pectation. T his was after a substantial decline of the European government bond yield following uantitative Easing by the ECB in March (Fig. 1-1).JGB y ields resum ed a m oderate downtrend in July as a risk - of f trend dev eloped due to the em ergence of risk s regarding the C hinese econom y and resources prices ( including crude oil prices) . T he C hinese econom y dev elopm ents thus ex erted signif icant im pacts on f inancial m ark ets in the world. As C hinese stock prices ( S hanghai C om posite S tock I ndex ) turned downward af ter a substantial rise in June and the standard renm inbi ex change rate against the U .S . dollar was lowered sharply in August, stock prices in other countries declined rapidly , with currency exchange rates fluctuating wildly (Figs. 1-2 and 1-3). Among resources prices, crude oil f utures prices resum ed their decline in July af ter rebounding f rom a bottom in January ( F ig. 1 - 4 ) . JGB y ields f ell with the trend of the y en’ s appreciation and stock price f alls under such global financial market and economic trends.

nder this situation, the BOJ introduced “Supplementary Measures for uantitative and ualitative Monetary Easing” in December to facilitate the “ uantitative and ualitative

Monetary Easing” policy (☞). While maintaining its policy of “purchasing JGBs so that their am ount outstanding will increase at an annual pace of about 8 0 trillion y en,” the BO J im plem ented these supplem entary m easures in preparation f or an increase in the gross am ount of its JGB purchases that was ex pected to com e in 2 0 1 6 due to an ex pansion in the redem ption of JGBs at m aturity . I n response to the supplem entary m easures, JGB m ark et participants increasingly ex pected the BO J to purchase longer- term JGBs, leading to drops in super long-term JGB y ields including the 2 0 - y ear JGB y ield that slipped below 1 .0 % .

☞ BO J “ S upple m entar y Measures for uantitative and

ualitative Monetary Easing” ( Decem ber 1 8 , 2 0 1 5 )① Expanding eligible collateral f or the BO J ’ s prov ision of credit ( Accepting f oreign currency - denom inated loans on deeds as eligible collateral and introducing a f ram ework in which the BO J will accept f inancial institutions' housing loans portf olio as collateral through a trust schem e)② Extending the average rem aining m aturity of JGB purchases ( f rom about 7 - 1 0 y ears at present to about 7 - 1 2 y ears)③ I ncreasing the m ax im um am ount of each issue of Japan real estate inv estm ent trust (J-REIT) to be purchased (from the current 5 % to 1 0 % of the total amount of that J-REIT issued)

1

-0.5

0.0

0.5

1.0

1.5

2.0（％）

(Source: Japan Bond T rading Co.)

20-yearbonds

A pr-15 M ay-15 Jun-15 Jul-15 A ug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 M ar-16

40-yearbonds

30-yearbonds

10-yearbonds5-yearbonds2-yearbonds

F i g .1- 1 J G B Y i e l d T r e n d s b y M a t u r i t y

第Ⅰ 7年度の債務管理政策Ⅰ　FY 2016 D ebt Management Policies1 T

rends of JGB

Market in FY

2015

9

F i g .1- 2 S h a n g h a i C o m p o s i t e S t o c k I n d e x t r e n d s

2,500

3,000

3,500

A pr-15

(Source: Bloomberg)

M ay-15 Jun-15 Jul-15 A ug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 M ar-16

4,000

4,500

5,000

5,500

8,500

9,000

9,500

10,000

10,500

11,000

11,500

12,000

12,500

13,000

14,000

15,000

16,000

17,000

18,000

19,000

20,000

21,000

22,000

(Source: Bloomberg)

A pr-15 M ay-15 Jun-15 Jul-15 A ug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 M ar-16

Nikkei averageNew York Dow Jones industrial averageGerman DA X index (right scale)

(yen, dollar) (euro)

20

30

40

50

60

70

80

W T INorth Sea Brent

(dollar/barrel)

Feb-15 M ar-15 A pr-15 M ay-15 Jun-15 Jul-15 A ug-15 Sep-15 Oct-15 Nov-15 Dec-15 Feb-16 M ar-16

* Front-month contract price

(Source: Bloomberg)

Jan-15 Jan-16

F i g .1- 4 C r u d e o i l f u t u r e s p r i c e t r e n d s

F i g .1- 3 J a p a n e s e , U .S . a n d G e r m a n s t o c k p r i c e t r e n d s

Ⅰ　FY 2016 D ebt Management Policies

1 Trends of JG

B M

arket in FY2015

10

Ref: Column 1: “ uantitative and ualitative Monetary Easing with a Negative I nterest R ate” ( P 1 5 )

R ef : BO J “ F low of F unds Accounts ( M arch- end 2 0 1 6 ( prelim inary ) ) ( P 3 1 )

(2) BOJ introduced " Q uantitativ e and Q ualitativ e Monetary

E asing with a N egativ e Interest Rate"Exerting the greatest impact on the JGB market in FY2015 was the BOJ s introduction of

uantitative and ualitative Monetary Easing with a Negative Interest Rate” that was

decided at its M onetary P olicy M eeting on January 2 9 , 2 0 1 6 .

T he policy is to apply a negativ e interest rate of m inus 0 .1 % to som e of the current

accounts that financial institutions hold at the BOJ while maintaining the uantitative

and ualitative Monetary Easing.” In explaining the objective of the policy, the BOJ said,

“ T he Bank will lower the short end of the y ield curv e by slashing its deposit rate on current

accounts into negativ e territory and will ex ert f urther downward pressure on interest rates

across the entire y ield curv e, in com bination with large- scale purchases of JGBs.” I n f act,

interest rates accelerated their downtrend, including the long- term JGB y ield that plunged

into negativ e territory on F ebruary 9 . As inv estors enhanced purchases of JGBs with

positive yields later, super long-term JGB yields also fell. All JGB yields briefly fell to all-

tim e lows - - m inus 0 .1 3 5 % on 1 0 - y ear JGBs, 0 .2 4 5 % on 2 0 - y ear JGBs, 0 .2 6 5 % on 3 0 - y ear

JGBs and 0.270 on 40-year JGBs, leading the yield curve to flatten with gaps between

short and long- term JGB y ields narrowing.

T he trend of JGB inv estors by business category under such situation indicated that city

bank s, which had reduced JGB holdings and accum ulated current accounts at the BO J since

the introduction of “ uantitative and ualitative Monetary Easing,” have refrained from

trading in JGBs including m edium - to long- term ones and held down the accum ulation of

current accounts at the BO J since the introduction of the negativ e interest rate. M eanwhile,

regional bank s hav e ex panded super long- term JGB purchases in pursuit of inv estm ent

returns.

L if e insurance com panies hav e reduced super long- term JGB purchases under the low

interest rate env ironm ent and increased f oreign bond inv estm ent, while f oreign inv estors

hav e continued their net purchases of short to m edium - term JGBs with f alls in dollar- based

y en f und raising costs.

I n the m eantim e, som e JGB m ark et participants v oiced concerns on the f alling liq uidity of

the JGB m ark et.

(3 ) Growing p resence of the BOJ and Foreign Inv estorsAs the BOJ has purchased massive JGBs in the market under its uantitative and ualitative

Monetary Easing, the central bank s JGB holdings and their share of outstanding JGBs have

continued to increase. At the end of M arch 2 0 1 6 , the BO J’ s JGB and T reasury Discount Bill

( T - Bills) holdings totaled about 3 6 4 trillion y en, accounting f or 3 3 .9 % of outstanding JGBs

and T - bills. T he BO J plans the gross am ount of its long- term JGB purchases at about 1 2 0

trillion y en in 2 0 1 6 com pared with the planned issuance of about 1 2 8 trillion y en in coupon-

bearing JGBs in F Y 2 0 1 6 , indicating its considerable presence in the JGB m ark et.

F oreign inv estors hav e increased their presence as JGB holders af ter the BO J. T heir JGB

holdings still lower than banks and insurers . While banks JGB holdings have declined,

with insurers’ JGB holdings hav ing lev elled of f , f oreign inv estors’ JGB holdings hav e

m oderately increased, standing at 1 0 .2 % at the end of M arch 2 0 1 6 . T heir T - bill holdings

第Ⅰ 7年度の債務管理政策Ⅰ　FY 2016 D ebt Management Policies1 T

rends of JGB

Market in FY

2015

11

Ref: Column 2 “Widening of Negative Basis Swap S pread” ( P 1 7 )

were as high as 4 9 .0 % . JGB trading trends by inv estor category ( F ig. 1 - 5 ) indicate that

f oreign inv estors’ net m edium - term JGB purchases were f ar larger than those of any other

inv estor category f rom the second half of 2 0 1 5 .

While domestic investors have refrained from purchasing short to medium-term JGBs

carry ing negativ e y ields other than those f or collateral, f oreign inv estors hav e increased

their purchases. T his is because f oreign inv estors can benef it f rom com bining short to

m edium - term JGB purchases with basis swaps ( ☞) . I n this inv estm ent m echanism , f oreign

investors use basis swaps to swap yen cash flow they receive by holding yen assets with

dollar and other cash f lows. S wap spreads they receiv e upon the swapping are added to

dollar and other cash flows, providing foreign investors with advantageous yields (Fig. 1-6).

Although any sim ple com parison cannot be done because of dif f erences in ratings and other

conditions, JGBs m ight hav e been v iewed as one of the attractiv e inv estm ent v ehicle f or

f oreign inv estors.

I n long- term JGB f utures trading in 2 0 1 5 , f oreign inv estors accounted f or about 9 4 % of

brok erage trading and about 5 1 % of brok erage trading and securities com panies’ dealing

on their own accounts ( F ig. 1 - 8 ) . F oreign inv estors, including f inancial institutions and

inv estm ent f unds, m ight hav e traded in long- term JGB f utures f or v arious purposes.

Whatever their purposes are, they may never participate in trading unless they can trade at

adeq uate prices. T his m eans that f oreign inv estors participate in the JGB m ark et because the

long- term JGB f utures m ark et is highly liq uid with the spot JGB m ark et m aintaining certain

liq uidity .

☞ A basis swap is a k ind of currency swap. O f currency swaps in which principals and interests in dif f erent currencies are swapped, those with interests indicated as L ibor

are called basis swaps. At present, inv estors who use U .S . dollars f or inv estm ent in y en can receiv e spreads, while those who use y en f or inv estm ent in dollars m ust pay spreads.

▲60,000

▲40,000

▲20,000

0

20,000

40,000

60,000

80,000

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Other corporations, etc.

Foreign investors

Investment trusts

L ife and non-life insurers

T rust banks

City banks

Other financial institutions

(100 million yen)

(Source: Japan Securities Dealers A ssociation)

F i g .1- 5 J G B T r a d i n g T r e n d s b y I n v e s t o r C a t e g o r y ( m e d i u m - t e r m J G B t r a d i n g )

Ⅰ　FY2016 Debt Management Policies

1 Trends of JG

B M

arket in FY2015

12

Fig.1-6 Dollar-yen Basis Swap Spread Trends

-120

-100

-80

-60

-40

-20

0

Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

（bp）

(Source: Bloomberg)

3-month6-month2-year5-year

Fig.1-7 JGB Trading Volume Trends

Fig.1-8 Long-term JGB Futures Trading Volume by Investor Category (2015)

(trillion yen/month)

Trading volume

Note 1. Excluding Treasury Discount Bills (treasury bills until January 2010)Note 2. Trading volume excludes bond dealers’ trading(Sources: Japan Securities Dealers Association, Bank of Japan)

Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr 12 Apr 13 Apr-14 Apr-15 Apr-160

20

40

60

80

100

120

140

Other financial institutions1% Investment trusts, etc

1%Trust banks

2%

Securities companies’ dealing on their own accounts

45%Foreign

investors51%

(Source: Japan Exchange Group, Inc.)

第Ⅰ 7年度の債務管理政策Ⅰ　FY 2016 D ebt Management Policies1 T

rends of JGB

Market in FY

2015

13

(4 ) C hange in Yield C urv eThe yield curve had retained a shape focusing on the zero level, reflecting the downward

rigidity of yields, before the BOJ s introduction of its “ uantitative and ualitative

Monetary Easing with a Negative Interest Rate.” However, the BOJ s decision to introduce

the “ uantitative and ualitative Monetary Easing with a Negative Interest Rate” pushed

down yields in the short-term zone first. As investors pursued positive yields later, those in

the long - to super long-term zone fell substantially, leading the yield curve to bull-flatten.

(5 ) Foreign Gov ernment Bond Market TrendsIn FY2015, yields on short to medium-term bonds were bipolarized reflecting the difference

between .S. and European monetary policy directions.

The 2-year yield susceptible to monetary policy influences rose toward the end of 2015 with

some fluctuations in the nited States while declining in many European countries. .S. and

European yields thus went in different directions (Fig. 1-10).

In the nited States, the 2-year Treasury yield moderately rose with some fluctuations on

speculation about a possible interest rate hik e by the F ederal R eserv e ( F ed) .

At its m eeting in Decem ber 2 0 1 5 , the F ederal O pen M ark et C om m ittee ( F O M C ) decided

to raise the target range f or the f ederal f unds rate by 0 .2 5 percentage points to 0 .2 5 % to

0 .5 0 % ( the f irst policy rate hik e since 2 0 0 6 ) ( ☞①) . I ts statem ent said, “ T he C om m ittee

j udges that there has been considerable im prov em ent in labor m ark et conditions this y ear,

and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent

obj ectiv e.”

In Europe, meanwhile, many countries had negative yields on short to medium-term

gov ernm ent bonds ( F ig. 1 - 1 1 ) . T hose y ields f ell gradually in Germ any and F rance in

FY2015 in a manner to prompt the European Central Bank (ECB) to decide on further

monetary easing. Even while the ECB was purchasing bonds with yields at or above the

deposit f acility rate, the 2 - y ear y ield in Germ any rem ained below the deposit f acility rate.

S om e m ark et participants v oiced concerns about rising v olatility and f alling liq uidity .

Behind such conditions might have been ECB s and other monetary policies. For the reason

☞① T he F O M C at its m eet-ings in January and M arch 2 0 1 6 ref rained f rom raising the policy interest rate due m ainly to unstable f inancial m ark ets. T he F ed plans to m oderately raise the policy interest rate while watching the im pacts of financial markets and emerging econom ies on the U .S . labor m ark et and prices.

▲0.4▲0.2

0.00.20.40.60.81.01.21.41.6

0 5 10 15 20 25 30 35 40 45

（％）

(Duration to maturity)(Source: Japan Securities Dealers A ssociation)

3/31/20153/31/2016

F i g .1- 9 J G B Y i e l d C u r v e s

Ⅰ　FY 2016 D ebt Management Policies

1 Trends of JG

B M

arket in FY2015

14

that inflation was not rising, the ECB eased its monetary policy twice -- in December and

M arch - - in F Y 2 0 1 5 ( ☞②). In additional monetary easing in December, the ECB lowered

the deposit f acility rate by 0 .1 0 percentage points to m inus 0 .3 0 % . I n M arch, it eased its

m onetary policy ex tensiv ely to cut the rate f urther to m inus 0 .4 0 % and to increase the

m onthly purchases under its asset purchase program by € 2 0 billion to € 8 0 billion f rom

April.

☞② I n additional m onetary easing published on Dec ember 3, the ECB decided (1) to cut the deposit f acility rate by 0 .1 0 percentage points to m inus 0 .3 0 % and to k eep the m onthly purchases under the asset purchase program at € 6 0 billion and ( 2 ) to ex tend the asset purchase program f or six m onths f rom S eptem ber 2 0 1 6 to the end of M arch 2 0 1 7 , to include euro- denom inated m ark etable debt instrum ents issued by regional and local gov ernm ents in the list of assets that are eligible f or regular purchases to reinv est the principal pay m ents on the securities purchased under the asset purchase program as they m ature. I n additional m onetary easing announced on M arch 1 0 , the ECB decided (1) to lower the deposit f acility rate to m inus 0 . 4 0 % and lower the other two policy rates ( ☞③) , ( 2 ) to ex pand the m onthly purchases under the asset purchase program by € 2 0 billion to € 8 0 billion f rom April and ( 3 ) to launch the second series of targeted longer-term refinancing operations ( T L T R O I I ) .

☞③ The ECB has three policy interest rates - - “ the interest rate on the m ain ref inancing operations,” “ the interest rate on the m arginal lending f acility ” and “ the interest rate on the deposit f acility .” “ T he interest rate on the m ain ref inancing operations” is positioned as the target f or guiding m ark et rates, supported b y “ the interest rate on the m arginal lending f acility ” as the ceiling and “ the interest rate on the deposit f acility ” as the bottom . At the M arch m eeting of the Governing Council, the ECB lowered “ the interest rate on the m ain ref inancing operations” f rom 0 .0 5 % to 0 .0 0 % and “ the interest rate on the m arginal lending f acility ” f rom 0 .3 0 % to 0 .2 0 % in addition to cutting “ the interest rate on the deposit f acility .”

F i g . 1- 10 J a p a n e s e , U .S . a n d E u r o p e a n 2- y e a r G o v e r n m e n t B o n d Y i e l d T r e n d s

F i g .1- 11 J a p a n e s e , U .S . a n d E u r o p e a n Y i e l d C u r v e s ( a s o f M a r c h 31, 2016)

(Source: Bloomberg)

▲1.5

▲1.0

▲0.5

0.0

0.5

1.0

1.5

A pr-14 Jul-14 Oct-14 Jan-15 A pr-15 Jul-15 Oct-15 Jan-16

U.S.

U.K.

Japan

Denmark

France

Germany

Sw eeden

Sw itz erland

（％）

(Source: Bloomberg)

▲ 1.5

▲ 1.0

▲ 0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 5 10 15 20 25 30

U.S.

U.K.

Sw eeden

France

Denmark

Germany

Japan

Sw itz erland

（％）

(Duration to maturity)

第Ⅰ 7年度の債務管理政策Ⅰ　FY 2016 D ebt Management Policies1 T

rends of JGB

Market in FY

2015

15

❶ N egativ e interest rate ap p lication scheme

On January 29, 2016, the BOJ decided to introduce uantitative and ualitative Monetary Easing with a Negative Interest Rate by adding a negative interest rate to the existing uantitative and ualitative Monetary Easing.” It then v owed to m ak e f ull use of possible m easures in term s of three dim ensions - - “ q uantity ,” “ q uality ” and “ interest rate” - - to realize the target inflation rate of 2 as early as possible.U nder the negativ e interest rate application schem e, the BO J has adopted a three- tier sy stem in which the outstanding balance of each financial institution s current account at the BOJ is divided into three tiers -- the “Basic Balance,” the “ M acro Add- on Balance” and the “ P olicy - R ate Balance.” T he interest rates of 0 .1 % , 0 .0 % and m inus 0 .1 % are applied to the three tiers, respectiv ely . T he “ Basic Balance” represents the av erage outstanding balance of current accounts that all financial institutions held at the BOJ during the one-year period of January to December 2015, which will basically remain unchanged. T he “ M acro Add- on Balance” will be rev iewed ev ery three m onths with considerations giv en to the req uired reserv es, the total am ount of the BO J prov ision of credit through the L oan S upport P rogram and the outstanding balance of current accounts that increases on a m acro basis. T he oustanding balance ex cluding the “ Basic Balance” and “ M acro Add-on Balance” is the “Policy-Rate Balance” to which the interest rate of minus 0.1 is applied. Explaining the reason f or adopting the m ultiple- tier sy stem , BO J Gov ernor H aruhik o K uroda said: “ T he outstanding balance of current accounts at the cental bank in Japan is far greater than in Europe and will increase by about 80 trillion yen annually. Applying a negative interest rate to all the outstanding balance would impose too much burden on financial institutions.” The Policy-R ate Balance is ex pected to range f rom 1 0 trillion y en to 3 0 trillion y en.

Q uantitativ e and Q ualitativ e Monetary E asing with a N egativ e Interest Rate

F i g .c 1- 1 I m a g e o f O u t s t a n d i n g B a l a n c e o f C u r r e n t A c c o u n t a t B O J

C olumn 1

Outstanding balance of current account

P olicy-R ate Balance

M acro A dd-on Balance

Basic Balance

▲0.1％

＋0.1％

0 ％

(Source: Bank of Japan)

Ⅰ　FY2016 Debt Management Policies

1 Trends of JG

B M

arket in FY2015

16

❷ Impacts of Introduction of “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate”

The introduction of "Quantitative and Qualitative Monetary Easing with a Negative Interest Rate" has exerted impacts on various areas. Financial institutions have refrained from raising additional funds. The amounts outstanding in the call money market have substantially declined. Money management funds (MMF), which invest mainly in T-Bills, the call money market and commercial paper, have discontinued new subscriptions or suspended investment. As for money reserve funds (MRF), funds have remained at deposit accounts at trust banks. As a result, the Policy-Rate Balance subject to the negative interest rate has increased for trust banks. In response, the BOJ at its Monetary Policy Meeting in March decided to include MRF in the Macro Add-on Balance (excluding MRF from the Policy-Rate Balance subject to the negative interest rate).As mentioned by BOJ Governor Kuroda, the negative interest rate policy possibly affects earnings at most banks. Although a fundraising cost fall is limited due to a small drop in deposit rates for banks’ fundraising, the negative interest rate on the outstanding balance of current accounts at the BOJ leads to market rate falls for lower investment returns. Particularly, it is pointed out that earnings at financial institutions with high shares for investment in securities in their assets could be affected seriously.In response, financial institutions have increased their tendency to take risks that differ from those for earlier investment. For example, they have been purchasing longer-duration JGBs as well as shares and REITs with dividends. They have also enhanced moves to purchase foreign bonds with higher yields while controlling foreign exchange risks. Some financial institutions cooperatively founded new investment companies to focus on efficient investment in pursuit of higher investment returns.On the other hand, some people are concerned that negative interest rates could be applied to deposits of ordinary people. However, the Financial Law Board has offered a view denying such possibility (Note 1). Some financial institutions are urging foreign banks, investment funds and pension funds to shoulder some costs, indicating significant impact from the negative interest rate introduction for financial institutions holding massive funds.The BOJ has pointed out that lending rate drops have led to refinancing, indicating some effects of the negative interest rate. It has also noted that moves to review asset allocation and increase new fundraising deals as well as refinancing can be expected to spread in a manner to vitalize the Japanese economy."Quantitative and Qualitative Monetary Easing with a Negative Interest Rate" has just been introduced and is expected to take some more time to produce clear effects.In the primary JGB market, the bid-to-cover ratio (Note 2) fluctuated wildly, with the tail (Note 3) expanding, just after the introduction of the new monetary policy. However, the market has restored stability, with new issues being absorbed into the market stably (as of June 2016).

(Note 1) “Putting in order views about contract interpretation problems arising from the introduction of the negative interest rate (excerpts)” (February 19, 2016, Financial Law Board) “(Skipped). Interest on bailment, as is the case with interest on loans, is interpreted as being paid by deposit-taking financial institutions to depositors, not as being paid by depositors. Deposit contracts do not plan interest payments by depositors. According to a reasonable interpretation of depositors’ intentions, therefore, deposit-taking fiancial institutions, though having room to collect deposit costs or costs of services through deposit accounts in accordance with deposit contracts, may not be allowed to set negative interest rates on ordinary or floating-rate time deposits for displaying at bank counters and collect amounts based on such rates from outstading deposits on interest payment dates.”

(Note 2) The ratio of bids to the planned issuance amount. (Note 3) The tail (the gap between the average and lowest accepted bid prices) indicates whether an auction is favorable or unfavorable. (1) If

the tail is short, the relevant auction is seen as favorable with JGB market participants supporting the market’s direction. (2) If the tail is long, the relevant auction is seen as unfavorable with market participants divided over the market’s direction.

第Ⅰ 7年度の債務管理政策Ⅰ　FY 2016 D ebt Management Policies1 T

rends of JGB

Market in FY

2015

17

❶ W hat is the basis swap sp read?

I n the recent m ark et, concerns hav e allegedly been growing about a rise in costs f or raising dollar f unds. S uch situation can be seen with the m ov e of the basis swap spread in the currency swap m ark et.I n a currency swap, principals in two dif f erent currencies are ex changed at a certain ex change rate f or a certain period, during which interests ( f or which the L ondon I nterbank O f f ered R ate, or L I BO R , is usually used) f or the currencies are ex changed.Fig. c2-1 outlines a currency swap (dollar-yen basis). In the figure, is the basis swap spread. The spread means a prem ium f or y en interest rates. I f the dem and f or raising y en is strong ev en in ex change f or an increase in y en interest payments, upward pressure is exerted on . If demand is strong for raising dollars even in exchange for a decline in yen interest receipts, downward pressure is exerted on .

F igure c2 - 2 indicates the trends of basis swap spreads ( f or 1 , 2 , 5 and 1 0 y ears) in and af ter April 2 0 1 0 , showing that negativ e spreads widened substantially in the past y ear. F or ex am ple, the latest 2 - y ear basis swap spread is m inus 7 0 basis points, m eaning that ex changing y en f or raising dollars f or two y ears generates a dollar L I BO R pay m ent and a y en L I BO R m inus 7 0 bp receipt. As the latest y en L I BO R is around 0 .0 % , their com bination results in a dollar L I BO R plus 7 0 bp pay m ent. T his m eans that a y en holder, or a Japanese inv estor, m ust pay a proper cost to raise dollar.

W idening of N egativ e Basis Swap Sp readC olumn 2

F i g .c 2- 2 D o l l a r - Y e n B a s i s S w a p S p r e a d T r e n d s

-120-100-80-60-40-20

020

10/4 10/10 11/4 11/10 12/4 12/10 13/4 13/10 14/4 14/10 15/4 15/10

(bp)

(year/month)

1year 2years 5years 10years

(Source: Bloomberg)

F i g .c 2- 1 I l l u s t r a t e d C u r r e n c y S w a p ( d o l l a r - y e n b a s i s ) S c h e m e■Initial phase ( Yen and dollar principals are exchanged)

■Term ( Interests are exchanged)

■M aturity ( Last interests pay ments and principals are exchanged)

Investor A

Yen principal・Yen LIBOR＋α

Investor A※Demand for raising dollars

Investor B※Demand for raising y en

Investor AYen LIBOR＋α

Dollar LIBOR

Yen principal

Dollar principal

( Source: M inistry of F inance)

Dollar principal・Dollar LIBOR

Investor B

Investor B

Ⅰ　FY2016 Debt Management Policies

1 Trends of JG

B M

arket in FY2015

18

❷ Background of rising dollar raising cost

The dollar raising cost hiked when the Lehman Shock and the euro debt crisis occured. This is reportedly because many investors tried to secure dollars as an international settlement currency as financial markets became dysfunctional. However, recent financial markets is not in such condition. The dollar raising cost hike since last year may be caused from strong expectations of U.S. interest rates rise in an interest rate hike stage, restricted dollar supply from U.S. financial institutions under toughened financial regulations, Japanese companies’ strong demand for dollars (dollar-denominated loans) (Fig. c2-3) for overseas expansion and Japanese financial institutions’ growing foreign bond investment.Fig. c2-4 indicates cumulative net fund flow into Japanese and foreign medium to long-term bonds since early last year, based on international balance of payments statistics. Fund flow into foreign medium to long-term bonds (Japanese investors’ net purchases of foreign medium to long-term bonds indicated by the blue line) has enhanced an expansion since mid-2015. As a low interest environment has been enhanced in Japan, most Japanese investors might have expanded foreign bond investment.

❸ Impacts of negative basis swap spread expansion

Another remarkable point in Fig. c2-4 is that foreign fund flow into Japanese medium to long-term bonds (foreign investors’ net purchases of Japanese medium to long-term bonds indicated by the red line) has considerably expanded. As noted above, Japan’s low interest rate environment has been enhanced. Nevertheless, foreign investors have seemingly expanded investment in Japanese bonds that have lost their attractiveness in terms of yields.Here, let’s return to the basis swap spread at the outset of this column. The negative basis swap spread is a premium interest rate that Japanese investors must pay to raise dollars. Conversely, the negative spread represents a premium interest rate that dollar holders, or foreign investors, can receive when raising yen. Given the premium, Japanese bonds that have lost their attractiveness for Japanese investors might have become an attractive investment target for foreign investors.Due to such situation, foreign investors’ presence in the JGB market has steadily increased (see P34). In foreseeing the supply-demand environment for the JGB market, we may have to pay attention not only to the investment trend of Japanese investors but also to that of foreign investors based on the supply-demand balance regarding currencies.

Fig.c2-3 Outstanding Loans at Overseas Branches of Japanese Banks

Fig.c2-4 Inward and Outward Securities Investment(Cumulative net investment in medium to long-term bonds since the start of 2015)

(Note)Medium to long-term bonds here are more-than-1-year bonds

(Source: Ministry of Finance)

(Trillion yen)

(Year/month)0102030405060708090

03/4 05/4 07/4 09/4 11/4 13/4 15/4

30

25

20

15

10

5

0-5

15/1 15/3 15/5 15/7 15/9 15/11 16/1 16/3

Inward investment in medium to long-term bonds (cumulative)

Outward investment in medium to long-term bonds (cumulative)

(Trillion yen)

(Year/month)

(Source: Bank of Japan)