Bank of Tokyo Mitsubishi, citing a report in Nihon Keizai Shimbun, says that the Ministry of Finance (MOF) in Japan will start to issue inflation-linked JGBs, whose principal at redemption increases in line with the annual inflation rate, from the 2003 fiscal year. Maturities will be at least ten years, with fixed coupons payable every six months. The planned issuance volume is measured in hundreds of billions of yen.
For investors, the new JGB will obviously be useful as an inflation hedge – provided there is some inflation. However, if prices go down, it is conceivable that redemption amounts might fall too. To reduce this risk, MOF reportedly intends to introduce a minimum guaranteed principal at the time of redemption. Profits on inflation-proofed principal will also enjoy specially favourable tax treatment.
With JGB issuance now running at Yen 100 trillion per year, MOF wants to vary its portfolio in order to improve digestion by the market. “Recently, due to lack of appropriate investment outlets, corporate pension funds and life insurance companies, who usually invest from the viewpoint of rather longer term, have aggressively snapped up SLGs (Super Long Government Bond) whose maturity is longer than 10 years and the interest is relatively high,” explains BoTM. “MOF believes that the new type of JGB will become a new investment option as investors can expect the redemption amount to increase when inflation rekindles in the near future.”