Evaluation of The Financial Management of Japan's Local Governments

ABSTRACT

This report presents an evaluation, from a microeconomic perspective, of the financial management in Japan's local governments. The evaluation focuses on the general accounts of the 47 prefectural and 13 major (ordinance-designated) city governments, and ranks each government unit based on an established index. While the ranking of local governments in terms of their financial performance is done systematically in the US, there are not many instances of such evaluations in Japan. As is made evident in this report, the budgets of local governments have been steadily deteriorating since the 1990s. Such a reality makes it all the more important that a neutral evaluation of their financial management be conducted. In this report, the US ranking system is used as a point of reference in conducting the evaluations of local Japanese governments.

The primary reason for limiting the focus of this report to prefectural and major city governments was the lack of adequate data records. As carrying out an analysis of all local governing bodies in Japan would also fail to meet time constraints, I have decided that the 47 prefectural and 13 major city governments would be the main target of this report's analysis. Though pre-existing public data was used as a foundation, an Internet survey sent to the 47 prefectural governments (August, 2003) was also implemented for this report. The questions and answers of this survey have been included in the end of the report as supplementary material. All 47 prefectural governments responded to the survey, and I would like to take this opportunity to thank all of them for their cooperation.

It is not possible to attain a complete picture of local government finance administration without also understanding the financial status of other non-general accounts. Thus, in addition to evaluating the budget balances based on the general accounts, this report also touches on several other important factors that are seen to directly or indirectly affect the budget balance. The books closings, for instance, with regard to public enterprise accounts, semi-public joint venture companies, and land development companies have significant affects on local government finances and were looked at in this report. However, due to insufficient data in these areas, the analysis of these factors may not necessarily have empirical support. Complete transparency of such account settlements will be very important in planning the reforms of local government finances going forward.

In terms of policy measures, the results of this analysis point to two important problems that are imminent and require a plan of action: 1) the problem of local government bond redemption (which will arise in 2005) and 2) the problem of retirement benefits (which will arise in 2007). Even though the weight of these future risks is widely acknowledged, the results of this survey corroborate the reality that appropriate action is lacking. These are the administrative issues that require the most immediate practical engagement.