Progress toward Resuming the Issuance of Inflation-Indexed Bonds pot

WHAT’S NEW

Progress toward Resuming

the Issuance of Inflation-Indexed Bonds

Issuance of Inflation-Indexed Bonds (JGBi)※1, introduced in March 2004, have been

suspended since October 2008, as the Lehman Shock in the same year brought about a

significant decline of liquidity in the market through increased needs for cash of the financial

institutions as well as prolonged future deflation expectations.

In the JGB Issuance Plan for FY2012, the Ministry announced that "practical discussions

will be held with market participants on detailed product designs etc. toward resuming the

issuance of Inflation-Indexed Bonds". Since February 2012, the Working Group for

Resumption of Issuance of Inflation-Indexed Bonds has been held among the market

participants and the Ministry. After the series of discussions in the Working Group, the new

product designs for resumption have been formulated as follows.

○ New Product Designs of Inflation-Indexed Bonds

The principal will be guaranteed at maturity (deflation floor). In case where the indexation

coefficient falls below 1 at maturity, the Bonds will be redeemed at the face value. Other

features are the same as the existing JGBi※2※3.

※1 Inflation-Indexed Bonds are bonds whose principals fluctuate along with price of goods.

※2 The number of decimal points of indexation coefficient will remain to be 3 for the time-being. In response to the

request for smoothing the daily transitions of indexation coefficients, however, it will be expanded to 5 at the time

when a smooth shift from the current system is deemed to be possible along with the expected full operation of

the new BOJ-Net.

※3 The bidding method of the competitive price auctions for the reopened issuances will remain the same as the

current method for the time-being; bidders are supposed to tender with prices which are multiplied by the inflation

coefficients. In response to the requests that the bidding method should be compromised with the market practice

where the bidders tender with the prices without multiplying them by the inflation coefficients, however, it is

planned that a potential revision of the bidding method will be discussed soon after the expected full operation of

the new BOJ-Net.

○ Timing of Resumption

The discussions will be continued at the abovementioned Working Group, the Meeting of

JGB Market Special Participants and the Meeting of JGB Investors. The resumption of

issuance is then projected with appropriate conditions in place.

Ministry of Finance, Japan

www.mof.go.jp

Quarterly Newsletter of the Ministry of Finance, Japan

JAPANESE GOVERNMENT BONDS

April 2012

Contents

1

What’s New

2

JGB Primary

Market

3

The Auctions for

Enhanced-Liquidity

and JGB Buy-Back

4

JGB Secondary

Market

5

JGB Outstanding

6

Economic and

Financial Trends

Face Value × × Coupon Rate ×

Future Product Designs

of Inflation-Indexed Bonds

１．Maturity： １０ years

The principal (face value) will be guaranteed

at maturity (from issue number 17)

５．Interest Payment： Biannual

(Hereinafter referred to as “CPI”)

１

２

ＣＰＩat Interest Payment

ＣＰＩat Issuance

６．Interest Amount：

Inflation-Adjusted Principal

３．Ref Index： Consumer Price Index

２．Features： Pre-fixed coupon rate (increments of 0.1%）

The principal fluctuates along with price of goods.

４．Deflation Floor：

Indexation Coefficient

(Composite index of all items excluding fresh foods)

Deflation Floor

(Conceptual Diagram)

①In case where the indexation coefficient is below 1, the inflation￾adjusted principal will fall below its face value.

②In case where the indexation coefficient at maturity is above 1,

the principal and the interest will be paid based on the inflation￾adjusted principal per se.

③In case where the indexation coefficient at maturity is below 1,

principal will be redeemed at its face value.

(Note) Deflation floor has no effect on interests during the maturing

period or at maturity.

1

Indexation

Coefficient ②

① ③10 years