10-year Inflation-Index Bonds (JGBi)

10-year Inflation-Index Bonds (JGBi) 10-year Inflation-Index Bonds (JGBi), introduced in March 2004, are the government bonds of which principal amount fluctuates in proportion with the consumer price index i.e. CPI excluding fresh food. While this new instrument meets the needs of investors who want to avert inflationary risks, it can also serve as a means of observing the expected inflation rate in the market. With conventional fixed-rate coupon-bearing JGBs, the principal at the time of issuance remains unchanged till redemption, and the interest amount remains the same for biannual interest payment. On the contrary, with InflationIndexed Bonds, the principal amount fluctuates in proportion with the CPI. Therefore, if the CPI increases after issue, the principal amount also increases according to the rate of inflation, and vice versa, and at maturity they are redeemed at the adjusted principal amount (hereinafter called inflationadjusted principal amount). Interest amount also changes according to the rate of inflation as it is calculated by multiplying the inflation-adjusted principal amount at the time of interest payment by the pre-fixed coupon rate. Inflation-adjusted principal amount is calculated by multiplying face value by indexation coefficient. Indexation coefficient, which indicates the level of fluctuation from the time of issuance, is calculated by dividing Ref index for the day by Ref index at the time of issuance (specifically, the 10th day of the issue month). Eligible Purchasers of Inflation-Indexed bonds were previously limited to financial institutions and foreign governments - individuals, non-financial corporations and foreign investors were not allowed to hold them. However, from FY2005, foreign juridical persons excluding those subject to taxation on interest from JGBs have been made eligible for purchase. Proprietorship of Inflation-Indexed bonds is limited to the following:
1.The Japanese government 2.Foreign juridical persons (including foreign governments, foreign local

governments, foreign central banks, international organizations and foreign government agencies, but excluding entities subject to taxation on interest from JGBs.) 3.Financial institutions, financial instruments firms and others designated in Articles 8(1) or (2) of the Act on Special Measures Concerning Taxation 4.Specified investment corporations and others designated in Articles 9-4(1),(2) or (3) of the Act on Special Measures Concerning Taxation 5.Public corporations designated in Article 11(1) of the Income Tax Act, and

charitable trusts and others designated in Article 11(2) of the above mentioned act 6.Foreign juridical persons which are trustees of qualified foreign securities investment trusts, as designated in Article 5-2(1) (limited to the part pertaining to book-entry transfer national government bonds prescribed in the same paragraph) of the Act on Special Measures Concerning Taxation 7.Trustees of trusts provided that the interest on the Inflation-Indexed bonds included in the assets of the trust is attributed to those specified in 1. to 5. above 8.Trust companies eligible for the provisions of Article 176(1) or (2) of the Income Tax Act with respect to the assets in their trusts, such as certain securities investment trusts (excluding those specified in 3. and 7. above.) 9.Call loan brokers defined by Article 1-9( ) of the Enforcement Order of the

Financial Instruments and Exchange Act and designated in Article 8(3) of the Act on Special Measures Concerning Taxation
[Conceptual scheme of Inflation-Indexed Bonds]

Ref Index and Indexation Coefficient