3 Japan: S. Ghon Rhee
3 Japan: S. Ghon Rhee
3 Japan: S. Ghon Rhee
3
Japan
S. Ghon Rhee
I. Introduction
TABLE 1
Government Debt and Fiscal Decit
(percent)
Fiscal Decit/GDP
1997 3.4 0.4 2.1
1998 5.3 1.3 0.3
1999 7.3 1.6 0.4
2000 7.1 2.0 0.6
Source: IMF, World Economic Outlook (October 1999)
Japan 79
This is bad news for Japans economy and the future credit rating
of JGBs. Even though it sounds far-fetched at present to discuss the risk
of runaway ination given the deationary trend of the Japanese economy,
the latent threat of ination cannot be overlooked in the presence of
ever-increasing scal decits in the Japanese government budget. Ac-
cording to International Monetary Fund (IMF) predictions, Japans scal
decit will reach 7.1 percent of its GDP in 2000, while the United States
will gain a surplus of 2 percent (Panel B of Table 1). Furthermore, inter-
national credit rating agencies such as Moodys and Du¬ and Phelps
issue warnings about possible down-grading of yen-denominated debt
rating.
The fact that Japan will remain the largest issuer of government
debt securities is important news for further development of the JGB
market because the MOF will be forced to heed the cost minimization of
JGBs.1 Any reform measures necessary to attain this goal will be adopted
more expediently and decisively than ever before.
This paper reviews the key steps for further development of the
JGB market in aligning its infrastructures with those of the US and UK
government securities markets. The remainder of this paper is divided
into three sections. In Section II we assess if Japans MOF is able to
minimize the cost of JGBs given the current status of the market, and in
Section III, we identify numerous reform measures to create a more e¬ec-
tive and e¹cient JGB market. The last section touches upon particularly
urgent policy issues on the regional level for the progression of the JGB
market to better serve global and regional constituencies.
TABLE 2
Fiscal Investment and Loan Program (February 2000)
(billion yen)
Amount Percent
Assets
Long-Term Government Bonds ¥ 83,302 18.8
Treasury and Financial Bills 999 0.2
General Account and Special Accounts 102,145 23.0
Government-Owned Organizations 117,850 26.5
Local Government 66,042 14.9
Special Companies 69,821 15.7
Bank Debentures 1,278 0.3
Others 1,533 0.3
Cash/Deposits 1,100 0.3
Total ¥ 444,069 100.0
Liabilities
Postal Savings and Postal Transfer Deposits ¥ 256,268 57.5
Postal Life Insurance Deposits 4,587 1.0
Employees Pension Deposits 130,942 29.5
National Pension Deposits 10,772 2.4
Other Deposits 36,238 8.2
Others 5,262 1.2
Total ¥ 444,069 100.0
Source: Ministry of Finance, http://www.mof.go.jp/english/mr-tfb/e1014ao.htm
5. Refer to Bond Plan Key to Halting Rise in Japan Interest, Asian Wall
Street Journal (30 November 1999).
82 Government Bond Market Development in Asia
activities by TFB, however, the yield level stabilized to the current level
of around 1.8 percent (10-year JGBs).5 With FILPs holdings accounting
for over one third of JGBs outstanding, the MOF is e¬ectively the larg-
est seller and buyer of JGBs. This dual role executed by MOF is in
explicit violation of the rule of separation between government debt
management and monetary policy. Comingled management of assets and
liabilities, especially FILPs inadvertent inuence over monetary policy,
not only causes the cost of government-issued debt to increase but also
creates serious impediments to the development of the JGB markets, as
discussed below.
6. Financing bills are issued on a document basis like Treasury bills. Be-
cause the discount rate remained below prevailing short-term market interest rates,
virtually all issues had to be subscribed by the Bank of Japan. Under the Big
Bang reform programs, Treasury nancing bills, food nancing bills, and foreign
exchange fund bills are all integrated into single nancing bills and they are
issued under a competitive auction system.
Japan 83
TABLE 3
Financial System Reforma
Expansion in means of asset investment
Enhancement to investment
trusts
Introduction of general Necessary deregulation Further improvements in
securities accounts carried out and introduced product attractiveness
(CMA) on 1 October. (amendment concerning
salaries e¬ected 10
September)
Introduction of company- Establish the general
type investment trusts institutional framework
(Investment Trust Law)
(law took e¬ect on
1 December)
Introduction of privately Stipulate privately placed
placed investment trusts investment trusts in law
(Investment Trust Law)
(law took e¬ect on
1 December)
Introduction of over-the- Store space lent for direct Sales by banks themselves
counter (OTC) sales of sales by investment trust (Securities & Exchange
investment trusts by companies (introduced on Law)
banks and other nancial 1 December after sales (law took e¬ect on
institutions rules were nalized) 1 December)
Full liberalization of Tokyo Stock Exchange and Introducing OTC securities
securities derivatives Osaka Stock Exchange derivatives (Securities and
introduced options on Exchange Law) (Law on
individual stocks (on 18 July) Foreign Securities Law
Enhance attractiveness of Expanding use of stock Firms) (law took e¬ect on
stocks options (law took e¬ect on 1 December)
1 June)
Promoting share buy-backs
as a means of writing
down prots
(law took e¬ect on 1 June)
Smaller minimum Have already articulated
investment lots for stocks how the Commercial Code
is to be interpreted
regarding conditional
changes in the Articles of
Incorporation (31 July)
Streamlining of foreign Introduced DR-based Designate DRs as securities.
equity listing by using trading in listed foreign (Securities and Exchange
depository receipts (DRs) equities (1 June) Law) (law took e¬ect on 1
December)
Revision of listing standards
(1 December)
(Tokyo Stock Exchange)
Improve access to trading Eliminated the system that Tokyo Stock Exchange
and quotation gives access to real-time Enhancement of market
information information only to information (30 November)
branches near the market
(1 October)
a
This schedule was released by MOF in June 1999. It contains major reform
programs even though some updating of correct progress is needed. Please refer to
http://www.mof.go.jp/english/system/system.htm.
84 Government Bond Market Development in Asia
In terms of GDP, Japans economy is about one half the size of the
US economy and about four times as large as that of the UK. As Japans
capital market development emulates the past experiences of its US coun-
terpart, the above four areas should be an interesting point of departure
in assessing further reforms for the JGB market. Since the JGB market
has matured in its own historical, macroeconomic, and institutional frame-
work, it faces a unique blend of capital market policy issues. Therefore,
this section will examine some capital market policy issues that are
unique to the JGB market and in light of US market experiences.
TABLE 4
Government Securities Markets
bidders may pay a lower price than they actually bid. In contrast, under
the multiple-price auctions (also known as the discriminatory auction),
participants submit sealed bids and pay the prices they bid. The Govern-
ment accepts the bids at gradually lower prices until the price at which
the auction is fully subscribed. 9 As a result, successful bidders for a
security may pay di¬erent prices for that security. These multiple-price
awards result in the winners curse, which means that the highest bidder
wins the auction by paying the highest price, only to nd that another
bidder pays a lower price. Bidders therefore tend to shade their bids
below the maximum that they are actually willing to pay.10 Since Salomons
short squeeze scandal was uncovered in mid-1991, the multiple-price
method has been criticized for failing to minimize nancing costs to the
US Treasury, and for encouraging manipulative behavior in the market-
place. The uniform-price, sealed-bid auction is advocated as an alternative.11
Australia, France, and New Zealand now utilize multiple-price (or
multiple-yield) auctions to sell marketable securities, while Canada, Bel-
gium, Italy, and the Netherlands use them for some portions of marketable
securities. Uniform-price, sealed-bid auctions are employed in Denmark,
Switzerland, and the United Kingdom. Beginning in 1992, the US Trea-
sury experimented with uniform-price auctions for two-year and ve-year
notes. Malvey, Archibald, and Flynn (1995) and Malvey and Archibald
(1998) indicated that these auctions produced marginally greater rev-
enue on average for the US Government. Nyborg and Sundaresan (1996)
report that WI market volume is higher under uniform-price than mul-
tiple-price auctions, which indicates a higher information release. The
information release, in turn, reduces preauction uncertainty, the winners
curse, and the probability of short squeeze. Feldman and Mehra (1993)
stated that uniform-price auctions become readily accepted because of
their administrative simplicity, economic e¹ciency, and revenue-enhancing
D. Repo Market
TABLE 5
Auction Methods for Government-Issued Securities
15. Bossard (1998) reports that the newly developed repo market in 1991 to
1993 was essential to foreign participation in the French government securities
market. At present, one third of French government securities are held by non-
residents.
16. Executives Meeting of East Asia and Pacic Central Banks and Monetary
Authorities, Financial Markets and Payment Systems in EMEAP Economies (1997).
90 Government Bond Market Development in Asia
E. Introduction of STRIPS
TABLE 6
Volume of Gaisai Bond Issuance
(trillion yen)
TABLE 7
Cost Di¬erential between Samurai and Euroyen Bonds
Assumptions:
Issuer: Sovereign Borrower
Issue Amount: ¥20 billion
Term: Five years
registered JGBs and 42.7 percent of book-entry JGBs are settled on the
DvP basis, whereas all JGBs processed through the Bank of Japan Finan-
cial Network System (BOJ-Net) rely on the DVP settlement. In contrast,
US and UK government securities are all settled on a DvP basis. Addi-
tionally, JGBs are not eligible for clearing through international clearing
houses such as Euroclear and Cedel, whereas all US and UK government
securities are. Furthermore, no regional clearing network has been cre-
ated to link the Tokyo clearing system with the regions nancial centers
such as Hong Kong, Singapore, and Sydney. A T+3 settlement period for
JGBs is longer than the T+1 cycle for US and UK securities. Real-Time
Gross Settlement must also be completed to bring Japans practices in
Japan 93
17. The target date of adopting RTGS for JGBs is the latter part of 2000.
18. Refer to Appendix Table of Questionnaire Results of Bank for Inter-
national Settlements, 1999, Market Liquidity: Research Findings and Selected
Policy Issues (May).
19. For the regional and global level clearing and settlement, refer to Rhee
(2000) and Morgan Guaranty Trust Company (1993).