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Fiscal Status of Shizuoka Prefecture

This report provides an overview of Shizuoka Prefecture's fiscal status, including changes in revenue and expenditures, debt status, and the medium-term fiscal outlook. It also covers the management of prefectural bonds. Shizuoka is known for its strong industries, constant review of administrative policy, and high credit ratings for its bonds.

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Fiscal Status of Shizuoka Prefecture

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  1. Fiscal Status of Shizuoka Prefecture November 2014

  2. Table of Contents 2. Shizuoka’s Fiscal Status a. Changes in Revenue 12 b. Changes in Expenditures 13 c. Debt Status 14 d. Medium-Term Fiscal Outlook 15 3. Shizuoka’s Bond Management a. Management of Prefectural Bonds 17 b. Prefectural Bond Issuance Plan 18 4. Reference Materials 1. Overview of Shizuoka a. Location and Size5 b. Stable Economic Foundation6 c. Size of Economy7 d. Transportation Infrastructure 8 e. Active Industrial Location 9 f. Abundant Tourism Resources10 2

  3. Highlights 1. Shizuoka has strong industries and strong economic fundamentals 2. Shizuoka constantly reviews administrative policy and sustains a healthy budget 3. Shizuoka prefectural bonds have received high credit ratings from two credit rating companies (Aa3 from Moody's and AA+ from R&I) ⇒ Overview of Shizuoka (4–10) ⇒ Shizuoka’s Fiscal Status (11–15) ⇒ Shizuoka’s Bond Management(16–18) 3

  4. 1. Overview of Shizuoka Shizuoka Prefecture UNESCO World Heritage Mount Fuji

  5. Overview of Shizuoka: Location and Size Shizuoka Prefecture Located in the center of Japan • Situated between Tokyo and Nagoya One hour by bullet train to Tokyo and NagoyaTwo hours by bullet train to Osaka • Economic activity within a 300 km radius of Shizuoka accounts for 70% of Japanese GDP Per capita income ranked 2nd(out of 47 prefectures) • Population: 3.7 million (tenth out of forty-seven) • Area: 7,780 sq. km.(thirteenth out of forty-seven) • Per capita income: approx. \3.16 million (second out of forty-seven) Osaka 2 hours 300 km radius Nagoya 1 hour Tokyo 1 hour 5

  6. Overview of Shizuoka: Stable Economic Foundation Pianos Transportation equipment 22.3% 28.6% 15.7 trillion yen Plastic products 3.7% Fourth in Japan Manufacturing equipment 4.2% 11.8% 4.6% Electrical devices Pulp/paper 7.1% 10.0% 7.4% Food products Chemicals Beverages, tobacco products. livestock feed “Production Prefecture”—Japan’s Leading Area Balanced Industrial Structure • Revenue from manufactured products (Fourth highest overall in Japan)First in Japan for:Beverages/tobacco products/livestock feed, electrical devices, pulp/paperSecond in Japan for:Transportation equipment • Founding place of global brand name companies, including Suzuki, Honda, and Yamaha • Home prefecture of the founders of Toyota, Honda, and Yamaha Total revenue from manufactured products (2012) Major Shizuoka-based companies 6

  7. Overview of Shizuoka: Size of Economy GPP larger than GDPs of Qatar and Kuwait 　　　・Gross prefectural product (GPP): USD 195 billion 　　　・Ranked tenth in Japan (out of forty-seven prefectures) GPP of Shizuoka/GDPs of selected countries in 2011 (billions of US dollars) Shizuoka 7

  8. Overview of Shizuoka: Transportation Infrastructure Mt. Fuji Shizuoka Airport Shin-Tomei Expressway • Domestic routes: four lines Forty-two round trips per week • International routes: four lines Thirteen round trips per week International destinations: Seoul, Shanghai, Wuhan, Taipei Port of Tagonoura Tomei Expressway Port of Shimizu Tokaido Shinkansen Opened in April 2012, the Shin-Tomei Expressway runs along the Tomei Expressway, the main highway in Japan, giving Shizuoka a particularly developed transportation network. Port of Omaezaki Suruga Bay’s port Port of Shimizu: 24.5 trips per week; destinations include China, Southeast Asia, America, Europe, and more Port of Shimizu 8

  9. Overview of Shizuoka: Active Industrial Location One of the Leading Prefecturesfor New Business Startups Number of global companies in Shizuoka by country 2008: 1st out of 47 (144 businesses) 2009: 5th out of 47 (44 businesses) 2010: 4th out of 47 (41 businesses) 2011: 3rd out of 47 (37 businesses) 2012: 2nd out of 47 (73 businesses) 2013: 6th out of 47 (77 businesses) 46 global companies with bases of operations established in Shizuoka Attracting Global Companies Abridged list of global companies in Shizuoka Germany France Switzerland Liechtenstein Austria Netherlands • Eaton Electrical • hightech metal investment • ABB • Schindler • Cosmelor • Air Liquide • Triumph • Böhler-Uddeholm • DSM Nutritional Products 9

  10. Overview of Shizuoka: Abundant Tourism Resources Mt. Fuji Shizuoka Airport Asagiri Food Park and Mount Fuji Seoul Shanghai Wuhan Taipei Hong Kong In addition to Mount Fuji, a UNESCO World Heritage Site, Shizuoka is also home to the Izu Peninsula, one of the premier tourism destinations in Japan. Shizuoka also prides itself on having the largest number of Japanese-style inns (ryokan) and hot spring facilities in Japan. Singapore Shirakabe-so hot springs 10

  11. 2. Shizuoka’s Fiscal Status Shizuoka Prefecture “Diamond Fuji,” as seen from Lake Tanuki

  12. Shizuoka’s Fiscal Status: Changes in Revenue Reversal of decline in tax revenue 12

  13. Shizuoka’s Fiscal Status: Changes in Expenditures Reduction in expenditures through administrative reform • 20% reduction in staff over ten years • Over 50% reduction in investment expenses over ten years Investment expenses Mandatory expenses Others Mandatory expenses as percentage of total Investment expenses as percentage of total 1,500 60.0% 54.5% 47.9% 50.0% 1,000 40.0% Percentage of total 28.6% 30.0% Billions of yen 500 15.5% 20.0% 10.0% 0 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Fiscal year (April to following March) 13

  14. Shizuoka’s Fiscal Status: Debt Status Primary balance in surplus 14

  15. Shizuoka’s Fiscal Status: Medium-Term Financial Outlook High marks on all national government-established fiscal indicators All four indicators within national standards *If an indicator (not including the future burden ratio) is exceeded, national government gains increased authority in management, including requiring authorization for bond issuance 15

  16. 3. Shizuoka’s Bond Management Shizuoka Prefecture

  17. Management of Prefectural Bonds Ratings for Shizuoka-Issued Bonds Issuance policy • Type: Japanese domestic municipal bond • Maturity periods (years): 5, 10, 20, 30 • BIS Risk Weight: 0% Local Government Bond (LGB) creditworthiness and Safety of Japanese LGBs • LGBs backed by national government via strong financial support and stringent oversight • Local government bankruptcy and LGB default not allowed under current Japanese legal system • Due to above-mentioned factors, LGB default has never occurred • LGBs assigned 0 % risk weight under the standardized approach of BIS regulations (Basel II) Rating and Investment Information, Inc. Moody’s AA+ Stable Aa3 Stable Rating Company Comment (February 2014) Rating Company Comment (December 2013) • Relatively low debt burden when compared with other local government organizations • Excluding supplementary debt, prefectural debt balances have continuously decreased; marked by healthy fiscal management and solid local economic fundamentals • Prefectural administration focusing on stimulating the local economy and maintaining a healthy fiscal status (JGB Rating: AA+ Stable) (JGB Rating: Aa3 Stable) Sinking fund accumulation rule Accumulation of 3.7% (1/27) of total prefectural bond issuance after three-year deferral period (lump-sum payment at maturity) 17

  18. Prefectural Bond Issuance Plan ●Shizuoka Prefectural Bonds Issuance plan for fiscal 2014 Issue plans from November 2014 onward • 10-year: 40 billion yen (20 billion each in November 2014 and March 2015) • 5-year: 10 billion yen (March 2015) • Total: 50 billion yen Note: Non-residents and non-domestic entities exempt from paying taxes on book-entry transfer LGB interest; procedures simplified as of June 2010 18

  19. 4. Reference Materials Shizuoka Prefecture • Japanese Local Government Bonds • Fiscal Health Indicators • Changes in Revenue for General Accounts • Changes in Expenditures for General Accounts • Changes in Prefectural Bond Balance in Billions of Yen • Changes in Primary Balance in Billions of Yen • Status of Sinking Fund Reserves in Billions of Yen • Financial Statements in Billions of Yen (Fiscal 2012) Yokoyama Taikan, Gunjo Fuji [Ultramarine Fuji] Shizuoka Prefectural Museum of Art

  20. Reference: Japanese Local Government Bonds Simplification of tax exemption procedures Non-residents/Non-domestic entities Qualified foreign intermediary (including Clearstream and Euroclear) Specified transfer institution (subcustodian) Director of tax office with jurisdiction over the specified transfer institution Japanese local government bonds have a risk weight of zero as a result of powerful national fiscal backing, a tax system designed to prevent failure, and other measures as described below. 1．Local issue tax system • When determining budgets for each fiscal year, the national government sets forth an estimate of revenues and expenditures for all local governments and guarantees revenue shortfalls. • As a part of this system, the national government provides backing for the redemption of the principal and interest of LGBs, thereby strengthening the repayment capacity of such bonds by local governments. 2．Bond issuance approval system as an early correction measure ■　Local governments must confer with the national government before issuing bonds and receive confirmation that the planned issuance is reasonable and will not negatively affect the local governments' future ability to repay principal and interest on their bonds. As of January 1, 2008, tax exemption measures apply with respect to interest on book-entry transfer LGBs for non-residents and non-domestic entities that satisfy the following conditions. Prior to that, a 15% source deduction was subtracted from interest earned on Japanese LGBs by non-residents and other qualifying groups. • Settled through the Japan Securities Depository Center, Inc. • Non-resident holds the bonds through a qualified foreign intermediary, qualified account management institution, or other such entity • Submits the appropriate tax exemption form In June 2010, the following measures took effect, aimed at simplifying and expanding eligiblity for tax exemption procedures. These affect interest earned on book-entry transfer LGBs for non-residents. In addition, these changes enabled settlement with Euroclear. • Elimination of separate individual bookkeeping under certain conditions; shift of tax exemption procedure responsibility from individual issuers to each transfer institution • Expansion of the range of qualified foreign securities investment trusts; tax exemption status for redemption profit and loss 20

  21. Reference: Fiscal Health Indicators • The April 2008 implementation of the Act on Assurance of Sound Financial Status of Local Governments ensures the objective representation of local governments’ fiscal situation. Under this law, the following four fiscal indicators have been set forth as Fiscal Health Evaluation Ratios to evaluate fiscal health and the necessity of restructuring. Every fiscal year, all local governments are required to have their Fiscal Health Evaluation Ratios (as based on figures for the previous fiscal year) examined by an evaluation committee, whose results are reported to the local legislature and published as public information. • If one or more of the Fiscal Health Evaluation Ratios exceeds the early warning limit, the government entity will be subject to an external audit and required to draft a Fiscal Improvement Plan. If the three indicators excluding the Future Burden Ratio worsen and any one of these indicators exceeds the reconstruction limit, the entity will be required to submit to stricter oversight by the national government, including partial restrictions on bond issuance. Real deficit ratio Amount of general account-based real deficit as a proportion of standard fiscal scale; indicates deficit level and deterioration of fiscal management Illustration Fiscally sound Healthy range (obligation to maintain indicators and publicize information) ●Examination by evaluation committee, reporting to local legislature, publishing of data Consolidated real deficit ratio Amount of real deficit or amount of fund shortage for all accounts (including public corporation accounts) as a proportion of standard fiscal scale; indicates deficit level and deterioration of fiscal management by combining deficits and surpluses of all accounts Early warning limit Early warning stage (independent efforts towards improvement) ●Creation and publishing of Fiscal Improvement Plan (approved by local legislature) ●Mandatory external audit ●Drafting of Fiscal Improvement Plan progress reports for public release and submission to local legislature Real debt payment ratio Amount of redemption of principal and interest covered by general accounts as a proportion of fiscal scale, serving as an indicator of the amount payable for local government bonds and cash flow levels. Reconstruction limit Fiscal reconstruction stage (partial takeover by national government) ●Creation and publishing of Fiscal Reconstruction Plan (approved by local legislature) ●Mandatory external audit ●Discussion with and approval of Fiscal Reconstruction Plan by Minister for Internal Affairs and Communications ●Drafting of Fiscal Reconstruction Plan progress reports for public release and submission to local legislature Future burden ratio Real debt, including investment entities engaging in local public corporations and loss compensation, to be covered by general accounts as a proportion of fiscal scale, serving as an indicator of the current balance of local government bonds and bonds likely to be paid in the future by general accounts, and the extent of pressure on future finances. Fiscal collapse 21

  22. Reference: Changes in Revenue for General Accounts* *Fiscal 2014 figures are initial budget estimates; actual figures provided for fiscal 2013 and before 22

  23. Reference: Changes in Expenditures for General Accounts* 23 *Fiscal 2014 figures are initial budget estimates; actual figures provided for fiscal 2013 and before

  24. Reference: Changes in Prefectural Bond Balance in Billions of Yen 24 General account Special account Corporate account

  25. Reference: Changes in Primary Balance in Billions of Yen 25

  26. Reference: Status of Sinking Fund Reserves in Billions of Yen Accumulation of 3.7% (1/27) of total prefectural bond issuance after three-year deferral period 26

  27. Reference: Financial Statements in Billions of Yen (Fiscal 2012) Balance sheet Statement of administrative costs Statement of changes in net assets Statement of cash flow 27

  28. Shizuoka Prefecture Address: Finance Division, Management Department 9-6 Ote-machi, Aoi-ku, Shizuoka-shi, Shizuoka Prefecture 420-8601 Phone: 054-221-2036 E-mail: zaisei@pref.shizuoka.lg.jp URL:http://www.pref.shizuoka.jp/a_foreign/english/index.html

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