Bond Japan Municipal Finance Organization 1.375% ( XS2296155562 ) in USD

Japan Municipal Finance Organization

100 % ▲

Japan

XS2296155562 ( in USD )

1.375% per year ( payment 2 times a year)

09/02/2031

Prospectus brochure of the bond Japan Finance Organisation for Municipalities (JFM) XS2296155562 en USD 1.375%, maturity 09/02/2031

200 000 USD

1 250 000 000 USD

10/08/2026 ( In 2 days )

The Japan Finance Organisation for Municipalities (JFM) is a government-related financial institution that provides loans and other financial services to local governments in Japan for public works projects and other municipal initiatives.

Japan Finance Organisation for Municipalities (JFM) issued a USD 1,250,000,000 bond (ISIN: XS2296155562) maturing on 09/02/2031, offering a 1.375% coupon with semi-annual payments, currently trading at 100% of par value and having a minimum trading size of USD 200,000.

BASE PROSPECTUS

JAPAN FINANCE ORGANIZATION FOR MUNICIPALITIES
(Incorporated under the Japan Finance Organization for Municipalities Law of Japan)
¥3,000,000,000,000
Global Medium Term Note Programme

Under the Global Medium Term Note Programme (the "Programme") described in this base prospectus (the
"Base Prospectus"), Japan Finance Organization for Municipalities ("JFM"), subject to compliance with all relevant
laws, regulations and directives, may from time to time issue notes ("Notes").
The maximum aggregate principal amount of Notes outstanding at any one time under the Programme will
not exceed ¥3,000,000,000,000 (and for this purpose, any Notes denominated in a currency other than Japanese yen
shall be translated into Japanese yen at the date of issue of such Notes) (calculated in accordance with the provisions
of the Dealer Agreement (as defined under "Subscription and Sale")). The maximum aggregate principal amount of
Notes which may be outstanding at any one time under the Programme may be increased from time to time, subject to
compliance with the relevant provisions of the Dealer Agreement.
This Base Prospectus has been approved as a prospectus issued in compliance with Part 2 of the rules and
regulations of the Luxembourg Stock Exchange (the "Luxembourg Rules and Regulations") by the Luxembourg
Stock Exchange in its capacity as competent authority under Part IV of the Luxembourg law of 16 July 2019 on
prospectuses for securities (the "Prospectus Law") for the purposes of giving information with regard to the issue of
Notes under this Programme. Application has been made to the Luxembourg Stock Exchange for Notes issued under
the Programme for the period of 12 months from the date of this Base Prospectus to be admitted to listing on the official
list of the Luxembourg Stock Exchange (the "Official List") and for such Notes to be admitted to trading on the Euro
MTF Market of the Luxembourg Stock Exchange (the "Euro MTF Market"). References in this Base Prospectus to
Notes being "listed" on the Luxembourg Stock Exchange (and all related references) shall mean that such Notes have
been admitted to listing on the Official List and have been admitted to trading on the Euro MTF Market. The Euro
MTF Market is not a regulated market for the purposes of the Directive 2014/65/EU on markets in financial instruments.
In relation to Notes listed on the Luxembourg Stock Exchange, this Base Prospectus is valid for a period of one year
from the date hereof. However, unlisted Notes may be issued pursuant to the Programme. The Final Terms (as defined
below) in respect of the issue of any Notes will specify whether or not such Notes will be listed on the Luxembourg
Stock Exchange (or any other stock exchange). Application is also being made to Tokyo Stock Exchange, Inc. (the
"Tokyo Stock Exchange") for the Programme to be listed on the TOKYO PRO-BOND Market of the Tokyo Stock
Exchange (the "TOKYO PRO-BOND Market").
The Notes have been assigned a provisional rating of "(P)A1" by Moody's Japan K.K. ("Moody's") and a
rating of "A+" by S&P Global Ratings Japan Inc. ("S&P") Notes issued under the Programme may or may not be rated.
Any credit ratings assigned to an issue of Notes will be specified in the applicable Final Terms (as defined herein).
A security rating is not a recommendation to buy, sell or hold securities and may be subject to
suspension, reduction or withdrawal at any time by the assigning rating agency.
Investing in Notes issued under the Programme involves certain risks. The principal risk factors that may
affect the abilities of JFM to fulfil its obligations under the Notes are discussed under "Risk Factors" below.
The Notes have not been, and will not be, registered under the United States Securities Act of 1933, as
amended (the "Securities Act"), or with any securities regulatory authority of any state or other jurisdiction of the
United States, and Notes in bearer form are subject to U.S. tax law requirements. The Notes may not be offered, sold
or (in the case of Notes in bearer form) delivered within the United States or to, or for the account or benefit of, U.S.
persons (as defined in Regulation S under the Securities Act ("Regulation S")) except in certain transactions exempt
from the registration requirements of the Securities Act. Notes in bearer form are subject to U.S. tax law requirements
and may not be offered, sold or delivered within the United States or its possessions or to United States persons, except
in certain transactions permitted by U.S. tax regulations.
Arranger
Barclays
Dealers
Barclays
BNP PARIBAS
BofA Securities
Citigroup
Daiwa Capital Markets Europe
Goldman Sachs International
J.P. Morgan
Mizuho Securities
Morgan Stanley
Nomura

The date of this Base Prospectus is 7 August 2020.
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CONTENTS

Page
Risk Factors ........................................................................................................................................... 7
Forward-Looking Statements ................................................................................................................ 18
Information Incorporated by Reference ................................................................................................. 19
Enforcement of Foreign Judgments ....................................................................................................... 20
Available Information ........................................................................................................................... 21
Overview of the Programme ................................................................................................................. 22
Forms of the Notes ............................................................................................................................... 27
Terms and Conditions of the Notes ....................................................................................................... 35
Form of Final Terms ............................................................................................................................. 65
Summary of Provisions Relating to the Notes while in Global Form ...................................................... 74
Use of Proceeds .................................................................................................................................... 78
Japanese Local Government Finance and the Role of JFM .................................................................... 79
Capitalisation and Indebtedness ............................................................................................................ 82
Japan Finance Organization for Municipalities ...................................................................................... 83
Selected Historical Financial Information.............................................................................................. 96
Operating and Financial Review ........................................................................................................... 97
Taxation ............................................................................................................................................. 116
Benefit Plan Investor Considerations................................................................................................... 128
Subscription and Sale ......................................................................................................................... 130
Transfer Restrictions .......................................................................................................................... 135
General Information ........................................................................................................................... 141

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IMPORTANT NOTICES
JFM accepts responsibility for the information contained in this Base Prospectus and declares that,
the information contained in this Base Prospectus is, to the best of its knowledge, in accordance with the
facts and contains no omission likely to affect its import.
Each Tranche (as defined herein) of Notes will be issued on the terms set out herein under "Terms
and Conditions of the Notes" (the "Conditions") and a document specific to such Tranche called the final
terms (the "Final Terms"). This Base Prospectus must be read and construed together with any
amendments or supplements hereto and with any information incorporated by reference herein and, in
relation to any Tranche of Notes, must be read and construed together with the relevant Final Terms.
JFM has confirmed to the Dealers named under "Subscription and Sale" below that this Base
Prospectus contains the information, which according to the particular nature of JFM and the Notes, is
necessary to enable investors and their investment advisors to make an informed assessment of the assets
and liabilities, financial position, profits and losses and prospects of JFM and of the rights attaching to the
Notes; that such information is true and accurate in all material respects and is not misleading in any
material respect; that any opinions, predictions or intentions expressed herein are honestly held or made
and are not misleading in any material respect; that this Base Prospectus does not omit to state any material
fact necessary to make such information, opinions, predictions or intentions (in the context of the
Programme and the issue, offering and sale of the Notes) not misleading in any material respect; and that
all proper enquiries have been made to verify the foregoing.
No person has been authorised to give any information or to make any representation not contained
in or not consistent with this Base Prospectus or any other document entered into in relation to the
Programme or any information supplied by JFM or such other information as is in the public domain and,
if given or made, such information or representation should not be relied upon as having been authorised
by JFM or any Dealer.
Neither the Dealers nor any of their respective affiliates have authorised the whole or any part of
this Base Prospectus and none of them makes any representation or warranty or accepts any responsibility
as to (i) the accuracy or completeness of the information contained in this Base Prospectus or (ii) the acts
or omissions of JFM or any other person (other than the relevant Dealer) in connection with the issue and
offering of the Notes. Neither the delivery of this Base Prospectus or any Final Terms, nor the offering,
sale or delivery of any Note shall, in any circumstances, create any implication that the information
contained in this Base Prospectus is true subsequent to the date hereof or the date upon which this Base
Prospectus has been most recently amended or supplemented or that there has been no adverse change, or
any event reasonably likely to involve any adverse change, in the prospects or financial or trading position
of JFM since the date thereof or, if later, the date upon which this Base Prospectus has been most recently
amended or supplemented or that any other information supplied in connection with the Programme is
correct at any time subsequent to the date on which it is supplied or, if different, the date indicated in the
document containing the same.
Product Governance under Directive 2014/65/EU (as amended)  A determination will be
made in relation to each issue about whether, for the purpose of the MiFID Product Governance rules under
EU Delegated Directive 2017/593 (the "MiFID Product Governance Rules"), any Dealer subscribing for
any Notes is a manufacturer in respect of such Notes, but otherwise neither the Arranger nor the Dealers
nor any of their respective affiliates will be a manufacturer for the purpose of the MiFID Product
Governance Rules.
The Final Terms in respect of any Notes may include a legend entitled "MiFID II Product
Governance" which will outline the target market assessment in respect of the Notes and which channels
for distribution of the Notes are appropriate. Any person subsequently offering, selling or recommending
the Notes (a "distributor") should take into consideration the target market assessment; however, a
distributor subject to Directive 2014/65/EU (as amended, "MiFID II") is responsible for undertaking its
own target market assessment in respect of the Notes (by either adopting or refining the target market
assessment) and determining appropriate distribution channels.
The distribution of this Base Prospectus and any Final Terms and the offering, sale and delivery of
the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Base
Prospectus or any Final Terms comes are required by JFM and the Dealers to inform themselves about and
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to observe any such restrictions. For a description of certain restrictions on offers, sales and deliveries of
Notes and on the distribution of this Base Prospectus or any Final Terms and other offering material relating
to the Notes, see "Subscription and Sale". In particular, the Notes have not been, and will not be, registered
under the Securities Act or with any securities regulatory authority of any state or other jurisdiction of the
United States, and Bearer Notes are subject to U.S. tax law requirements. The Notes may not be offered,
sold, or in the case of Bearer Notes, delivered within the United States or to, or for the account or benefit
of, U.S. persons (as defined in Regulation S) except in certain transactions exempt from the registration
requirements of the Securities Act.
The Notes may be offered and sold (A) as Bearer Notes or Registered Notes outside the United
States to non-U.S. persons in reliance on Regulation S ("Regulation S Only Note Offerings") or (B) in
registered form outside the United States to non-U.S. person in reliance on Regulation S and within the
United States to qualified institutional buyers (as defined in Rule 144A under the Securities Act ("Rule
144A")) in reliance on Rule 144A ("Rule 144A and Regulation S Note Offerings"). Prospective
purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions
of Section 5 of the Securities Act provided by Rule 144A. For a description of these and certain further
restrictions on offers, sales and transfers of Notes, see "Subscription and Sale" and "Transfer Restrictions".
THE PROGRAMME AND THE NOTES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION (THE "SEC"),
ANY STATE SECURITIES COMMISSION IN THE UNITED STATES OR ANY OTHER U.S.
REGULATORY AUTHORITY, NOR HAS ANY OF THE FOREGOING AUTHORITIES PASSED
UPON OR ENDORSED THE MERITS OF ANY OFFERING OF NOTES OR THE ACCURACY
OR ADEQUACY OF THIS BASE PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENCE IN THE UNITED STATES.
This Base Prospectus has been prepared on the basis that, except to the extent sub-paragraph (ii)
below may apply, any offer of Notes in any Member State of the European Economic Area (the "EEA") or
the United Kingdom (a "Relevant State") will be made pursuant to an exemption under Prospectus
Regulation (EU) 2017/1129 (the "Prospectus Regulation") from the requirement to publish a prospectus
for offers of Notes. Accordingly, any person making or intending to make an offer in a Relevant State of
Notes which are the subject of an offering contemplated in this Base Prospectus as completed by the Final
Terms in relation to the offer of those Notes may only do so (i) in circumstances in which no obligation
arises for JFM or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or
supplement a prospectus pursuant to Article 23 of the Prospectus Regulation, in each case, in relation to
such offer, or (ii) if a prospectus for such offer has been approved by the competent authority in that
Relevant State or, where appropriate, approved in another Relevant State and notified to the competent
authority in that Relevant State and (in either case) published, all in accordance with the Prospectus
Regulation, provided that such offer is made in the period beginning and ending on the dates specified for
such purpose in such prospectus, and JFM has consented in writing to its use for the purpose of such offer.
Except to the extent subparagraph (ii) above may apply, neither JFM nor any Dealer have authorised, nor
do they authorise, the making of any offer of Notes in circumstances in which an obligation arises for JFM
or any Dealer to publish or supplement a prospectus for such offer.
IMPORTANT EEA AND UK RETAIL INVESTORS: The Notes are not intended to be
offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to
any retail investor in the EEA or in the United Kingdom (the "UK"). For these purposes, a retail investor
means a person who is one (or more) of: (i) a retail client as defined in point (11) of Article 4(1) of MiFID
II; or (ii) a customer within the meaning of Directive (EU) 2016/97, where that customer would not qualify
as a professional client as defined in point (10) of Article 4(1) of MiFID II. Consequently, no key
information document required by Regulation (EU) No. 1286/2014 (the "PRIIPs Regulation") for offering
or selling the Notes or otherwise making them available to retail investors in the EEA or in the UK has
been prepared and therefore offering or selling the Notes or otherwise making them available to any retail
investor in the EEA or in the UK may be unlawful under the PRIIPs Regulation.
PRODUCT CLASSIFICATION PURSUANT TO SECTION 309B OF THE SECURITIES
AND FUTURES ACT (CHAPTER 289) OF SINGAPORE
The Final Terms in respect of any Notes may include a legend entitled "Singapore Securities and
Futures Act Product Classification" which will state the product classification of the Notes pursuant to
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section 309B(1) of the Securities and Futures Act (Chapter 289) of Singapore (as modified or amended
from time to time, the "SFA").
JFM will make a determination and provide the appropriate written notification to "relevant
persons" in relation to each issue about the classification of the Notes being offered for the purposes of
section 309B(1)(a) and section 309B(1)(c) of the SFA.
The Notes are exempt from the requirement for registration under the Financial Instruments and
Exchange Act of Japan (Law No. 25 of 1948, as amended, the "Financial Instruments and Exchange
Act") and are subject to the Act on Special Measures Concerning Taxation of Japan (Law No. 26 of 1957,
as amended, the "Act on Special Measures Concerning Taxation"). Each Dealer has represented and
agreed that it has not, directly or indirectly, offered or sold, and will not, directly or indirectly, offer or sell
as part of its primary distribution (boshu) at any time, any Notes to, or for the benefit of, any person other
than a beneficial owner that is, (i) for Japanese tax purposes, neither (x) an individual resident of Japan or
a Japanese corporation, nor (y) an individual nonresident of Japan or a non-Japanese corporation that in
either case is a Specially-Related Party of JFM (as defined in "Taxation") or (ii) a Japanese financial
institution designated in Article 6, paragraph (9) of the Act on Special Measures Concerning Taxation.
BY SUBSCRIBING FOR THE NOTES, AN INVESTOR WILL BE DEEMED TO HAVE
REPRESENTED THAT IT IS A PERSON WHO FALLS INTO THE CATEGORY OF (i) OR (ii)
ABOVE.
In addition, interest payments on the Notes will generally be subject to Japanese withholding tax
unless it is established that the Notes are held by or for the account of a beneficial owner that falls within
either clause (i) or (ii) set forth above and companies with the applicable requirement for tax exemption, or
is a Japanese public corporation, financial institution or financial instruments business operator, etc.
described in Article 3-3, Paragraph 6 of the Act on Special Measures Concerning Taxation which complies
with the requirement for tax exemption under that paragraph.
JFM will not issue "Taxable Linked Securities" (securities of which the amount of interest is
to be calculated by reference to certain indexes (as prescribed by the Cabinet Order under Article 6,
Paragraph 4 of the Act on Special Measures Concerning Taxation) relating to JFM or a Specially-
Related Party of JFM) under the Programme.
Neither this Base Prospectus nor any Final Terms constitutes an offer or an invitation to subscribe
for or purchase any Notes and should not be considered as a recommendation by JFM, the Dealers or any
of them that any recipient of this Base Prospectus or any Final Terms should subscribe for or purchase any
Notes. Each recipient of this Base Prospectus or any Final Terms shall be taken to have made its own
investigation and appraisal of the condition (financial or otherwise) of JFM.
In this Base Prospectus, unless otherwise specified, references to a "Member State" are references
to a Member State of the EEA, references to "¥", "Japanese yen" or "yen" are to the Japanese yen,
references to "U.S.$", "U.S. dollars" or "dollars" are to United States dollars, references to "£", "GBP" or
"pounds" are to pounds sterling and references to "", "EUR" or "euro" are to the currency introduced at
the start of the third stage of European economic and monetary union, and as defined in Article 2 of Council
Regulation (EC) No. 974/98 of 3 May 1998 on the introduction of the euro, as amended.
In this Base Prospectus, references to the "JFM Law" are to the Japan Finance Organization for
Municipalities Law of Japan (Law No. 64 of 2007, as amended).
Certain figures included in this Base Prospectus have been subject to rounding adjustments;
accordingly, figures shown for the same category presented in different tables may vary slightly and figures
shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.
In connection with the issue of any Tranche of Notes, the Dealer(s) (if any) named as the
Stabilising Manager(s) (or persons acting on behalf of any Stabilising Manager(s)) in the applicable
Final Terms may over allot Notes or effect transactions with a view to supporting the market price
of the Notes at a level higher than that which might otherwise prevail. However, stabilisation may
not necessarily occur. Any stabilisation action may begin on or after the date on which adequate
public disclosure of the terms of the offer of the relevant Tranche of Notes is made and, if begun, may
cease at any time, but it must end no later than the earlier of 30 days after the issue date of the
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relevant Tranche of Notes and 60 days after the date of the allotment of the relevant Tranche of Notes.
Any stabilisation action or over-allotment must be conducted by the Stabilising Manager(s) (or
persons acting on behalf of the Stabilising Manager(s)) in accordance with all applicable laws and
rules.
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RISK FACTORS
Prospective investors should read the entire Base Prospectus.
Any investment in the Notes is subject to a number of risks. Prior to investing in the Notes,
prospective investors should carefully consider risk factors associated with any investment in the Notes,
the business of JFM and the industry in which it operates together with all other information contained in
this Base Prospectus, including, in particular the risk factors described below. Words and expressions
defined in the "Terms and Conditions of the Notes" below or elsewhere in this Base Prospectus have the
same meanings in this section.
The following is not an exhaustive list or explanation of all risks which investors may face when
making an investment in the Notes and should be used as guidance only. Additional risks and uncertainties
relating to JFM that are not currently known to JFM, or that JFM currently deems immaterial, may
individually or cumulatively also have a material adverse effect on the business, prospects, results of
operations and/or financial position of JFM and, if any such risk should occur, the price of the Notes may
decline and investors could lose all or part of their investment. Investors should consider carefully whether
an investment in the Notes is suitable for them in light of the information in this Base Prospectus and their
personal circumstances.
Risks Relating to JFM
JFM's business operations, results of operations and financial condition are affected by the policies of
the Japanese national and local governments.
JFM is an entity established by the JFM Law, which is a national law of Japan. JFM's primary
objective is to contribute to the sound operation of local government financing and to improve the welfare
of local residents by providing long-term funding at low interest rates to local governments. It also supports
local governments by providing them with staff training, conducting surveys and research on local
government funding and dispatching experts in local government finances in response to specific
requirements, so that they can efficiently and effectively raise funds from private financial institutions and
other investors. JFM is the primary public financial institution for supplying long-term, low-cost financing
to local governments for funding national policy targets and it is a preferred lender to local governments
for basic infrastructure-related funding. JFM loans, which accounted for approximately 15.3 per cent. of
local government funding during the fiscal year ended 31 March 2020 based on the 2019 Local Government
Borrowing Programme, constitute an integral part of the support system provided to local governments by
the national government's Ministry of Internal Affairs and Communications under its Local Government
Borrowing Programme.
As an entity created to facilitate public policy, JFM's business, financial condition and results of
operations are significantly affected by the policies of the Japanese national and local governments. Such
policies may determine, among other things, local government borrowing requirements and are affected by
many factors, including the political, socioeconomic and financial conditions and developments in Japan
and of such governments. In particular, local government outlays for public works projects, shortfalls
between overall outlays and tax and other revenues, extraordinary events such as natural disasters and other
factors affect the demand of local governments for borrowing. Social policy may affect JFM's management
of its assets, as illustrated by various forms of relief granted to borrowers in the wake of the Great East
Japan Earthquake. Moreover, a policy change leading to a change in the JFM Law could change JFM's
mandate and negatively affect its operations and other aspects of its business.
Although the national government guarantees a certain amount of bonds issued by JFM, the
national government does not, without specific grant, guarantee, directly or indirectly, JFM's securities or
other obligations, and the amount of JFM bonds so guaranteed has been shrinking in recent periods as only
those bonds which are issued to replace bonds previously issued by the Predecessor (as defined in "Japan
Finance Organization for Municipalities") may be so guaranteed. Even JFM bonds issued without a
national government guarantee, however, have received credit ratings consistent with the credit rating
received by national government bonds ("JGBs"). For example, according to S&P, this is largely because
it considers JFM a "government-related entity" with an extremely high likelihood of extraordinary
government support and accordingly link JFM's rating to that of Japan, and according to Moody's, the
alignment of JFM's ratings with that of the sovereign reflects the close integration of JFM's activities with
the government (sources: S&P RatingsDirect®, 10 June 2020, Moody's Credit Opinion, 12 December 2019).
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This view arises from JFM's important role in facilitating public policy. If the perceived likelihood of such
implicit support were to fall, credit ratings of JFM and its bonds would also likely fall.
The close relationship between the national government and JFM's borrowers means that JFM's
business and results of operations can be directly affected by national government policy. For example,
when there have been shortfalls in local revenue sources, which have arisen in part due to local government
financial conditions, the national government has allowed local governments to prepay, without penalty,
higher interest rate loans from JFM and to refinance those loans at current lower interest rates, and may
continue to do so, under certain conditions. In addition, it is commonly perceived that there is implicit
national government support for local government bonds and loans, which permits access by local
governments to cheap funding. Although such bonds and loans are not explicitly guaranteed by the national
government, their issues have been authorised by the national government and there have been no
substantial credit risk spreads among local government issuers. This suggests a perception of implicit
national government support for local government bonds and loans, including JFM loans. Moreover, the
Ministry of Internal Affairs and Communications has itself indicated that such bonds and loans will be
reimbursed due to arrangements in place for ensuring local governments have access to financial resources
necessary to make reimbursements, and for monitoring local government financial situations and ensuring
local government financial soundness.
The national government's policies could change in a way that affects its relationships with JFM
or the local governments. It is possible the national government could further distance itself from JFM.
Moreover, in recent years, government policy has been to increase the independence of local governments,
and if further steps in this direction are taken, the implicit support of local governments by the national
government could be reduced.
If actual or perceived national government support for JFM or JFM's borrowers declines, this
would make obtaining funds by JFM and its borrowers from the capital markets more expensive. This
could negatively affect their access to liquidity and their ability to pay their obligations when they come
due.
The worldwide economic effects of the spread of COVID-19 could adversely affect JFM's business,
results of operations and financial condition.
The ongoing and widespread outbreak of the 2019 Novel Coronavirus ("COVID-19"), which was
declared by the World Health Organization as a public health emergency of international concern on 30
January 2020 and characterised as a pandemic on 11 March 2020, has significantly and adversely affected
global economic systems, global supply chains, and financial markets worldwide, causing diminished
investment sentiment, sporadic volatility in global capital markets and a precipitous decline of value in
stock markets around the globe. Governments around the world, including the Japanese government, have
made efforts to contain the COVID-19 outbreak. In Japan, for example, on 7 April 2020, Prime Minister
Shinzo Abe initially declared a state of emergency in relation to COVID-19 for seven prefectures, including
Tokyo and Osaka, which, among other things, enabled those local governments to request school and
business closures and encourage residents to stay at home except for essential tasks. The state of emergency
was subsequently extended to apply nationwide on 16 April 2020. The state of emergency was lifted for all
of Japan's prefectures by 25 May 2020.
Despite the various measures undertaken by governments, the global economy has experienced,
and continues to experience, severe adverse consequences. In particular, the travel, tourism, hospitality,
food service and retail industries around the world, including in Japan, have experienced immediate and
continuing, direct and adverse impact due to a significant reduction in travel, daily movement and large
gatherings of people (through travel restrictions and other voluntary and involuntary containment measures)
as well as prolonged closures of workplaces and public buildings in an effort to mitigate the further spread
of COVID-19. These developments have also contributed to significant volatility in global financial,
foreign exchange, commodity and energy markets, including major fluctuations of the yen against the U.S.
dollar. According to preliminary economic reports published monthly by the Cabinet Office of Japan
between March and May 2020, the Japanese economy is in an "extremely severe situation" due to COVID-
19, citing decreases in private consumption, business investment, exports, industrial production, corporate
profits, and firms' business sentiment and weakness in the labour market. In June 2020, the Cabinet Office
of Japan affirmed its assessment of the "extremely severe" state of the Japanese economy, but noted that
the situation had "almost stopped deteriorating". Further, in July 2020, the Cabinet Office noted the
Japanese economy is "showing movements of picking up recently" although the situation remains "severe"
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due to COVID-19. As a result, the state of the Japanese economy in the future remains highly uncertain.
Governments and central banks around the world, including the Japanese Government and the Bank of
Japan have taken and may take further significant financial stimulus measures, including but not limited to
delaying, reducing or eliminating tax payments, increasing purchases of securities and undertaking other
forms of direct fiscal support or public subsidies for businesses and/or individuals, in an effort to mitigate
the adverse effects of the COVID-19 outbreak. However, it is as of yet unclear whether or when any of
these measures will have the intended effects of mitigating the adverse impact of COVID-19. In the medium
to long term, if the current outbreak of COVID-19 is not contained or if future outbreaks of COVID-19 or
similar diseases are not effectively managed, adverse effects on the economies and financial markets of
Japan and of many other countries may transform into a prolonged economic downturn or global economic
or financial crisis or recession.
Japan's economy had already been showing signs of a slowdown prior to the COVID-19 outbreak
in January/February 2020, with nominal GDP declining for the three months ended 31 December 2019 and
31 March 2020 compared to their respective previous quarters. If there is a sustained material deterioration
in financial markets or economic conditions as a result of these events or developments, particularly in
Japan, the national government policy with respect to JFM or the local governments to which JFM regularly
lends may change and such change may adversely affect JFM's business, results of operations and financial
condition. In addition, JFM could experience a deterioration in the credit quality of its loan portfolio and a
related increase in its credit costs, as well as an increase in funding costs, which could adversely affect its
results of operations and financial condition. Any of these factors could have a material adverse effect on
JFM's business, results of operations and financial condition.
If Japanese economic conditions do not improve or if they worsen, JFM's business operations, results
of operations and financial condition may be negatively affected.
Prospective investors in JFM bonds should be aware of the challenges faced by the Japanese
economy in general. Prior to the outbreak of COVID-19, the domestic economy in Japan had already been
showing signs of a slowdown, partially attributable to the increase in the consumption tax rate from 8% to
10% in October 2019. The Japanese economy contracted in the fourth quarter of 2019 and in January and
February 2020, reversing a trend of steady improvement in recent years. The outbreak of the COVID-19
pandemic has significantly and adversely affected economic systems, global supply chains, and financial
markets worldwide, causing diminished investment sentiment, sporadic volatility in global capital markets
and a precipitous decline of value in stock markets around the globe.
While the Japanese and global economies face immediate challenges raised by COVID-19, a
variety of other macroeconomic and geopolitical factors could weigh on economic conditions in Japan.
Continued uncertainty regarding the United Kingdom's exit from the European Union (the "EU"),
geopolitical instability in other various parts of the world, material changes in regional economic or political
unions or associations between countries, increased protectionism affecting trade relations globally, and
the uncertain impact of the policies pursued by the presidential administration in the United States, could
also contribute to economic instability in those and other regions and affect Japanese and global economic
conditions.
Domestically, the long term impact of such issues as well as others (including the recent increase
in the consumption tax rate) on Japan's economy, trade balance, interest rates and fiscal position (including
as a result of the fiscal and monetary stimulus response to COVID-19), remains uncertain.
Other challenges for the Japanese economy also include an increased dependence on LNG and
other energy imports as a result of the nuclear accident at the Fukushima Daiichi Nuclear Power Plant and
suspension of operations at other nuclear power plants. A weakened yen would make these imports more
expensive. In addition, over the long term, Japan faces demographic challenges, such as an aging workforce
and population decrease, and high levels of public debt and associated debt servicing payments.
If economic conditions do not improve or if they worsen, particularly in Japan, the national
government may be unable to support JFM or JFM's borrowers. In addition, JFM could experience a
deterioration in the credit quality of its loan portfolio and a related increase in its credit costs, which could
adversely affect its results of operations and financial condition.
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JFM's credit rating is linked to that of Japan, which means a downgrading of Japan would likely result
in a downgrading of JFM.
Due to JFM's public-sector role, for example, S&P considers JFM a "government-related entity"
with an extremely high likelihood of extraordinary government support, and Moody's considers the
alignment of JFM's ratings with that of the sovereign reflects the close integration of JFM's activities with
the government (sources: S&P RatingsDirect®, 10 June 2020, Moody's Credit Opinion, 12 December 2019),
any rating action taken with respect to Japan can be expected to impact JFM's ratings.
Japan's debt rating has been subject to downgrades and lowered rating outlooks in recent years as
a result of certain factors including its fiscal deficit and economic growth. Each of those downgrades has
resulted in a commensurate downgrade of JFM's rating. Currently, JGBs are rated A+ (Stable Outlook) by
S&P, A (Stable Outlook) by Fitch and A1 (Stable Outlook) by Moody's. While JFM has not experienced
any significant negative effects as a result of those rating actions, and while S&P revised JFM's rating
outlook from Positive to Stable following the same revision to Japan's rating outlook, any future adverse
rating actions may adversely affect JFM's rating, or its ability to raise funds in a desirable manner. There
can be no assurance JGB ratings will not be downgraded in the future.
Investors should also note that, notwithstanding the S&P and Moody's view that JFM is a
"government-related entity", JFM is not a government entity and its debts (including the Notes) are not
direct or indirect obligations of Japan or guaranteed in any way by Japan.
JFM is exposed to credit risk.
JFM is exposed to credit risk, which is the risk of loss arising from a credit event, such as
deterioration in the financial condition of a borrower or a counterparty, which causes an asset to lose value
or become worthless. Loans and financial transactions involve credit risk. JFM makes loans exclusively
to local governments. Local taxes are a major source of revenue for local governments, and some local tax
items are subject to local economic conditions. Accordingly the revenue of local governments may be
subject to fluctuations in the relevant local economies. There can be no assurance that JFM will not
experience a credit event, including with counterparties, in the future.
JFM is exposed to various market risks.
JFM is exposed to various market risks, including the risk of loss resulting from changes in the
value of assets and liabilities due to fluctuations in risk factors such as interest rates, securities prices and
foreign exchange rates, and the risk of loss resulting from changes in earnings generated from assets and
liabilities.
Interest Rate Risk. JFM is exposed to interest rate risk, which is the risk of loss resulting from
fluctuations in interest rates, and more specifically, the risk of losses being incurred or profits decreasing
from fluctuations in interest rates when there is a duration gap between assets and liabilities. Loans
constitute a large part of the assets of JFM, and the maximum term to maturity of JFM loans is 40 years.
However, the majority of the funds for these loans is raised through issuance of 10-year bonds. This gap
exposes JFM to the interest rate risk associated with bond refinance. In addition, JFM's results of operations
could be affected more generally by a declining interest rate environment, as JFM's average interest rate on
loans would decrease as existing loans with relatively high interest rates mature or are prepaid, and are
refinanced by lower interest rate loans, reflecting the then current interest rate environment. Although JFM
implements measures to address the interest rate risk resulting from a duration gap between lending and
fundraising, there can be no assurance that such measures will always be effective in reducing such losses,
and if such measures prove to be ineffective or insufficient, this could materially adversely affect JFM's
profitability, results of operations and financial condition.
JFM is also exposed to "pipeline" risk. JFM generally raises funds required to finance a loan by
issuing bonds prior to making the loan. Proceeds from bond issuances may not be earmarked for a particular
loan. Fluctuations in interest rates between the time JFM issues bonds and the time it ultimately lends the
proceeds therefrom may affect the profitability of a loan. Although JFM uses swap transactions to hedge
against pipeline risk, there can be no assurance that such hedging transactions will cover all such risks.
Foreign Exchange and Other Risks. JFM is exposed to various other risks, for example foreign
exchange risk, associated with bond principal and interest payments, which are generally hedged by swap
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