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The views expressed in these papers and presentations are those of the author(s) only, and the presence of them, or of links to them, on the IMF website does not imply that the IMF, its Executive Board, or its management endorses or shares the views expressed in the papers or presentations.

Market Liquidity of Japanese Government Bonds

Ministry of Finance Japan

10th Annual OECD-WB-IMF Global Bond Market ForumApril 2008, Washington DC

1

While debt outstanding of JGBs is huge, its market liquidity is said to remain relatively low compared with foreign counterparts.

Low turnover ratioWide bid-offer spreadRelatively small presence of foreign investors in the JGB cash market compared with the JGB futures marketOccasional squeezes of specific issues in the JGB cash and repo markets

2

Government Bonds Outstanding and Turnover

(Source) Japan: MOF, Japan Securities Dealers Association US: US Treasury, FRB(Note 1) US Government Bonds outstanding is denominated in yen by Government Expenditure Rate ($1=\116)(FY2007)(Note 2) Transactions exclude repo transaction

(CY)

600659 673

459 485 504

3.30 3.07 3.32

31.5630.17

33.14

0

100

200

300

400

500

600

700

800

2004 2005 2006

（\ trillion）

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00（Transactions／

Outstanding）

Outstanding（Japan）

Outstanding（US）

Turnover（Japan）

Turnover（US）

(times)

3

Comparison of bid-offer spread in the secondary market （Japan, USA, Germany）

（Note)

Figures for Japan are based on responses to questionnaire of 16 companies which are JGB Market Special Participants.

Bid-offer spread above is only indicative prices at a time of research.

EUR 0.100USD 0.031Average JPY 0.257




bid-offer spread

bid-offer spread

bid-offer spread

bid-offer spread

30-year

10-year

5-year

2-year

Germany（per face value 100€）BLOOMBERG BONDTRADER

（ March 19, 2008 ）

USA（per face value 100$）

BLOOMBERG BONDTRADER

（March 19, 2008）

Japan（per face value ¥100）

Survey of JGB Market Special Participants（March 3, 2008～March 27, 2008）





bid-offer spread

bid-offer spread

bid-offer spread

bid-offer spread

30-year

10-year

5-year

2-year

Germany（per face value 100€）BLOOMBERG BONDTRADER

（ March 19, 2008 ）

USA（per face value 100$）

BLOOMBERG BONDTRADER

（March 19, 2008）

Japan（per face value ¥100）

Survey of JGB Market Special Participants（March 3, 2008～March 27, 2008）

4

143 trillionyen20%

Total715 trillion

yen

143 trillionyen

384 trillonyen

572 trillonyen

220 trillionyen

FY2004 FY2007 FY2004 FY2007

1,040 trillionyen

590 trillionyen463 trillion

yen

487 trillionyen

CY 2004 CY 2007 CY 2004 CY 2007

＜JGB market ＞＜Futures market ＞

(Note) Excluding inter-dealers’ transaction. Excluding repo transactions and FBs. (Source) Japan Securities Dealers Association, Tokyo Stock Exchange

FY 2004 FY 2007 CY 2004 CY 2007

double

487trillionyen51%

Total950 trillion

yen 1,040trillion yen

64%

Total1,630 trillion

yen

Foreign Investors Domestic Investors

1.5 times

Foreign Investors Domestic Investors

Foreign Investors Presence in the JGB Secondary Market

220trilliom

yen36%

Total604trillion

yen

Foreign Investors

Domestic Investors

5

- 5.0

- 4.0

- 3.0

- 2.0

- 1.0

0.0

1.0

12/1

8/00

03/1

9/01

06/1

8/01

09/1

7/01

12/1

7/01

03/1

8/02

06/1

7/02

09/1

6/02

12/1

6/02

03/1

7/03

06/1

6/03

09/1

5/03

12/1

5/03

03/1

5/04

06/1

4/04

09/1

3/04

12/1

3/04

03/1

4/05

06/1

3/05

09/1

2/05

12/1

2/05

03/1

3/06

06/1

2/06

09/1

1/06

12/1

1/06

03/1

2/07

06/1

1/07

09/1

0/07

10- year JGB(current)

5-year JGB(current)

(%)

Historical Changes in Special-Collateral Repo rate (Over night)

(Source) Bank of Japan（Note） All rate are only indication rate.

6

Too Many Issues per ProductMonthly issues of 2, 5, 10 and 20 year JGBs → 12 issues per year per productSpecific issues are held by certain investors and seldom available in the market

Certain asset classes (Ultra Long and JGBi) are still in a development stage and their outstanding to be further accumulated.Business practices not accepting “Fail” to occur

What are the backgrounds?

7

Number of securities remained and annual number of securities issued in major countries

2-year 12 24 12 24 2-year 13 24 2-year 4 8 Syort-term 1 5 2-year 1 2(up to 7year)

5-year 8 44 max12 max60 3-year 2 9 5-year 3 11 Middle-term 1 7 5-year 2 9（7 year to 15 year）

10-year 6 88 max12 max120 5-year 13 56 10-year 2 22 Long-term 2 30 10-year 2 18（beyond 15 year）

20-year 7 93 max12 max240 10-year 4 32 30-year 1 11 Syort-term inflation index 0 0 15-year 1 5（up to 7 year ）

30-year 2 27 2 60 30-year 2 46 1 1Middle-term inflationindexed bonds 0 1 30-year 0 4（7 year to 15 year）

40-year 1 1 1 1 1 3 0 1Long-term inflationindexed 3 13 50-year 0 1（beyond 15 year）

15-year CMT 3 40 2 30 2 15 0 1

JGBi 4 14 4 40 1 4 0 1

0 3 0 6

0 1

4 3

Total 43 331 max57 max575 Total 38 192 Total 9 53 Total 7 56 Total 10 51

（SOURCE）Japan：MOF、U.S.A、U.K.、France：Debt Management Office HP、Germany：Central Bank HP

(NOTE２)　The maximum annual number of securities issued in Japan is based on FY 2008 JGB issuance plan.

(NOTE３)　Long-term bond in U.K. include 13 issues of Rump gilts

annualnumber ofsecurities

issued

5-year inflationindexed bonds

FranceGermanyJapan U.S.A U.K.annual

number ofsecurities

issued


issued

number ofsecuritiesremainded




maximumannual numberof securities

issued




issued


issued


maximumnumber ofsecurities

issued


(NOTE１)　Japan：annual number of securities issued（FY 2007）、number of securities remained（at the end of March, 2007）、U.S.A.：annual number of securities issued （CY 2007）、number of securitiesremained（at the end of December, 2007）、 Germany：annual number of securities issued（CY 2007）、number of securities remained（at March, 2008）、U.K.：annual number of securities issued（CY 2007）、number of securities remained（at the end of December, 2007）、France：annual number of securities issued（CY2007）、number of securities remained（at the end of March, 2008）

10-year floatingrate




１0-year inflationindexed bonds



10.4%

27.7%

14.3%

9.2%6.6%

13.3%

8.0%

3.9%

3.2%

10.2%

5.4%

8.7%

6.5% 1.1% 1.6%

1.2%

1.9%

1.5%

7.6%

0.9%

3.0%

1.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Japan U.S.A. U.K. France Germany

40 years or more

from 30 to 40 years

from 20 to 30 years

from 10 to 20 years

Inflation- Indexed

Floating- rate

remaining tomaturity

0.0%

Inflation Indexed and Super Long as a Proportion of Total Outstanding Debts

（Source）Japan：MOF U.S.A, U.K., France：Website of relevant governments（Note1）Non-marketable bonds are excluded. （e.g. bonds for individual investors）（Note2）In U.K., "40 years or more" includes perpetual gilts.（Note3）Japan,:Dec. 2007 U.S.A., Germany： Jan. 2008 U.K., France: Dec. 2007

9

Generally, the JGB market has provided a destination for safe heaven investment.There is a tendency of polarization in the JGB market: buying shorter maturity products (low delta) and selling longer maturity products, CMT and JGBi (unwinding by highly leveraged foreign hedge fund for the risk reduction purpose).

Negative swap spread for Super LongDrastic undervaluation of CMT and JGBi

The recent financial turmoil highlighted the liquidity of specific asset classes of JGBs.

10

Historical Changes in SWAP Spread

△ 0.35

△ 0.25

△ 0.15

△ 0.05

0.05

0.15

0.25

0.35

0.45

2006

/10/

120

06/1

0/21

2006

/11/

1020

06/1

1/30

2006

/12/

2020

07/1

/920

07/1

/29

2007

/2/1

820

07/3

/10

2007

/3/3

020

07/4

/19

2007

/5/9

2007

/5/2

920

07/6

/18

2007

/7/8

2007

/7/2

820

07/8

/17

2007

/9/6

2007

/9/2

620

07/1

0/16

2007

/11/

520

07/1

1/25

2007

/12/

1520

08/1

/420

08/1

/24

2008

/2/1

320

08/3

/420

08/3

/24

2008

/4/1

3

40-year

30-year

20-year

10-year

5-year

2-year

10-year19.4b.p

5-year24.0b.p

2-year33.7b.p

30-year▲6.3b.p

20-year▲0.2b.p

40-year▲11.7b.p

as of Apr. 18

11

Market Price of 15-year CMT

96.0

97.0

98.0

99.0

100.0

101.0

102.0

05/22/07 06/22/07 07/22/07 08/22/07 09/22/07 10/22/07 11/22/07 12/22/07 01/22/08 02/22/08 03/22/08

15Y45th（α▲45ｂｐ）



12

Interest Rate on JGBi

- 0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

04/3 04/6 04/9 04/12 05/3 05/6 05/9 05/12 06/3 06/6 06/9 06/12 07/3 07/6 07/9 07/12 08/3

(%)

Compound interest rateof JGBi

1.389%

0.098%

1.291%

8th7th6th Reope1st 2nd 3rd 4th 5th 9th 10th Reopen 11th 12th Reopen 13th

Compound interest rateof 10- year JGB

14th Reopen

as ofApr.18

Break- even infration rate

15th

13

CPI Expectations & BEI

(Note) QSS: QUICK Survey System

- 0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Apr-

06Ma

y-06

Jun-

06Ju

l- 06

Aug-

06Se

p-06

Oct-

06No

v-06

Dec-

06Ja

n-07

Feb-

07Ma

r-07

Apr-

07M

ay- 0

7Ju

n-07

Jul- 0

7Au

g-07

Sep-

07Oc

t-07

Nov-

07De

c-07

Jan-

08Fe

b-08

Mar

- 08

Apr-

08

％

as of Apr.18

0.098%

11th8th Reopen

Break- even inflation rate (BEI)

9th 10th Reopen 12th Reopen

1.022%

13th

10 year average core CPI expectations inQSS Report

10 year average core CPI expectations - BEI

14th Reopen

0.55%

1.12%

1 year average core CPI expectations inQSS Report

15th

14

Re-opening as a general rule (30 and 40 year JGB, CMT and JGBi)Auction for Enhanced-liquidity: expanding target issues (JGBswith remaining maturities 6-29 year, excluding those with remaining maturities 9-11 and 19-21)Special Auction for Enhanced-liquidity in order to respond to such temporal lack of market liquidity as seen in the squeezeBuy-back program: annual buy-back amount increased to 3.0 trillion yen from 1.8 trillion yen, focusing on CMT and JGBiEfforts to diversify investors bases especially for CMT and JGBi

The MOF, Japan has adopted certain policy measures to enhance market liquidity of JGBs.

15

ReopeningIntroducing Reopening as a general rule

JGBi (Feb. 2007-)30-year JGB (Jul. 2007-)15-year CMT (Feb. 2008-)40-year JGB (May. 2008-)

Issuance calendar and Reopening Style of JGBi, 30-year JGB, 15-year CMT and 40-year JGB

<Issuance calendar and Reopening Style of JGBi, 30- year bonds and 15- year CMT>(trillion yen)

Apr. May Jun. Jul. Aug. Sep. O c t. Nov. D ec . Jan. Feb. Mar. Total

0.5 0.5 0.5 0.5 0.5 0.5

new issue new issue reopen new issue new issue reopen

0.6 0.6 0.6 0.6

new issue reopen new issue reopen

0.6 0.6 0.6 0.6

new issue reopen new issue reopen

0.2 0.2

reopen* reopen*

* To the first issue (0.1 trillion yen, Nov, 2007)

2.4

2.4

3.0

30- year JGB

JGBi

15- ye ar CMT

0.440- year JGB

16

Market発行当局

Enhancing Market LiquidityBuy-back and Auction for Enhanced-liquidity Function Together like Two Wheels of a Cart

Regular Issuance

Regular Redemption

Auction for Enhanced-liquidity・Expand target issues (total \1.2 trillion)

Remaining maturity：11 to 16-year → 6 to 29-year

Buy-back・The total Buy-back amount will be expanded to about \3 trillion from \1.8 trillion.

・Focus on 15-year CMTs

Debt Management

Office

17

Auction for Enhanced-liquidityMOF conducts the Auction for enhanced-liquidity

（100 billion yen per month）

Target Issues20-year JGBs with approx. 11-16 years remaining to maturity (Apr. 2006-)JGBs with remaining maturities from 6 to 29-year (Apr. 2008-)(excluding JGBs with maturities from 9 to 11-year and 19 to 21-year, inflation-indexed bonds, and 15-year CMTs)

Special Auction for Enhanced-liquidityEstablishing a scheme of Special Auction for Enhanced-liquidity in FY2008 in order to respond to such temporal lack of market liquidity as seen in the squeezes.

18

Buy-back ProgramExpanded to include all fixed-rate JGBs starting Jan. 2006 (30-year JGB became eligible on April 4, 2008).Increased Buy-back amount from 100 billion yen/month to 150 billion yen/month from Apr. 2006.Expanded to include all CMTs and JGBis from Dec. 2006.Increased Buy-back amount from 1.8 trillion yen to about 3.0 trillion yen, focusing on 15-year CMTs and JGBis in FY2008.

(billion ye n pe r month )

150

100

50

Fixe d- rate JGB sdue FY2008

All fixe d- rate JGB s

All C MTsAll JGB is

(\50 billion )

All fixe d- rate JGB s(\100 billion )

All C MTs(\1.2 trillion / ye ar)

All JGB is(\0.6 trillion / ye ar)

All fixe d- rate JGB s(e xc luding 40- ye ar JGB s)(\1.2 trillion / ye ar)

Jan . 2006 Apr. 2006 D e c . 2006 Apr. 2008

19

PensionFunds26.93.9%

PublicPensions

75.211.0%

Life and NonlifeInsurance

125.918.4%

Banks, etc270.739.6%

BOJ65.19.5%

Fiscal LoanFund16.52.4%

Foreigners49.97.3%

Households36.05.3%

GeneralGovernment

（excludePublic

Pensions）2.30.4%

Others15.92.3%

（\ trillion ）

PensionFunds19.83.5%

PublicPensions

46.08.1%

Life andNonlife

Insurance47.08.2%

Postal LifeInsurance

50.18.8%

Banks, etc138.924.4%

PostalSavings

87.615.4%

BOJ84.114.8%

Fiscal LoanFund53.59.4%

Foreigners20.03.5%

Households14.62.6%

Others6.91.2%

GeneralGovernment

（excludePublic

Pensions）1.40.2%

Total 569.9 trillion yen

From preliminary figures of the end of December 2007, Banks, etc includes Japan Post Bank. Life and Nonlife Insurance includes Japan Post Insurance.Bank of Japan “Flow of Funds”

The end of Mar. 2004

Total 684.3 trillion yen

（QE）

The end of Dec. 2007

Breakdown of JGB Holders

(Note)

(Source)

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