Up-to-date Documents on Local Autonomy in Japan No.7

The New System for Promoting Soundness
in Local Finances in Japan

Yoshihiko KAWATO
Associate Professor
Faculty of Regional Policy, Takasaki City University of Economics

Council of Local Authorities for International Relations (CLAIR)
Institute for Comparative Studies in Local Governance (COSLOG)
National Graduate Institute for Policy Studies (GRIPS)Except where permitted by the Copyright Law for “personal use” or “quotation” purposes, no partof this booklet may be reproduced in any form or by any means without the permission. Any
quotation from this booklet requires indication of the source.

Contact
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Institute for Comparative Studies in Local Governance (COSLOG)
National Graduate Institute for Policy Studies (GRIPS)
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Foreword
The Council of Local Authorities for International Relations (CLAIR) and the National
Graduate Institute for Policy Studies (GRIPS) have been working since FY 2005 on a “Project on theoverseas dissemination of information on the local governance system of Japan and its operation”.
On the basis of the recognition that the dissemination to overseas countries of information on theJapanese local governance system and its operation was insufficient, the objective of this project was
defined as the pursuit of comparative studies on local governance by means of compiling in foreign
languages materials on the Japanese local governance system and its implementation as well as byaccumulating literature and reference materials on local governance in Japan and foreign countries.
In FY 2009, we continued to compile “Statistics on Local Governance (Japanese/English)”,“Up-to-date Documents on Local Autonomy in Japan”, “Papers on the Local Governance System
and its Implementation in Selected Fields in Japan” and “Historic Development of Japanese Local
Governance”. We also continued to conduct a search for literature and reference materials concernedwith local governance in Japan and overseas to be stored in the Institute for Comparative Studies in
Local Governance (COSLOG).
If you have any comments, suggestions or inquiries regarding our project, please feel free tocontact the Council of Local Authorities for International Relations (CLAIR) or the Institute forComparative Studies in Local Governance (COSLOG) of the National Graduate Institute for Policy
Studies (GRIPS).

February 2010
Michihiro Kayama
Chairman of the Board of Directors
Council of Local Authorities for International Relations (CLAIR)
Tatsuo Hatta
President
National Graduate Institute for Policy Studies

PrefaceThis booklet is one of the results of research activities conducted by the Institute for Comparative
Studies in Local Governance (COSLOG) in FY 2009 as one part of a project that started in FY 2005
entitled “Project on the overseas dissemination of information on the local governance system ofJapan and its operation”, in cooperation with the Council of Local Authorities for International
Relations (CLAIR). For the purpose of implementing this project, a “Research committee for the
project on the overseas dissemination of information on the local governance system of Japan and its
operation” has been set up, and a chief and deputy chiefs with responsibility for the project havebeen designated from among the members concerned with each research subject.
“Up-to-date Documents on Local Autonomy in Japan" (2009、Volumes 6,7) were written under the
responsibility of the following two members:（Chief）
Kiyotaka Yokomichi, Professor of the National Graduate Institute for Policy Studies
Yoshihiko Kawato, Associate Professor of Takasaki City University of Economics
This booklet, the 7th Volume in the series, was written on the subject of the new systemfor promoting soundness in local finances in Japan.

The content of this paper provides a summary explanation of the significance, the content
and the formation process of the new system of financial soundness in local governments thathas emerged in recent years.
Finally, I would like to express my appreciation to Associate Professor Kawato, and also to othermembers of the research committee for their opinions and advice. Furthermore, I would like to thankMr. Maurice Jenkins for his English translation.
February 2010
Hiroshi Ikawa
Chairperson
Research committee for the project on the overseas dissemination of informationon the local governance system of Japan and its operation
Professor
National Graduate Institute for Policy Studies

The New System for Promoting Soundness in Local Finances in Japan
Yoshihiko KAWATO
Associate Professor
Faculty of Regional Policy, Takasaki City University of Economics

1 A new system aimed at achieving soundness in local government finances
Recently, a new system has come into being aimed at achieving soundness in local government
finances. This paper aims to give an overview of what kind of system this is and how it came into
being.
1-1 The formation of the new system
If we look at the state of local government finances in recent years, we can see steadily growing
severity, as illustrated by such examples as the bankruptcy of Yubari City in Hokkaido in 2006, andefforts to get to grips with the restoration of sound finances on the basis of the Special Measures
Law for the Promotion of the Rebuilding of Local Finances. The cause of the bankruptcy of YubariCity can be found in the expenses that Yubari City had to bear following the closure of the local coalmine and the failure to realize a planned tourism and resort development project. Specific instancesthat can be cited are the expiry in 2001 of the validity of the “Emergency Measures Law to Promote
Coal-mining Districts”, which had as its objective local promotion following coal-mine closures, andthe reduction in local allocation tax as a result of central government administrative financial
reforms (Hobo, 2007).
On the basis of the continuing severity of local finances, the government enacted in June 2007 the“Law Relating to the Financial Soundness of Local Governments, etc.” (hereafter, Local FinanceSoundness Law). The objectives of this law were set out as follows: “To establish a system ofmaking public announcements concerning the ratios of local government finances, and to enablelocal governments to decide on a system for the speedy achievement of financial soundness andfinancial rebuilding as well as formulating plans aimed at promoting the sound management ofpublicly managed enterprises. At the same time, there is a need consider administrative and financial
measures for the implementation of such plans, and in this way to contribute to the financial
soundness of local governments as a whole.” (Local Finance Soundness Law, Article 1).
Systems aimed at putting local government finances on a sound footing have a long history.
Through the enactment in 1955 of the Special Measures Law for the Promotion of the Regenerationof Local Finances, and the enactment in 1952 of the Law on Publicly Managed Local Enterprises,systems were established to restore a sound financial basis to local governments with deficits andpublicly managed enterprises with deficits respectively1.
Taking as a basis the issues raised by the hitherto prevailing systems of bringing soundness tolocal finances, the paper will now give an overview of the points of improvement in the new systemcreated by the Local Finance Soundness Law2. Looking first at the problem points in the prevailingsystem of achieving financial soundness, these can be listed as follows. ① the financial information1

shows in an easily understandable manner is inadequate, ② the only criteria are those ofreconstruction organizations, and there is no function for a speedy correction of errors, ③ only
indicators for income and expenditure focused primarily on the general accounts are given
consideration, and even if issues in the financial information about stock (liabilities) are cited, they
are not taken up, and ④ there is no speedy correction function with reference to publicly managed
enterprises. In short, under the hitherto prevailing system, local governments could not issue local
reconstruction bonds without going through the procedure of formulating a financial reconstruction
plan in the form of an application and obtaining the consent of the Minister of the Interior (nowMinister of Internal Affairs and Communication (hereafter, MIC)), and thereafter carrying theprocess of financial reconstruction.
Against the background of this situation, the following improvements were made on the basis of
the new system created on the basis of the Local Finance Soundness Law. ① Establishment ofindexes and full information disclosure: establishment as flow indexes of the real deficit ratio, theconsolidated real deficit ratio, and the real debt service ratio; establishment as stock indexes of the
future burden ratio = indexes by real liabilities, including public enterprises, third sector enterprises,
etc.; attachment of the audit inspection report and reporting to the assembly, together with a publicannouncement. ② Achievement of financial soundness through independent improvement efforts
at the early financial soundness stage: formulation of a financial soundness plan (required to beapproved by the assembly) and obligation to request an internal audit; requirement for a report to theassembly and a public announcement on the progress of implementation within every fiscal year; inthe event that the early achievement of financial soundness is deemed to be outstandingly difficult,necessary recommendations are to be made by the Minister of MIC or the prefectural governor. ③
Definite rebuilding through involvement of the central government, etc., at the stage of financial
rebuilding: formulation of a financial soundness plan (required to be approved by the assembly) andobligation to request an internal audit; there is a choice whether or not to seek consultation with andthe agreement of the Minister of MIC concerning the financial rebuilding plan (in the event of
non-agreement, there are restrictions on the issue of local bonds, excluding disaster rehabilitation
projects, etc.; in the event of agreement, it is possible to issue local bonds (rebuilding transfer special
bonds), the redemption deadline of which falls within the period of the plan in order to transfer thebalance of the financial shortfall); in the event that financial management is deemed not to conformwith the plan, central government will recommend budget changes, etc.
1-2 Progress of formation of the new system
The beginning of getting to grips with the enactment of a new law aimed at the achievement offinancial soundness can be found in a report issued in July 2006 by the “Round Table Vision of
Decentralization in the 21st Century”, organized by the then Minister of MIC (Hiraoka; Mori, 2008).
This report identified the following 6 problem areas: ① excessive intervention by central
government and the financial dependence of local governments; ② an increase in the accumulated
debts of local governments; ③ a drop in sustainability in the context of a declining population; ④
the inadequacy of efforts to put together a package of factors that make a particular locality uniquely2attractive; ⑤ inadequacy of participation and governance by local residents; and ⑥ the actual lackof transparency of local finances. In addition, the report also showed an awareness that a national
average that exceeded the national minimum would be virtually impossible to sustain in a context ofdeclining support, and that economic vitality would be lost unless the continuing growth of afinancial burden was brought to a halt. Specifically, the following 5 principles of decentralization
were set out: ① Freedom and responsibility; ② Small government; ③ Individual competition;④ Governance by residents; and ⑤ Thorough information disclosure3.
If we look at the connections between the suggestions made by the “Round Table Vision of
Decentralization in the 21st Century” and the Local Finance Soundness Law, we find that reference
is made to strong connections between the said law and a “legal system of financial rebuilding after
collapse”; there are also “indications of need for disciplined restoration of local finances in thecontext of a feeling of crisis at having reached the point at which a local government will collapse asa result of management failure”. Against this background, the Vision suggested a time-scale of lessthan 3 years for a speedy start on preparations for an examination of a “legal system of financial
rebuilding after collapse”. Moreover, the Cabinet resolution of July 7, 2006, entitled “Basicguidelines concerning economic and financial management and structural reform, 2006” specified an“appropriate re-evaluation of rebuilding laws and regulations”4. Subsequent to this, with a view to
examining the desired state of a financial rebuilding system for local governments, the “ResearchGroup on a New Local Financial Rebuilding System” was established in August 2006, and in
December of the same year, brought together the results of its examination in a document entitled,“Report of the Research Group on a New Local Financial Rebuilding System5”. Issues that werepointed out in this Report included a lack of disclosure of easily understandable financial
information and the lack of any mechanism to enable corrections to the system to be made. In
response to this situation, the Report suggested that a mechanism should be established to set out andmake public financial indexes, and at the same time establish a new system aimed at a speedy
achievement of financial soundness.
This paper will aim to provide an overview of postwar developments up to the enactment of the
Local Finance Soundness Law, and of the present financial state of local governments, and will also
introduce the contents of the said law.

2 The history and the present state of attempts to achieve the financial
soundness of local governments
Firstly, the paper will look at the growing severity of the situation of local finances since the1970s in the light of the history of the promotion of the soundness of local finance. Against thisbackground, the paper will then give an overview of the present situation.
2-1 The postwar history of the efforts to achieve sound local finances
The situation of local finances has become increasingly severe since the 1970s. In 2001, Iwaba
wrote as follows: “At the present time (2001), the financial deficit and the accumulation of debt must
be looked at as, so to speak, a transformation of the basis of the deficits that have afflicted Japanesefinances since the 1970s. It is also fair to say that this deficit and accumulated debt on the part of3

local finances constitutes the most distorted part of the structural characteristics of the financial
system, and has contributed to the enlargement of the financial deficit that is dominated by the
deficit situation of the country as a whole.” (Iwaba (2001), p 6. The bracketed part within thequotation has been added by the author).
Furthermore, when we look at the 1990s, we can see that the financial situation is moving towardcrisis point. Namekata (2001) identified the structural characteristics of local finances in the 1990s in
terms of the following 2 factors. ① The steep increase in accumulated local debts: the total of thebalance of local bonds, the balance of local public enterprise bonds, and the balance of the special
accounts for local allocation tax6, exceeded ¥180 trillion in fiscal 2000, thus approaching 37% as apercentage of GDP 7 . ② The increasing distortions shown by the local fiscal situation (therestructuring of financial relationships between local governments): the specific content is as follows.
(a) the decline of the revenue guarantee function as a result of the rise in the bond flotation
appropriation ratio and the increasing subsidization of local allocation tax in respect of enterprises
specially designated as falling under government policy leadership; (b) strengthening of the Local
Finance Equalization Grants System, whereby funds were transferred from urban local governments
to financially weak local governments so as to achieve a guarantee of revenue; (c) a reduction innational treasury subsidies and an increase in the burden on local governments; (d) a deepening of
the financial crisis centered on large cities. It should also be noted that as a cause of (d), it is possible
to cite the decline in revenue derived primarily from 2 taxes (personal corporate tax and corporate
business tax) caused by the instability resulting from the collapse of the bubble (pp 41-66), The
financial crisis situation in Japan, affecting both the national and the local sectors, continued after
entry into the 2000s.
In response to this kind of crisis situation, the Koizumi Cabinet implemented structural reforms, aspart of which the Council on Economic and Fiscal Policy issued in June 2001, an “Outline of Basic
Policies for Macroeconomic Management and Structural Reform of the Japanese Economy” ‘(theso-called “Large-Bone Policy (2001)”), which showed the basic direction to be followed. As one ofseven projects aimed at structural reform, the above document specified a “Program of Local
Autonomy and Revitalization”, setting out the following directions of reform in terms of therelationship between central government and local governments: ① “Revitalization throughindividuality and competition” in a shift away from “Balanced development”; ② Strengthening of
the foundation of local government administration so that it can become a receptacle fordevelopment, and at the same time, promotion of municipal mergers in support of this strengthening
policy; ③ clarification of the relationship between benefits and burdens; and ④ a reduction in
subsidies, local allocation tax, etc. Furthermore, in the following year, in June 2002, the government
issued a document entitled “Basic Policies for Economic and Fiscal Management and Structural
Reform 2002” (the so-called “Large-Bone Policy of 2002”). The policies aimed “to examine theideal pattern of tax revenue distribution in terms of the “trinity reform”, including national treasury
subsidies and obligatory shares, local allocation tax, and transfer of tax revenue, and to set a target ofachieving tax reforms within one year”.
The result of this was the fundamental direction of the “trinity reform”, as set out in the policy

4document of June 2003, entitled “Basic Policies for Economic and Fiscal Management andStructural Reform 2003” (the so-called “Large-Bone Policy of 2003”). The policies set the period
from fiscal 2004 through fiscal 2006 as the period for reform, the content of which can be defined interms of the following objectives. ① to abolish and reduce the national treasury subsidies andobligatory share to approximately 4 trillion yen; ② to maintain the financial adjustment function of
local allocation tax, but to restrain the revenue guarantee function; and ③ to transfer about 80% ofrevenue sources from national treasury subsidies to local revenue, primarily focusing on reinforcing
fundamental tax revenue, and to expand the autonomous rights of local governments to levy taxation(“Large-bone policies 2001-2003”, Shigemori, 2004). Reforms based on these policies were taken
forward, but the local financial situation remained as before in a very precarious condition. The
following section will give an overview of the present state of affairs.
2-2 The present financial state of local governments
This section gives an overview, in terms of the current state of local government finances, of the
final settlement of ordinary accounts8 and of enterprises.
2-2-1 The settled ordinary accounts of local governments9
Itemized below are details of expenditures and revenues, of closing balances and of the flexibilityof financial structures.
(1) Expenditures: The figure for expenditures in fiscal 2007 was ¥89.1476 trillion, a fall, after 8
successive years of decline, of ¥63 billion (for details of the decline since fiscal 2003, see
Diagram 1). In specific detail, the change from fiscal 2006 to fiscal 2007 is as follows. As a resultof such circumstances as reform of the system and a natural increase, expenses concerned withsocial security increased (an increase of ¥717.6 billion), and retirement expenses increased
sharply by ¥426.8 billion, due to the large number of baby-boomers who reached retirement age.
On the other hand, staff salaries decreased by ¥280 billion, while investment expenditures
decreased by ¥915.4 billion, showing that strenuous efforts to reduce expenditures were
continuing.
(2) Revenues: Total revenues for fiscal 2007 amounted to ¥91.1814 trillion, a decrease of ¥346.9
billion from fiscal 2006, marking the 8th successive year of a decline (for details of changes since
fiscal 2003, see Diagram 2). As a result of such factors as the tax revenue transfer from income
tax and the cessation of the fixed rate tax reduction, local tax revenue increased for 4 years insuccession, and local allocation tax, including emergency financial countermeasure bond issues,also effectively decreased for the fourth successive year. Furthermore, as a result of such factors
as restrictions on national expenditures concerned with local publicly operated enterprises,
national treasury subsidies also decreased for the sixth year in succession.
(3) Closing balances: From fiscal year 2006 into fiscal year 2007, the effective credit closingbalance was ¥1.3597 trillion yen, an overall decrease of ¥164.8 billion yen resulting from the factthat the fall in revenues was greater than the fall in expenditures. It should also be noted that 25
public bodies had effective debit closing balances (1 prefecture, 24 municipalities).
(4) The flexibility of financial structures: From fiscal 2006 into fiscal 2007, the operating balance5ratio rose by 2 points as a result of such factors as the decrease in local allocation tax, reaching
93.4%, and the financial structure became increasingly rigid. However, in the same period, thereal debt service ratio (the figure resulting from the indices established later on the basis of the
Local Finance Soundness Law) fell overall by 2.1 points to 12.8% as a result of such factors as
the reflection in the general revenue figures to which appropriations for public bond expenses
were allocated in line with the actual state of the city planning tax.

hundred million yen(Diagram 1) Changes in expenditures

Fiscal Year

Source: Ministry of Internal Affairs and Communications, Overview of closing balances of ordinaryaccounts of local governments for fiscal 2007, (Nov. 2008)

hundred million yen(Diagram 2) Changes in revenues

Fiscal Year

Source: Ministry of Internal Affairs and Communications, Overview of closing balances of ordinaryaccounts of local governments for fiscal 2007, (Nov. 2008)

2-2-2 Local public enterprises10
An overview of the state of local public enterprises in fiscal year 2007 is as follows.
(1) Number of enterprises and of employees
At the end of fiscal year 2007, the number of organizational bodies operating local publicly

6managed enterprises was 1,863 (including 5 bodies managing local public enterprises in the form
exclusively of enterprise organizations and partial-affairs associations as well as the 23 special
wards of metropolitan Tokyo). Of this total number, 47 were prefectures, 17 ordinance-designatedcities, and 1, 799 general cities, towns and villages. The number of enterprises thus managed was
9,210; in recent years, there has been a declining trend (for shifts since fiscal 2003, see Diagram 3),
and the number of enterprises in fiscal 2007 was 107 fewer than in fiscal 2006. Furthermore, interms of the categories of enterprises in 2007, sewerage enterprises accounted for the largest
number with 40.2%, followed by sewage disposal (including simple sewerage work, ibid below) at
24.7%, and hospital enterprises at 7.2% (Diagram 4).
(Diagram 3) Changes in the number of local publicly managed enterprises
Number of enterprises

Fiscal Year

Source: Ministry of Internal Affairs and Communications media document, "Overview of the closingbalances of local publicly managed enterprises in fiscal 2007" (Sept. 30, 2008)(Diagram 4) Percentage categories of local publicly managed enterprises

Other
23.7%

Waterworks (including
simple sewerage work)
24.7%

Industrial sewerage
1.7%

Hospitals
7.2%
Sewerage
40.2%

Transport
1.1%Electricity
1.0%
Gas
0.4%

Source: Ministry of Internal Affairs and Communications media document, "Overview of the closingbalances of local publicly managed enterprises in fiscal 2007" (Sept. 30, 2008)7

(2) Financial management situation(a) Overall financial management situation
Looking at the overall financial management situation, including enterprises to which the
Local Publicly Managed Enterprise Law applies and those to which it does not11, the proportionof enterprises with credit balances is 86.4%, and those with debit balances, 13.6%, resulting inan overall credit balance of ¥468.6 billion (Table 1) (the credit balance in fiscal 2006 was ¥193.3
billion).
(Table 1) Overall management situation (income by enterprise category)(Unit: hundred million yen)Enterprise

Waterworks

Industrial sewerage

Transport

Electricity

Total income

2,692

198

102

44

Gas

Hospitals

Sewerage

Other

Total

△43

△1,947

1,054

2,585

4,686

Continued from the above

Note: "Simple sewerage work" is included in "waterworks".
Source: Ministry of Internal Affairs and Communications, "Overview of closing balances of local publicly managed
enterprises in fiscal 2007" (Sept. 30, 2008)(b) Accumulated deficit
The accumulated deficit amounted to ¥4.9381 trillion in fiscal 2007, an increase of 2.7%, or¥128.4 billion, compared with fiscal 2006. Categorizing the deficit by kinds of enterprises,transport enterprises were the most numerous, followed by hospital enterprises, sewerage
enterprises, and waterworks enterprises (Diagram 5).
(3) Bad debts
Bad debts in fiscal 2007 amounted to ¥360.1 billion, showing only a decrease of 0.8% (¥2.8
billion) compared to fiscal 2006. Categorizing the bad debts by kinds of enterprises, transport
enterprises were the most numerous, followed by hospitals and sewerage enterprises (Diagram
6).

8

(Diagram 5) Changes in the amount of accumulated deficits■Otherhundred million yen□Waterworks■Sewerage■Hospitals■Transport

Fiscal Year
Source: Ministry of Internal Affairs and Communications, "Overview of closing balances of local publicly
managed enterprises in fiscal 2007" (Sept. 30, 2008)(Diagram 6) Changes in bad debts

hundred million yen□Other■Sewerage■Hospitals■Transport

Fiscal Year
Source: Ministry of Internal Affairs and Communications, "Overview of closing balances of local publicly
managed enterprises in fiscal 2007" (Sept. 30, 2008)

2-2-3 The third sector, etc.
This section aims to provide an overview of the present state of third sector enterprises in which
local governments invest. Third sector enterprises are not financed by local governments, but play animportant role in achieving administrative objectives.
(1) The objects of investigation
The document needed to understand the situation of the third sector is an investigation report12
issued by the central government on December 25, 2008 (the situation as of March 31, 2008). The
objective of the investigation was to grasp the situation with regard to the financial management ofand investment in third sector enterprises as corporate bodies (=juridical persons) in receipt of

9

investment by local government bodies. The parameters of the investigation are as follows.
(a) The “third sector”, comprising corporate bodies, as recognized in company law as well as incivil law, at the time of the investigation, in which such bodies “local governments” themselves
as well as bodies in which local governments are majority investors.
(b) The so-called “three public corporations”, namely the Local Housing Corporation, the Local
Highway Corporation, and the Land Development Corporation.
(c) Local independent administrative corporations.
Furthermore, with regard to the following sections, namely (4) the state of management andfinancial support, and (5) the adoption of the point-evaluation of information disclosure andfinancial management, the following corporate bodies will be the objects of investigation. (a)corporate bodies recognized as such in company law as well as civil law (including corporate bodies
in which the total of investment by multiple local governments is more than 25%) in which thepercentage of investment by local governments, as well as bodies in which local governments aremajority investors, exceeds 25%; (b) corporate bodies recognized as such in company law as well ascivil law, in which the percentage of investment is less than 25%, but which are in receipt offinancial support (subsidies, loans, compensation for losses, guarantee against debts); (c) the “threepublic corporations”; and (d) local independent administrative corporations.
(2) Number and mode of establishment of corporate bodies
The number of corporate bodies is decreasing. The number of bodies in the third sector, etc., asof March 31, 2008, was 8,899, a decrease of 1.2% (108 corporate bodies) compared to the position
at March 31, 2007. Furthermore, the number of newly established corporate bodies is also
decreasing. The number of corporate bodies newly established in the calendar year 2007 was 14
fewer than in 2006, totaling 58 such bodies (Diagram 7).
(Diagram 7) Types of established juridical persons■ Local independentadministrative corporations■ The three public
corporations□ Non-profit corporations■ Corporate bodies■ Other juridical persons
recognized in company law■ Joint-stock corporations

Source: Ministry of Internal Affairs and Communications, "Results of an investigation concerning the third
sector, etc." (Dec., 2008)10

Furthermore, the composition by category of third sector bodies is as shown in Diagram 8.
(Diagram 8) Composition by subject category of bodies in the third sector, etc.

Information processing
1.2%

Pollutiion andenvironmental protection
0.9%
Other
11.1%

International exchange
1.3%
Housing and city services
1.9%
Daily life hygiene
3.4%

Regional and city
development
17.9%

Agriculture, forestry andfisheries
15.2%

Social welfare and health
care
5.4%
Transport and roads
5.5%

Tourism and leisure14.6%

Commerce and Industry
8.4%

Education and culture
13.1%

Source: Ministry of Internal Affairs and Communications, "Results of an investigation concerning the third
sector, etc." (Dec., 2008)“Regional and city development” is the most numerous, accounting for 17.9%, followed by“agriculture, forestry and fisheries” at 15.2%, and “tourism and leisure” at 14.6%. It is also
noteworthy that in the fields of “information processing”, “transport and roads”, and “tourism andleisure” there are a large number of joint-stock corporations (89.7%, 79.9% and 69.7% respectively),while in the fields of “international exchange”, “social welfare, health and medical care”, and“education and culture”, there are a large number of non-profit corporations (98.3%, 93.4% and90.2% respectively)(3) The investment situation
The total figure for investment by local public bodies, etc., in 7,686 third sector organizations (incompany law as well as in civil law) amounted to 49.9% of the total figure (Table 2). However, since
the investment percentage by local governments the “three large corporations” and by local
independent administrative corporations is 100%, corporations are excluded from the above figures.
(Table 2) The state of investment in the third sector
Categoryclassification
Juridical person incompany law
Juridical person in
civil law
Third sector total(Monetary units: million yen)
Percentage of
Number ofinvestmemnt bycorporate bodies
local governments

Total investment
amount (A)Investment amountby local publicbodies (within A)

Private sector
investment
amount (within A)

3,078,398

1,307,897

1,770,501

42.5%

3,713

1,320,085

887,377

432,708

67.2%

3,973

4,398,483

2,195,274

2,203,210

49.9%

7,686

Source: Ministry of Internal Affairs and Communications, "Results of an investigation concerning the third sector,
etc." (Dec., 2008)11

(4) The state of management and financial support
The current state of the 7,621 corporate bodies comprising third sector bodies, etc., is as follows(corporate bodies in respect of which financial statements were not made due to reasons that
occurred shortly after they were established, are excluded).
(a) 65.8% of third sector organizations have credit balances, while 35.2% have debit balances.
(b) In the case of 5.6% of third sector organizations, their debts are greater than their assets.
Furthermore, the situation regarding financial support given by local governments to the 7,621
third sector organizations is as follows.
(a) Among third sector organizations, the number of corporate bodies which received subsidies is3,020 (47.1% of the total), and the total amount of grants given is ¥258.5 billion13.
(b) Among third sector organizations, 631 corporate bodies (9.8% of the total) are in receipt ofloans from local governments, and the total amount of loans is ¥267.8 billion.
(c) Among third sector organizations, the number which have debts in respect of which local
governments have made a contract covering compensation for loss or a guarantee to cover the
debts is 491 (7.7% of the total), and the total balance thus provided amounts to ¥1.9417
trillion.
(5) The adoption of point-evaluation for information disclosure and financial management
One essential precondition to achieving financial soundness in the third sector is full disclosure of
the financial situation and of the actual condition of the third sector enterprises concerned; in thissituation, there is a demand for procedures to be put in place to enable a check on the actual
condition and circumstances to be made by society or an external organization. Specifically, an
overview of how 7,612 corporate bodies implement information disclosure and point-evaluation of
their management is as follows.
(a) Information disclosure by third sector organizations
Information disclosure is positively implemented by 85.3% of third sector organizations14,
making it clear that it is something carried out by the vast majority of organizations. It is also
worth noting that in 48.8% of third sector cases, local governments have determined thepractice of information disclosure by means of bylaws or published guidelines.
(b) Management point-evaluation system
The percentage of corporate bodies that implement a management point-evaluation system ona regular basis by means of committees and the like is 21.6%. In the case of other corporate
bodies too, there are cases where point-evaluation is regularly implemented without relianceon committees and the like.
2-3 Financial evaluation of local governments on the basis of basic numericalindicators
The following paragraphs provide once again an overview of evaluation on the basis offundamental numerical indicators of the finances of local governments in fiscal 2007.
Looking first at the general account, the situation is very severe in that total expenditures arecontinuously decreasing as a result of efforts to make reductions, and total revenues are also12

decreasing. A further point is that organizations with closing balances which show a surplus are
decreasing, while there are also cases of closing balances that show a deficit. Furthermore, revenue
and expenditure ratios are also rising, and financial structures are showing an increasing rigidity.
If we look also at the condition of publicly managed corporations, we see that the number ofcorporations showing a deficit stands at 13.6%, and that while there is a slight decrease in thenumber of bad debts, there is an increase in the amount of accumulated losses. Furthermore, turning
to the condition of third sector organizations, approximately 30% show deficit balances, while 5.6%
have liabilities in excess of assets. There are also a not inconsiderable number of organizations thathave received subsidies or loans from local governments or which receive support in such forms asan agreement to provide compensation for losses. There are also third sector organizations in respectof which streamlining or legal restructuring procedures have been implemented.
Given the above, according to the oversight provided by numerical indicators before the move toestablish indices, it is clear that although efforts to make improvements could be seen, there was asteadily deteriorating trend. The following section will examine the financial situation of local
governments as revealed by indices based on the Local Finance Soundness Law.

3 The indicators in the Local Finance Soundness Law
If we examine the Local Finance Soundness Law, we can find as means of judging the soundnessof local government finances, 4 indicators on the basis of which to judge the financial soundness
ratio, as well as the financial shortfall ratio, comprising an indicator to enable us judge themanagerial soundness of the accounting of public enterprises. Details of the content of thesevarious indicators are as follows15:
3-1 4 financial indicators for judging the degree of financial soundness
Within the framework of the Local Finance Soundness Law, the 4 financial indicators aredesignated in terms of their contribution to the achievement of financial soundness. They give an
objective portrayal of the financial soundness of local governments (prefectures, municipalities andspecial wards) and provide the conditions necessary to make a judgment on the speedy achievementof financial soundness or on regeneration (Diagram 9).

13

(Diagram 9) Accounts to measure the financial soundness ratio

Source: Ministry of Internal Affairs and Communications, Local Public Finance Bureau, Finace Investigation
Division, "concerning the Law Relating to the Financial Soundness of Local Governments" (June 4, 2008)(http://www.soumu.go.jp/iken/zaisei/kenzenka/exm/pdf/080604_1_3.pdf) (accessed Aug. 23, 2009)

Local governments are obliged, in each fiscal year, to make a public report to the local assembly
concerned, providing at the same time details of the audit inspection, with the calculation data on the
degree of achievement of financial soundness based on the closing accounts of the previous fiscal
year. The 4 financial indicators are as follows.
(1) Real deficit ratio: Taking the general account16 of the local government concerned as the target,
the actual amount of the deficit (※a) in relation to the standard financial scale.
(2) Consolidated real deficit ratio: Taking the general account of the local government concerned as
the target, the actual amount of the deficit, or the amount of the financial shortfall (※b) inrelation to the standard financial scale.
(3) Real debt service ratio; “The inserted amount for the standard revenue demand accruing to
special revenue + the principal and interest of redemption money ・ quasi-principal andquasi-interest of redemption money” deducted from “the amount of the principal and interest ofredemption money as well as the quasi-principal and quasi-interest of redemption money that
represents a burden on the general account of the local government concerned (※c)” in relation
to the amount (※d) that constitutes the basis of the standard financial scale.
(4) Future burden ratio: The actual burden (※e) that the local government is expected to bear in
future in respect of its general accounts, including debt incurred by local public corporations or14

by investing corporate bodies engaged in implementing compensation for loss in relation to theamount (※d) constituting the basis of the standard financial scale.
It should be noted that the definitions of (※a) to (※e) as used in (1) to (4) above are as follows.
(※a) real deficit amount: amount advanced + (deferred payment amount + carried over enterprisecosts.
(※b) consolidated real deficit: the extent to which the total of ① and ② below exceeds the totalof ③ and ④ below.
① The total of the real deficit in the accounts generated by actual deficits, taken from special
accounts other than the general account as well as publicly managed corporation accounts(corporations to which the Public Management Corporation Law applies and those to which itdoes not apply).
② The total of the financial shortfall as the accounting amount generated by the financial
shortfall, as taken from the special accounts for public corporations.
③ The total of the real profit balance of the sum generated by actual profits, taken from special
accounts other than the general account and the accounts of public corporations.
④ The total of excess funding as the accounting amount generated by the excess funding sum, as
taken from the special accounts for public corporations.
(※c) The quasi-principal and quasi-interest of redemption money: The total of the following listed
items, ① through ⑤.
① In the case of a local bond subject to lump-sum repayment on reaching maturity, the amountequal to one annual repayment installment of the principal of a bond, the repayment period ofwhich is set at 30 years in annual installments.
② Money recognized as having been assigned to the revenue of publicly managed corporation
bonds within the funds taken from the general account into special accounts other than thegeneral account.
③ Money recognized as being assigned to repayment revenue of local bonds created bycooperatives, taken from charges imposed on, or financial support given to cooperatives andlocal development corporations (cooperatives, etc.)④ Money equivalent to public bond expenses taken from income and expenditure based on
bond-charging procedures.
⑤ Interest on short-term loans.
(※d) Amount constituting the basis of the standard financial scale: The quasi-principal andquasi-interest of redemption money deducted from the standard financial scale deducted fromthe amount inserted as the standard financial demand relating to the principal and interest ofredemption money.
(※e) The actual debt: “the amount inserted as the standard financial demand related to the basic
amount that can be assigned + the amount included in special revenue + the total of the local
debt” deducted from “the future burden”, which is the total of the items listed below as ①
through ⑧.
① The total of the local public debt at the end of the fiscal year preceding the current fiscal year15

in the general accounts.
② The anticipated expenditure based on debt-incurring actions (expenses related to Article 5 of
the Local Finance Law).
③ The amount expected to be inserted, as taken from the general accounts assigned to theprincipal of repayment of local bonds in accounts other than the general accounts.
④ The estimated debit representing a charge on the local public body concerned in terms of themoney allocated for redemption of the principal of a local public bond issued by a cooperative towhich the local body concerned belongs.
⑤ The estimated charge on general accounts, as taken from the amount estimated as needed for
retirement allowances (the amount to be paid to all employees at the end of their term ofservice).
⑥ In the case of the debt of corporate bodies established by local governments after meeting set
criteria, the estimated charge to general accounts of such debt after taking into consideration thefinancial and management circumstances of the said corporate bodies.
⑦ The real consolidated deficit.
⑧ The estimated amount to be charged to general accounts as taken from the amountcorresponding to the real consolidated deficit of a cooperative or the like, or the “amount which
has the potential to be so charged”, showing the basic sum which can be allocated to therepayment sums shown in ① through ⑥ above, under Article 241 of the Local Autonomy
Law.
3-2 Speedy achievement of a sound condition for local finances, and rebuilding of
local finances
In cases where the ratio for determining soundness on the part of a local government exceeds thestandard early financial soundness criterion, the local government must determine the plan for theachievement of such financial soundness before the end of the fiscal year in which the probability ofthe said achievement of soundness is made public. Moreover, in a case in which the rebuilding
judgment ratio (3 ratios excluding the future ratio from within the ratio for determining soundness)exceeds the standard financial soundness criterion, the local public body concerned must determine,
before the end of the fiscal year in which the ratio for determining soundness is made public, afinancial rebuilding plan (Table 3).
Regulations concerning the public announcement of the ratio for determining soundness as well asof the financial shortfall ratio were implemented from April 1, 2008, and the ratio applied was that of
the ratio for determining soundness based on the final accounts of fiscal 2007. Moreover, theobligatory framing of a plan to achieve financial soundness as well as other regulations were
implemented on April 1, 2009, and the ratio applied was that of the ratio for determining soundness
based on the final accounts of fiscal 2008.

16

(Table 3) Criteria for attaining early financial soundness - criteria for financial rebuilding(reference) Criteria for shifts inthe system of consulting on andgetting permission to issue local
bonds

Real deficit ratio - real deficit
ratio in the general accounts

Prefectures: 2.5％
Municipalities: in compliance withfinancial regulations 2.5％～10％

Criteria for attaining earlyfinancial soundness

Criteria for financial
rebuilding

Prefectures: 3.75％
Municipalities: in compliance withfinancial regulations 11.25％～15％

Prefectures: 5％
Municipalities: 20％

Consolidated real deficit ratio real deficit ratio in all accounts―

Prefectures: 8.75％
Municipalities: in compliance withfinancial regulations 16.25％～20％

Prefectures: 15％
Municipalities: 30％(Ref. Note)

Real debt service ratio - ratio
showing public bonds as wellas the ratio of expenses
equivalent to public bonds

18％

Prefectures – municipalities: 25％

Prefectures – municipalities:
35％

Future burden ratio - ratio
showing the real burden
expected to be assumed in the
future in general accounts
other than the public debt
balance―

Prefectures・Designated cities: 400％
Municipalities: 350％―

Financial shortfall ratio of
public enterprises - ratio of thefinancial shortfall by categoryof publicly managed enterprise

10％

20％

―

Note: Changing criteria over 3 years from fiscal 2009 through fiscal 2011are established as folllows: Prefectures
25%→25%→20%; Municipalities 40%→40%→35%
Source: Ministry of Internal Affairs and Communications, Local Public Finance Bureau, Finace Investigation
Division, "concerning the Law Relating to the Financial Soundness of Local Governments" (June 4, 2008)(http://www.soumu.go.jp/iken/zaisei/kenzenka/exm/pdf/080604_1_3.pdf) (accessed Aug. 23, 2009) and
MAC media document, "Overview of criteria for determining financial soundness and of the financial
shortfall ration in fiscal 2007" (confirmed document), issued on Nov. 28, 2008)

3.3 Public announcement of the financial shortfall ratio
Local public bodies (including cooperatives and local development projects) that manage publicly
managed enterprises must make a report on the financial shortfall ratio (the ratio of the financial
shortfall (※f) to the scale of the enterprise (※g)), by publicly managed enterprises, to the assemblyof the public body concerned, attaching a copy of the audit investigation, and at the same time must
make the contents of the report public. In the event that the financial shortfall ratio exceeds thecriteria for financial soundness, the local public body must decide on a plan for the achievement ofsuch soundness.
Furthermore, the definitions of the expressions (※f) and (※g) used above are as follows:

17(※f) Financial shortfall ratio
Financial shortfall ratio (enterprises to which the Local Public Enterprise Law is applied) =dynamic debt + the amount on hand of local bonds raised for the purpose of allocation to revenue
in terms of incidental expenses other than expenses for construction improvement – current assets(※1) – financial shortfall that can be deleted (※2)
Funding insufficiency ratio (enterprises to which the Local Public Enterprise Law is not applied)= (needed funds moved forward + the amount on hand of local bonds raised for the purpose of
allocation to revenue in terms of incidental expenses other than expenses for construction
improvement) – financial shortfall that can be deleted
Furthermore, in the definition of financial shortfall, the definitions used for the expressions (※1)
and (※2) are as follows.
(※1) Current assets: in the case of a publicly managed enterprise that undertakes residential landdevelopment, there is a special case concerned with the calculation of current assets related tothe evaluation of the land.
(※2) Financial shortfall that can be deleted: a set sum deducted from the financial shortfall incases where an enterprise suffers from a lack of structural funding within a set period after thecommencement of the enterprise.
(※g) The scale of an enterprise (※3):
Scale of an enterprise (enterprise to which the Local Public Enterprise Law is applied) = theamount of trading profits (※4) – the amount of profit from entrusted work.
Scale of an enterprise (enterprise to which the Local Public Enterprise Law is not applied) = theamount of income corresponding to trading profits – the amount corresponding to profit from
entrusted work.
It should also be noted that the complementary explanations of expressions (※3) and (※4) usedin the above definition of the scale of an enterprise (※g) are as follows.
(※3) The scale of an enterprise undertaken by a publicly managed enterprise in respect only of
housing land development denotes the total of the capital and debt as shown by the “scale of thesource of revenue for project management” (the scale of the funding raised)/(※4) The business profits of a publicly managed enterprise that has introduced the designatedadministrator system (user charge system), are treated as special cases.
3-4 The characteristics of the new system based on the Local Finance Soundness Law
The major characteristics of the new system based on the Local Finance Soundness Law are that
there are 4 financial indicators, not just the “general accounts” as has been the case in the past. These
are: ① the real deficit ratio; ② the consolidated real deficit ratio; ③ the real debt service ratio;
and ④ estimated future burden ratio. By means of the use of these indicators, it is possible to grasp
the financial situation of local public bodies that have consolidated all their accounts including
separate corporate bodies.
Specifically, the different sets of figures can be listed as follows. Firstly, there is the “real deficit
ratio”, which takes the “general accounts” as the object to be evaluated and serves as the foundation.

18

In addition to this, three sets of consolidated financial indicators have been set up as a structure,
namely the “consolidated real deficit ratio”, which takes the accounts of “publicly managed
corporations”; the “real debt service ratio”, which takes the accounts of “partial-affairs associations
and wide-area unions”; and the estimated “future burden ratio”, which takes the accounts of the“local public corporations and the third sector” as the object to be evaluated. From among these, the“real debt service ratio” and the “future burden ratio” show the level of the burden to borne by the“general account”.
Furthermore, the indicator termed the “financial shortfall ratio” has also been introduced. This is
an independent indicator, calculated by the accounts of each publicly managed corporation, and it isbased on the actual financial shortfall that results when the shortfall that can be wiped out (planned
deficit) is deducted from the financial shortfall (current debts – current assets) that is at the base of
the financial shortfall concept that has been used up to now (current debts – current assets / operating
profits).
By means of the introduction of financial indicators, local governments have become able to grasp
the state of their finances in an objective and multi-faceted manner. It has also become possible, byusing judgments based on these indicators, to set up procedures which have mobilized a speedy
achievement of financial soundness or rebuilding on the basis of intervention by central government.
In ways such as these, systems aimed at comprehensively and systematically implementing theachievement of sound local finances have been established. Mention must also be made of importantcharacteristics of the new system, in the form of a strengthening of the external administrative
checking function of the process of achievement of financial soundness, including the imposition ofan obligatory audit of the indicators, the preparation of a plan for the achievement of financial healthor for financial rebuilding, and the incorporation into a system of assembly resolutions concerning
the achievement of sound management by publicly managed enterprises.
3-5 Ratio for determining financial soundness – financial shortfall ratio17
I will now try and give an oversight of the situation regarding the ratio for determining financial
soundness and the financial shortfall ratio in respect of local governments. Local governments inJapan comprise 47 prefectures, 17 designated cities, 789 cities and wards (“core cities”, “special casecities”, “cities”, and “special wards”), and 1,004 towns and villages, making a total of 1,857; thetotal number of publicly managed enterprise accounts amounts to 7,448. The position with regard to
the number of bodies in the case of which the ratio for determining financial soundness exceeds theearly financial soundness ratio, and on the other hand the number of publicly managed enterpriseaccounts in the case of which the financial shortfall ratio exceeds the management soundness
criterion is shown in Tables 4 and 5 respectively.

19

(Table 4) Number of organizations for which the achievement of financial soundness isjudged to have exceeded the criteria for the early achievement of such soundness
Real deficit
ratio

Consolidated
real deficit ratio

Real debt
service ratio

Future burden
ratio

Total

Prefectures〔47〕

0

0

0

0

0

Designated cities〔17〕

0

0

0

0

0

Cities and wards〔789〕

2（1）

9（2）

8（1）

3

22（4）

0

2

25（1）

2

29（1）

2（1）

11（2）

33（2）

5

51（5）

Towns and villages〔1,004〕
Total〔1,857〕

Note 1: Figures within [ ] designate the number of individual organizations
Note 2: Figures within ( ) designate the number, within the total in the box, of organizations that exceeded thefinancial rebuilding criteria (40% was applied as the consolidated real deficit ratio in fiscal 2009).
Note 3: The future burden ratio is not the financial rebuilding criterion.
Note 4: The figure in the "total" box is the total number of organizations, i.e. the net total of organizations thatexceeded the criteria for the achievement of early financial soundness (financial rebuilding criteria),
comprising 43 (3) organizations in all (15 (2) cities and wards, and 28 (1) towns and villages.
Source: MAC media document, "Overview of criteria for determining financial soundness and of the financial
shortfall ration in fiscal 2007" (confirmed document), issued on Nov. 28, 2008)(Table 5) The number of accounts of publicly managed enterprises with financial shortfall
ratios that exceed the criteria for management soundness
Prefectures
Waterworks enterprises

DesignatedcitiesMunicipalities

Partial-affairs
associations

Total

0(26)

0(17)

3(1,262)0(101)

3(1,406)

0(3)

0(6)

6(925)

0(3)6(937)

0(39)

0(7)

0(96)

0(8)

0(150)

Transport enterprises

0(3)

4(20)

13(70)

0(4)17(97)

Electricity enterprises

0(30)

0(4)

1(27)

0(3)

1(64)

Gas enterprises

0(0)

0(1)

0(33)

0(1)

0(35)

Port and harbor work
enterprises

0(29)

0(4)

0(36)

0(4)

0(73)

Hospital enterprises

0(48)

1(17)

50(520)2(83)53(668)Market enterprises

0(8)

1(17)

7(142)

1(11)9(178)

0(3)

0(6)

3(44)

0(12)

3(65)

0(54)

0(25)

24(451)3(9)27(539)Sewerage enterprises

0(44)

0(27)

13（2,648）0(22)13（2,741）

Enterprises related totourism facilities

0(6)

0(6)

22(336)0(2)22(350)

Other enterprises

0(19)

0(1)

2(84)

0(41)

2(145)

0(312)

6(158)

144（6,674）

6(304)

156（7,448）

Simple waterworks
enterprises
Industrial waterworks
enterprises

Livestock raising andslaughtering enterprises
Housing development
enterprises

Total

Note: Figures within ( ) are the number of accounts of publicly managed entetrprises by kind of enterprise
Source: MAC media document, "Overview of criteria for determining financial soundness and of the financial
shortfall ratio in fiscal 2007" (confirmed document), issued on Nov. 28, 2008)20

On the basis of the above, the following points can be made with regard to the ratio for
determining financial soundness on the part of local governments in fiscal 2007. Out of the total of
1,8578 local governments, a net total of 43 exceeded the criterion for achievement of early financial
soundness, and of this total, 3 local governments displayed very severe financial circumstances inexcess of the criteria for financial rebuilding. This figure is a very small percentage of the overall
total, but when consideration is taken of the need to provide stable administrative services to theresidents of the various local governments concerned, it cannot be overlooked. In the case also of
publicly managed enterprise accounts, out of the total of 7,448 accounts, the number of suchaccounts in which the financial shortfall ratio exceeded the criterion for management soundness
totals 156, and this number presents a serious problem. Even if the number of local governments
which are experiencing severe conditions in terms of the ratio for determining financial soundness
and/or the financial shortfall ratio, is small, it is expected that measures aimed at tackling the issues
involved in achieving financial health will continue to be steadily implemented.

4 In conclusion
The central core of the new system aimed at enabling local public bodies to attain financial healththrough the Local Finance Soundness Law can be found in efforts to obtain a still firmer grasp of thereal situation of local finances and to respond in a speedy and appropriate manner in cases where
there are problems. Up until now, the soundness of local government finances has been judged as aseparate issue, taking as a foundation the ordinary accounts and the actual state of local publicly
managed enterprises. However, the field of local government covers a very wide area, including thethird sector, and the various parts of local government finances are closely inter-connected and exert
a great influence on each other.
The fields of activity of local governments have expanded so as to enable local governments to
respond to the diversification of people’s value judgments and the growing sophistication of theirneeds. As a result of this trend, it has become impossible for local government to get an accurate
grasp of an overall picture of their situation only by referring to financial issues concerned with theirprevious fields of activity. From the point of view also of the complicated financial structure of local
governments that has been shown in this paper, their activity is required to be evaluated from avariety of perspectives, including general accounts, publicly managed enterprise accounts,
partial-affairs associations and wide-area unions, local government public corporation and third
sector accounts, and so on. At the same time, local governments are also required to unify theirvarious activities within one activity framework, and to carry out their decision-making andimplement their activities in a rational manner. In order that local governments can identify
appropriate objectives for their own actions, it is necessary for them to implement financial
evaluation level by level and in a comprehensive way, and the new system for achieving financial
soundness introduced by means of the Local Finance Soundness Law is precisely what will enable
them to respond to this requirement.
Through the said law, local governments have acquired a multi-faceted, comprehensive indicatorof their financial condition. What is important from now on is that in the financial areas too that have21

been added as objects of financial evaluation under the new system, local governments get anadequate grasp of their financial condition and at the same time, of the actual state of their activities,
and devise measures to respond to the issues that emerge.

[Notes]1 Ministry of Internal Affairs and Communications, ed., [in Japanese] Chihou zaisei hakusho [White

Paper on Local Public Finance], 2009 edition, p 130 (closing balances are for the 2007 fiscal
year).
2 Ministry of Internal Affairs and Communications(http://www.soumu.go.jp/iken/zaisei/kenzenka/pdf/kenzenka_data_1.pdf) Accessed Nov. 11, 2009.
3 According to a “Report on the Round Table Vision of Decentralization in the 21st Century”, issued
on July 3, 2006, by the Round Table Vision of Decentralization in the 21st Century.
4 According to the “Report of the Research Group on a New Local Financial Rebuilding System”,
issued on December 8, 2006, by the Research Group on a New Local Financial Rebuilding System.
5 According to the report referred to in f.n. 4
6 The formal name of “special tax allocation account” is “special account for tax allocation andtransfer tax distribution”. “Tax allocation” refers to “local tax allocation”; without infringing on
the autonomy of local public bodies, this device aims at achieving balanced fiscal revenue
throughout the country, and at guaranteeing the planned management of local administration. Set
percentages of different kinds of national taxation, namely income tax, corporate tax, liquor tax
and tobacco tax, are calculated in respect of each tax and transferred by central government tolocal governments. Local allocation is classified into ordinary local allocation tax and special local
allocation tax, which is allocated in response to special circumstances such as natural disasters.
Ordinary local allocation tax is allocated to local public bodies whose basic financial needs exceed
their basic financial revenues, and the amount of the allocation is the difference between the two
sets of figures (deficit in financial resources). Source: Ministry of Internal Affairs andCommunications, ed., [in Japanese] Chihou zaisei hakusho [White Paper on Local Public
Finance], 2009 edition (closing balances are for the 2007 fiscal year) , p(10)7 At the end of fiscal 2008, the balance provisionally entered was ¥197 trillion, an increase to 37.4%
of GDP. Source: Ministry of Internal Affairs and Communications, Chihou zaisei no genjou [Thepresent state of local finances], http://www.soumu.go.jp/iken/zaisei/pdf/genjyo_070518_2.pdf(accessed Sep. 19, 2009).
8 The “ordinary account” is the net account figure for accounts other than that for local public
enterprises in local public bodies. In addition to the general account, it also covers matters otherthan those related to local public enterprises within special accounts. The range of each accountdiffers by each individual public body, making integrated control and comparison of financial
circumstances very difficult to achieve. It is therefore for reasons of statistical convenience that theaccounts classification system is used in local finances. Source: Ministry of Internal Affairs andCommunications, ed., [in Japanese] Chihou zaisei hakusho [White Paper on Local Public
Finance], 2009 edition (closing balances are for the 2007 fiscal year).
9 Ministry of Internal Affairs and Communications, Media document, [in Japanese] Heisei 19 nendo
chihou koukyou dantai futsuu kaikei kessan no gaiyou [Overview of the closing balances ofordinary accounts in local public bodies in fiscal 2007], issued November 28, 2008. The document
summarizes the net closing balances for ordinary accounts in prefectures (47) as well as in 3,297
municipalities (1,793 cities, towns and villages; 23 special wards; 1,374 partial-affairs
associations; and 107 wide-area unions).
10 According to: Ministry of Internal Affairs and Communications, ed., [in Japanese] Chihou zaisei
hakusho [White Paper on Local Public Finance], 2009 edition, (closing balances are for the 2007
fiscal year); and Ministry of Internal Affairs and Communications, Media document, [in Japanese]
Heisei 19 nendo chihou kouei kigyou kessan no gaiyou [Overview of the closing balances ofpublicly managed enterprises for fiscal 2007], issued on September 20, 2008.

22

11 “Enterprises with legal applicability” are enterprises to which the Local Publicly Managed

Enterprise Law (Law No. 292, 1951) is applied in its entirety or in terms of financial regulations
contained in the said law, while in contrast, “Enterprises without legal applicability” areenterprises to which the Local Publicly Managed Enterprise Law does not apply, and which carryout accounting procedures according to the national government accounting formula. Source: as inf.n. 10.
12 According to a report issued by the Ministry of Internal Affairs and Communications on
December 25, 2008, [in Japanese] Dai-3 sekutaa nado no joukyou ni kansuru chousa kekka[Results of an investigation concerning the third sector, etc.].
13 Corporate bodies in receipt of subsidies from local public bodies have been investigated since
fiscal 2008 not only in respect of subsidies earmarked for management profits, but also in respectof other subsidies. Source: as cited in f.n. 12.
14 With regard to the parts of the third sector, etc., in which information disclosure is thoroughly
implemented, the disclosure of financial statements (including overviews) is made in any eventand does not depend on a demand for this information being made. Source: as cited in f.n. 1215 According to the media document, Heisei 19-nendo kessan ni motodzuku kenzenka handan
hiritsu – shikin fusoku hiritsu no gaiyou (kakuhou) [An overview (confirmed report) on the ratio
for determining soundness and the financial shortfall ratio on the basis of the closing balances forfiscal 2007], issued on November 28, 2008.
16 Within the accounts operated by local public bodies, the “general account” deals with mattersother than the accounts of local publicly managed enterprises. It has almost the same scope as theordinary account used in local public body financial statistics, and no distinction is made between
this and set accounts such as “assumed business accounts”. It should also be noted that local
publicly managed enterprise accounts are the generic name covering the accounts of publicbusiness managed by local public bodies, national health care enterprises, enterprises concernedwith the health and medical care of elderly persons, nursing care enterprises, for-profit enterprises,
agricultural mutual aid enterprises, communications disaster mutual aid enterprises, and medical
enterprises attached to public universities. Sources: as in f.n. 15; and Chihou zaisei hakusho [White
Paper on Local Public Finance], 2009 edition (closing balances are for the 2007 fiscal year),issued by the Ministry of Internal Affairs and Communications.
17 According to the source cited in f.n. 15.

23

[References]
Namekata, Hisao (2001), [in Japanese] Dai 1-shou chihou zaisei kiki no genjou to genin, [Chapter
1: The present situation and the causes of the crisis in local finances] in: Iwanami, Kazuhiro, ed.,[in Japanese] Dou suru jichitai zaisei: saisei he-no orutanateibu, [What are local finances to do?
Alternatives leading to regeneration], pp. 36-82, Otsuki Shoten Publishers.
Iwanami, Kazuhiro (2001), [in Japanese] Joshou chihou zaisei kiki to akaji – saimu no bouchou[Preface: The crisis and deficits of local finances – expanding debts] in Iwanami, Kazuhiko, ed.,[in Japanese] Dou suru jichitai zaisei: saisei he-no orutanateibu, [What are local finances to do?
Alternatives leading to regeneration], pp. 1-33, Otsuki Shoten Publishers.
Shigemori, Akira (2004), [in Japanese] Dai 8-shou Bunkenteki zeizaisei shisutemu kaikaku he,[Chapter 8: Toward system reform in a decentralized fiscal financial system] in: Shigemori, Akira;Tanaka, Shigehiro, [in Japanese] Kouzou kaikaku to chihou zaisei, [Structural reform and local
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Hiraoka, Kazuhisa; Mori Hiroyuki (2008), [in Japanese] Dai 1-shou Zaiseikenzenka hou to chihou
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