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TEXT-S&P summary: Japan Finance Organization for Municipalities

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(The following statement was released by the rating agency)

Oct 11 - =============================================================================== Summary analysis -- Japan Finance Organization for Municipalities - 11-Oct-2012 =============================================================================== CREDIT RATING: AA-/Negative/A-1+ Country: Japan Primary SIC: Sovereign Mult. CUSIP6: 471060 Mult. CUSIP6: 471068 =============================================================================== Credit Rating History: Local currency Foreign currency 27-Jan-2011 AA-/A-1+ AA-/A-1+ 26-Sep-2008 AA/A-1+ AA/A-1+ =============================================================================== Rationale

The ratings on Japan Finance Organization for Municipalities (JFM) reflect ourview that there is an "extremely high" likelihood of extraordinary support toJFM from the government of Japan in the event of financial distress, arisingfrom the organization's very important policy role and its integral link withthe central government in Japan's local and regional government (LRG) sector.

We assess JFM's stand-alone credit profile (SACP, which excludes potentialextraordinary government support) as 'a+'. Its loan asset quality is verystrong, with no nonperforming loans (NPLs) despite 100% concentration in onesector: all loans are made to Japan's LRGs and their related entities with LRGguarantees. In addition, JFM has had no credit defaults on its loans since theinception of JFM's predecessor entity in 1957. Although Standard & Poor'sRatings Services recognizes the heavy indebtedness of Japan's LRGs as aconstraining factor, the status of JFM as a preferred creditor to LRGs helpsmaintain its 0% default rate.

Standard & Poor's uses its Government Related Entities (GRE) criteria toassess the credit quality of JFM. Our assessment is based on JFM's:

-- "Very important" role as the primary public financial institutionsupplying long-term, low-cost financing for Japan's LRGs to fund nationalpolicy targets and its status as a preferred creditor to the LRG sector forbasic infrastructure-related funding.

-- "Integral" link with the government of Japan given that JFM's lendingconstitutes an integral part of the system support under the Local BorrowingProgram (LBP) provided to LRGs by the Ministry of Internal Affairs andCommunications (MIC).

Despite the central government divesting completely from JFM as of October2008, we believe JFM's link to the government remains unchanged. The centralgovernment still provides its unconditional and irrecoverable guarantee toabout 60% of JFM's outstanding debt. Currently, the organization is jointlyowned by all LRGs in Japan, and the ratings incorporate the ongoing supportthat JFM receives from these bodies.

Liquidity

We consider JFM's liquidity position as adequate, backed by its conservativeliquidity policy and stable long-term funding. Its long-term funding ratioremains above 95% and its short-term wholesale funding to total wholesalefunding has been about 30% over the last five years. JFM has good access toJapan's domestic market--which we consider deep and liquid--and theunconditional and irrevocable guarantee of the central government is alsoavailable for part of its financing.

Outlook

The negative outlook reflects the outlook on the sovereign ratings on Japan(AA-/Negative/A-1+), which constrain the outlook on JFM under our criteria.Any upward movement of the rating would depend on positive changes in thesovereign credit quality of Japan, hence an upgrade is unlikely unless wechange the sovereign rating.

We do not expect material changes to JFM's very important policy role andintegral link to the government. Also, we believe that JFM's asset quality islikely to remain stable, given its prudent asset management, and that its ALMrisk management will improve further. The ratings could come under furtherpressure if JFM's asset quality deteriorates significantly, or its volume ofassets expands to undermine its prudent risk management and financial healthof the organization, thus leading to a significantly lower SACP. The ratingscould also come under further pressure if we see evidence of a lowerlikelihood of central government support.

Related Criteria And Research Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010.

((Bangalore Ratings Team, Hotline: +91 80 4135 5898Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, ReutersMessaging: Debanjali.Ghosh.reuters.com@reuters.net))

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