Japanese local government officials will visit today with the Public Securities Association to explore the possibility of modeling their current local debt market after the U.S. municipal market.
Heather Ruth, president of the PSA, said many changes are brewing in the Japanese financial markets that make the prospect of selling sub-sovereign debt to a broad customer base appealing. The Japanese have not indicated, she emphasized, that a tax-exempt structure is under consideration.
"Their first visit to the U.S. in 1985 was to investigate widening, deepening, and making more liquid their municipal securities market," Ms. Ruth said. "They may be looking to create more competition on the dealer side."
Currently, local Japanese issuance is enormous. The Japanese Local Bond Association says there are 3,292 separate public entities -- prefectures, cities, towns, and villages -- that issued about $63.23 billion of debt during Japan's fiscal year, which ended March 31, 1991. The volume represents an increase of more than 25% from 1980.
By comparison, American municipalities issued $127 billion of tax-exempt long-term debt in fiscal 1990.
And Ms. Ruth expects the Japanese are contemplating future increases in bond volume. "The federal government in Japan is under pressure to spend more," Ms. Ruth said. "And they have announced their intention to increase spending on infrastructure."
Despite the size of the market, Japanese banks have been the overwhelming buyers of the debt, leaving local officials dependent on the fortunes of the banks for the success of their sales. Communications from the delegation to the PSA indicate that capital pressures on the banks are a major concern.
"How [has the] capital adequacy rule by [the Bank of International Settlements] affected the municipal bond market?" the association asked in a letter last month. The BIS accords -- in combination with last year's Tokyo stock market crash -- have tremendously strained some of the nation's largest banks, requiring them to have a weighted 8% capital-to-risk ratio by the end of fiscal 1992.
One of two ways to clear the capital hurdle is to shrink assets. Ms. Ruth theorized that the banks may be considering the sale of their local bonds to to help achieve the ratios.
Certain aspects of Japanese municipal finance are similar to U.S. municipal finance, while other aspects are completely foreign. For example, some borrowing purposes sound very familiar: financing construction of public facilities, infrastructure repair, and refunding outstanding bonds.
But a major difference is the close relationship between local issuers and the federal government. In a simplified balance sheet of revenues and expenditures for local debt, the association lists the National Treasury Fund as contributing 15.3% of the revenues for local issuance. At the same time, the proceeds of local sales are used to fund officials' salaries.
The interdependence of the local and federal arms of government extend to the creditworthiness of the Japanese municipal securities, Ms. Ruth said. "The bonds typically are implicitly backed by the Japanese federal government.
"It's inconceivable that there will be a great deal of independence below the national government level," she continued. "Culturally, they have never been independent locally, while the U.S. system is similar perhaps to Australia. Our municipal systems are functions of breakaways from the British Empire; we're former colonies."
The 20-member delegation will include budget directors from four of the largest municipalities -- Tokyo City, Osaka Prefecture, Tokushima Prefecture, and Osaka City -- as well as representatives from the equivalent of Japanese bond banks, the major commercial banks in the country, and the four dominant Japanese securities firms.