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Effective Use of Revenue Bond : Possibility to Introduce into Japan

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First, this paper specifies differences on institutional scheme and market circumstance of municipal bonds between in Japan and in the United States, and examines how the revenue bond scheme can be introduced into Japan. Now in Japan municipal bond market has changed, as municipal bond can issue not under the permission but with consultation of central government from April 2006 and local governments can issue municipal bonds without their consent of central government. We recognize that there are many differences in bond issuing circumstance between the United States and Japan, because municipal bonds in the United States had been issued by various terms and conditions based upon each credit of local government. Therefore we think there are less incentive and less possibility for local government to issue revenue bond in Japan without changes of situations. But in Japan recently many actors are moving to develop and diversify municipal bond marketability, and "Chiho-Bunken 21 Seiki Vision Kondankai" (The informal council to discuss 21st century's vision for decentralization and shared responsibilities between central and local governments) reported the necessity of revenue bond. These movements suggest that incentive to issue revenue bond may progress rapidly in the near future. (Please see the chapter 2 & 3)

Second, we also made investigation and analysis of issuing process details in the United States based upon recognition of the two countries' differences, and we specified procedural problems for introduction of the revenue bond system into Japan, such as institutional issues, human resources, and capability. In the United States, various regal structures, which are essential for safe repayment of principal and interest to investors, guidelines of detailed and continuing disclosure after issuing and issuing procedure are established. These lead clear role share and risk allocation with market participants, and also lead the progress of evaluation and analytic know-how. As the result, those mechanisms can activate securitization and secondary market development of municipal bond. Market mechanism works effectively in issuing process of revenue bond in the United States. Furthermore it can provide incentives for individual investors to invest and trade revenue bonds. Contrary to such situation, municipal bond market in Japan has had little variety as investment asset and less liquidity in the secondary market. Historically only municipal bond guaranteed by central government without credit risk for bond investors has been issued. Therefore in Japan various regal structures and guidelines, which are essential for revenue bond issuing, are not framed. This situation leads to the extreme lack or shortage of experience and know-how for credit evaluation, risk analysis, timely disclosure and so on. (Please see the chapter 4 & 5)

In order to introduce the revenue bond system into Japan, we must take notice to the points as above.It will become more important to make institutional development or improvement of legal structures and market circumstance, especially to promote disclosure system useful for various investors, mainly individual investors, and to develop more secondary market of municipal bonds.

Key words

revenue bond, social infrastructure development, municipal bond system, bond rating, bond insurance

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Reports No.73/2006 OCT.

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