The Japanese Ministry of Finance (MOF) is considering an increase in its issuance of inflation-linked JGBs thsi year, to meet strong demand.
The MOF held its regular meeting with the Japanese primary dealers on April 13, and some participants requested increased issuance, and the ministry agreed to review the idea.
The high demand for inflation-linked JGBs reflects the emergence of the Japanedse economy from a prolonged period of deflation, with the CPI turning positive, plus growing interest from overseas investors.
Importantly, accounting rules for inflation-proof JGBs is also being reviewed, whivh would help the Japanese banks that are the major purchasers of the bonds. “Unlike their counterparts in the US and France, the redemption amount is not guaranteed for the inflation-linked JGB issued in Japan,” says a spoksman for Mizuho Corporate Bank in Tokyo. “Under the former accounting method practised in Japan, unrealized profit or loss of principal should be posted in the current profit and loss account. However, in March, 2006 the Accounting Standards Board of Japan decided to allow bond holders to put unrealized profit or loss directly in the capital account, assuming it is unlikely that inflation will diminish the principal. Japanese banks made it a practice not to reflect the unrealized profit or loss of the fixed coupon JGB. Instead, they declared it in the capital account. Now, the change in accounting method enables them to handle inflation-linked JGB in the same way.”
MoF is apparently considering increasing the volume of inflation-linked JGB to Yen 4 trillion this year, leaving overall issuance volume for the fiscal year unchanged at Yen 126 trillion. It follows that an increase in index-linked issues will be offset by a shrinkage in longer dated 15 year floating-rate bonds, which have not proved popular.