Lessons from the Japanese Government Bond Market - PowerPoint PPT Presentation

Loading...

PPT – Lessons from the Japanese Government Bond Market PowerPoint presentation | free to download - id: 3aedc-NGRiO



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Lessons from the Japanese Government Bond Market

Description:

Conference on Development of Indonesian Government Bond Market. July 25-26, 2000. Jakarta, Indonesia. 2. Current Status of JGB Market ... – PowerPoint PPT presentation

Number of Views:124
Avg rating:3.0/5.0
Slides: 27
Provided by: sghon
Learn more at: http://www2.hawaii.edu
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Lessons from the Japanese Government Bond Market


1
Lessons from the Japanese Government Bond
Market
  • S. Ghon Rhee
  • K. J. Luke Distinguished Professor of
  • International Finance and Banking
  • University of Hawaii
  • Conference on Development of Indonesian
    Government Bond Market
  • July 25-26, 2000
  • Jakarta, Indonesia

2
Current Status of JGB Market
  • Japan is the largest issuer of government debt
    in the world.
  • End-1999 March 2000
  • Japan 3.30 trillion 3.69 trillion
  • USA 3.28 trillion 3.26 trillion
  • Planned JGB Issuance in 2000 820 billion
  • U.S. Treasury had paid down in last two
    years 140 billion

3
(No Transcript)
4
Japans Big Bang Financial System Reform (I)
  • Initiated by Prime Minister Hashimoto in November
    1996
  • Big Bang derived from astronomy The universe
    is originated from a gigantic explosion
  • Motivation for UK Big Bang in 1986
  • 1. London Trading Volume 1/13th New York
    Volume and 1/5th of Tokyo Volume in 1985
  • 2. Reform Measures in UK
  • a. Internationalization
  • b. Deregulation of Fixed Commission Rule
  • c. Proprietary Transaction Allowed
  • d. Opening of Ownership of Stock Exchange
    Members to Outsiders

5
Motivation for Japans Big Bang
  • Depressed Equity Market Once the largest in the
    world, Tokyo Market is now less than one-quarter
    of the size of New York.
  • Tokyo Trading Volume is one-tenth of New York
    Volume.
  • Market Index
  • Dec 29,89 July
    13,00
  • DJIA 2,753 10,783
  • Nikkei 225 38,916 17,036

6
Japans Big Bang Reform Measures (I)
  • Deregulation of cross-border transactions and
    foreign exchange business
  • Adoption of a competitive auction method to issue
    financing bills
  • Abolition of securities transaction tax
  • Deregulation of brokerage commission
  • Preparation of legal framework for loan/asset
    securitization

7
Japans Big Bang Reform Measures (II)
  • Allowance of off-exchange trading
  • Allowance of banks and financial institutions to
    issue bonds
  • Entry by banks, securities companies, and
    insurance companies into each others business
  • Introduction of individual stock options
  • Replacement of merit-based licensing system with
    a disclosure-based registration system for
    securities companies.

8
Three Major Weaknesses of JGB Market
  • 1. Fails to Tap the Pool of Global Capital
  • 2. Violates the Rule of Separation between
    Government Liabilities Management and Monetary
    Policy
  • 3. Unfinished Primary and Secondary Markets
    Infrastructures Remain

9
Investment by Foreign Investors in JGBs
  • Foreigners Holding of Government Debt
  • Japan 4 to 10
  • United States 37
  • United Kingdom 14
  • As of April last year, the withholding tax on
    redemption gains and interest income from JGBs
    were exempted for foreigners.
  • However, tax exemption is not done at the source
    and is applicable only to BOJ book-entry system.

10
Violation of the Separation Rule between
Liabilities Management and Monetary Policy (I) 
  • MOFs Trust Fund Bureau is the largest fund
    manager in the world through Fiscal Investment
    and Loan Program (FILP).
  • FILP Asset Size 4.2 trillion (as of May 2000)
  • 17 of FILP Assets are invested in JGBs
  • MOF is the largest issuer and buyer of government
    bonds
  • Government Holding of Its Own securities
  • Japan 45 of JGBs Outstanding
  • (including BOJ holdings)
  • US Nil

11
Violation of the Separation Rulebetween
Liabilities Management and Monetary Policy (II) 
  • The dual role executed by MOF An explicit
    violation of the separation rule between
    government debt management and monetary policy
  • Negative consequences
  • The cost of JGBs increases due to the lack of
    intense competition on the primary market
  • MOFs purchase activities of JGBs in the open
    market affect long-term market interest rates
    although FILP is considered as an extension of
    the fiscal policy.

12
Further Development of JGB Market
Infrastructures
  • Major Forces Underlying Expansion of the US
    Government Bond Market in 1980s
  • a. Introduction of Financial Futures and Options
  • b. Active Trading of Treasury Securities on a
    When-Issued Basis
  • c. Expansion of REPO transactions
  • d. Introduction of the Separate Trading of
    Registered Interest and Principal of Securities
    (STRIPS)

13
Sequence of Government Bond Market Reforms
French Experience
  • Bond futures market (1986)
  • Primary dealer system (1987)
  • Interdealer broker network (1987)
  • Purely competitive auctions (1987)
  • REPOs (1991)
  • STRIPS (1991)
  •  
  • Brossard, Philippe, 1998, The French Bond Market
    Enhancing Liquidity, A paper presented at a World
    Bank Workshop on the Development of Government
    Bond Markets, June 11-12, Seoul, Korea.

14
Further Strengthening of JGB Market
Infrastructure  
  • 1.   Introduce the primary dealer system
  • 2.  Adopt the uniform-price auction method
  • 3. Further Develop the REPO market and provide
    easy access to foreign institu-tional investors
  • 4. Create a User-Friendly Derivative Market
  • 5.  Allow when-issued trading
  • 6.  Introduce STRIPS

15
Create the Primary Dealer System
  • The lack of the primary dealer system is a most
    idiosyncratic feature of the JGB market
  • Most advanced markets adopted the primary dealer
    system Exceptions are Japan and Germany
  • MOFs role as a de facto underwriter in the
    primary market should be blamed.
  • Underwriting by a syndicate has been the standard
    in the primary market although public auction
    systems based on the multiple-price auctions were
    introduced for the maturities of 2-, 4-, 6-, and
    20-year bonds in recent years.

16
Adopt a Uniform-Price Auction Method (i)
  • Uniform-price auction method
  • all successful bidders pay the same price for a
    given security---either the lowest of the
    accepted price or the highest of the accepted
    yields
  • Hence, some successful bidders may pay a lower
    price than they actually bid
  • Multiple-price auction method
  • Successful bidders pay the prices they bid
  • The winners curse is introduced because the
    highest bidder wins the auction by paying the
    highest price, only to find that another bidder
    pays a lower price
  • In the presence of this curse, bidders tend to
    shade their bids below the maximum that they are
    actually willing to pay

17
Adopt a Uniform-Price Auction Method (ii)
  • Empirical Evidence is in Support of the
    Uniform-Price Auction
  • The uniform-price auction method generates higher
    revenue for the government
  • US Treasury currently utilizes the uniform-price
    auction method for all Treasury securities
  • Japan never adopted the uniform-price auction
    method

18
(No Transcript)
19
Four Major Functions of the REPO Market
  • Allows primary dealers to cover their long/short
    positions
  • Allows institutional investors to maximize
    investment income by lending their securities
  • Allows foreign investors to reduce currency risk
    through money market hedging
  • Facilitates clearing and settlement

20
Japanese REPO Markets Gensaki and Kashisai
Transactions (I)
  • GENSAKI Market
  • Traditional Gensaki market is a European-style
    sales-and-buy-back REPO since the ownership to
    the security is transferred to the buyer and no
    marking-to-market is performed.
  • Gensaki is recognized as a form of bond trading
    and REPO transactions on the Gensaki market were
    subject to securities transaction taxes.
  • The Gensaki market was built around largely
    Treasury bills and Financing bills because they
    were not subject to securities transaction taxes.
  •  
  • The Kashisai market is a securities borrowing and
    lending mechanism, where Kashisai transactions
    were not subject to securities transaction tax.
    This market evolves into an American-style REPO
    market because the lender of a security retains
    its ownership and marking to the market is
    performed. It also faced its own institutional
    impediment because interest rate ceiling was
    imposed on cash collateral.

21
Japanese REPO Markets Gensaki and Kashisai
Transactions (II)
  • Kashisai Market 
  • The Kashisai market is a securities borrowing and
    lending mechanism, where Kashisai transactions
    were not subject to securities transaction tax.
  • This market evolves into an American-style REPO
    market because the lender of a security retains
    its ownership and marking to the market is
    performed.
  • It also faced its own institutional impediment
    because interest rate ceiling was imposed on cash
    collateral in the past.

22
Japanese REPO Markets Gensaki and Kashisai
Transactions (III)
  • Gensaki market volume doubled in 1999, but
    participation by foreign institutions in the
    Gensaki market remains insignificant.
  • Tax treatment still remains the issue in addition
    to the European-style of Gensaki transactions
    because any revenue from REPO is considered as an
    income by Japanese tax authorities and foreigners
    must pay withholding taxes.
  • The Kashisai market did not expand after the
    interest rate ceiling on cash collateral was
    lifted in 1996.
  • Foreign institutions are not active in the REPO
    market

23
Japanese Financial Derivative Markets
  • Japan maintains most user-unfriendly derivative
    markets in the presence of
  • Margin requirements
  • Price limits
  • Trading halts
  • Other circuit breaker rules

24
Introduce When-Issued Trading
  • In most advanced markets, trading is permitted
    during the period between new issue announcement
    date and actual issue date
  • U.S. Market one to two weeks
  • France 2 days
  • When-issued trading functions like trading in a
    forward market.
  • Primary Dealers Sell Forward
  • Institutional Investors Buy Forward
  • Major Benefits of WI Market Minimization of
    Price and Quantity Uncertainties
  • a. Price Discovery
  • b. Pre-Issue Distribution
  • c. Interest Rate Risk Hedging by Locking in
    the Yield prior to the Auction

25
Introduce STRIPS
  • By introducing STRIPS, the MOF can provide the
    market with highly liquid zero-coupon bonds and
    notes.
  • As a result, STRIPS will
  • a. expand the investor base
  • b. improve tracking of effective yield curve
  • c. allow institutional investors to reduce
    reinvestment risk.

26
  • My Last Message is
  • The largest government bond market in the world
    still faces many policy issues.
  • Thank You for Your Attention
About PowerShow.com