In Tokyo, bureaucrats see Kimura’s town and hundreds of others like it as a drain on Japan’s national coffers, and are laying plans to legislate the majority of them out of existence. Hamamasu will likely merge with two neighboring towns, the furthest some 60 kilometers away. “Year by year, allocations from the central government are declining because of the bad economy,” Kimura says. “We’re now at a point where it’s difficult to provide adequate services.”
Like much of small-town Japan, Hamamasu’s finances are in ruin. Its single biggest budget expenditure, “administration fees,” provides upkeep for public buildings and pays salaries for 87 civil servants. The next largest outlay: service on the town’s $27 million debt. The local tax roll grows shorter every year even as health-care costs soar. Once a point of local pride, a fortress like city hall built in the 1990s is now the subject of much grousing. “That building is something you’d find in a town of 10,000 or 15,000,” says a local merchant. “It’s embarrassing how they’ve mismanaged money.”
Japan is famous for inaction in the face of national government, bank and corporate debt problems–so the aggressive attack on bloated local government comes as a surprise. Only recently has the campaign attracted significant play in the national press, a trend that suggests government prodding (through the cozy press-club system) to spur change from above. Last week, for example, the Asahi Shimbun ran a report called local finance: the limit to dependency on the central government. It lambasted towns for busting their budgets to build schools and elderly-care facilities–heavily subsidized by the central government–based not on need but on a desire to create local construction jobs. “If Japan does not review its financial structure,” it warned, “both the central and local governments may collapse together.”
More than 2,000 municipalities now face pressure to join forces with neighboring communities, or else. Under a 2001 federal statute, towns that agree to mergers by March 2005 will receive tax and cash incentives. Those that refuse could see their funding slashed. Tokyo’s aims: cut the subsidy of small-town services that are no longer necessary–like schools that remain open to serve only one child–shrink the flow of tax revenue from cities to towns and make local officials more accountable for egregious waste. The agenda amounts to the downsizing of rural Japan’s postwar welfare state, and has the clear support of Prime Minister Junichiro Koizumi. “The Koizumi administration’s policy is to cut down on subsidies to smaller municipalities by encouraging mergers,” says Minoru Morita, a political analyst in Tokyo. “Central-government bureaucrats don’t trust the municipalities, and don’t need them either.”
Not anymore. For decades Japan’s ruling Liberal Democratic Party was built on rural voters, but it increasingly draws its support from urban areas, which have long resented the massive flow of funds to the countryside. Under the old LDP after World War II, the powerful Ministry of Finance created a unique form of public finance to rebuild the nation. Known as the Fiscal Investment Loan Program, or FILP, the obscure program is so big it’s been called Japan’s “second budget.” The money flow starts when average Japanese, who live mainly in cities, deposit their wages in Japan’s equally unique post-office savings accounts. FILP borrows that money at near-zero interest and loans it out to a motley assortment of quasi-public companies, most of them in the countryside.
By the late 1990s, the Finance Ministry realized it had created a monster. Much of the country’s spending was being wasted in the hinterland, where the norm is make-work projects and overkill, like Hamamasu’s town hall. As the national debt rose from 68 percent of GDP in 1992 to 148 percent at the end of 2002, tax revenues were falling by a third, due largely to the aging of the population. And with the “big bang” financial reforms of the late 1990s, the postal savings system had more freedom to invest as it chose, endangering the flow of funds to rural towns. The Finance Ministry decided it had to dismantle the doomed system, and none too soon.
For decades, Japan sustained low tax rates modeled on the U.S. system with high public expenditures like those in European welfare states by “raiding the FILP piggy bank,” says Stephen Church, head of Analytica Financial Research in Tokyo. “It’s been a disaster.” Even now, FILP accounts for two thirds of local government borrowing. According to Church, bad loans and other losses from FILP borrowers total $1.3 trillion, or about 25 percent of Japan’s GDP. (That’s about the same size as Japan’s mountain of bad bank debt.) “And that’s conservative,” he warns. “Some say FILP’s bad debt is twice that size.”
When Koizumi came to office as a maverick reformer, he signed on to a rural reform scheme that the Ministry of Finance had created before he took power. The idea was to shut down the “second budget” channel by 2008, and reducing the number of municipalities from 3,200 to 1,000 is only part of the plan. The Ministry of Finance also wants to privatize the quasi-public corporations supported by the FILP that do everything from reclaiming farmland and building airports to running mental-health clinics and sewage treatment plants. Those corporations will have to find private financing or shut down.
Japan has redrawn its map before, but for very different reasons. In the 1880s and again in the 1960s, tens of thousands of small settlements were combined into larger towns in the name of progress–sovereign hamlets a mile apart no longer made sense when roads or telephones could bridge the distance. Japan was “coming together,” and towns were enthusiastic about joining the project, says Toshihiko Takamura, head of Hokkaido’s –office for regional consolidation. “What’s different this time is the reason for merging is a negative one–Japan’s economic and demographic situation.”
The economic logic of further town mergers is clear. The return on public investment in Japan decreases precipitously with the size of the town receiving it, says Nobuki Mochida, an expert in local finance at Tokyo University. Returns are twice as high in urban areas, yet per capita public investment remains four times higher in the countryside. Why? Overlapping authority between center and periphery, complex tax-sharing formulas and the profusion of special grants favored by pork-barrel politicians. “The Tokyo bureaucrats tell them, ‘You should build a luxury town hall and, if you do, the central government will reimburse you.’ In the 1990s the government frequently used such methods to stimulate the economy,” says Mochida.
Hamamasu is a showcase for the system. This tiny and remote town touts a modern public library, a new care center for the elderly, a government-funded hot-spring resort and a beachside park as well as subsidized cattle, timber and fishing industries and the lavish city hall. Change will be painful: Kimura shows off a cascading chart of deep cuts already made in his budget, but it won’t be enough. Outside, 14-year-old Hayato Ishidoya worries that a merger could close the local high school and require him to travel up to 80 kilometers to a new one. But like most villagers, he doesn’t seem to worry much about where the seat of local government lies, changing borders or even whether his town’s name will survive: “Hamamasu is Hamamasu,” he says.
So far, public opposition to the merger plan comes mainly from town officials, not townspeople. It’s not clear yet how many merger deals have been struck, but media reports on the debates among local officials are increasingly common. In Tokyo, the Ministry of Finance deployed its “tribe” of loyal lawmakers to push its plan through the Diet. They have the upper hand against a rival tribe allied with the Ministry of Public Management, which wants to expand local freedom to tax and spend. Takashi Inoguchi, a specialist in Diet factionalism at Tokyo University, says the Ministry of Public Management is “interested in enhancing local government if only because it would enhance their own power, authority and budget.”
The reformers would appear to have public sentiment on their side, too, because hostility to local control has deep roots in Japan. After World War I, Tokyo took taxing powers away from the prefectures because local collections had created deep disparity between rich and poor regions–an offense to Japan’s egalitarian ideals. The problem is that centralized tax collection led to new imbalances, this time between the countryside and cities. Today Japan divides its public-works spending exactly as it did in 1965–69 percent to construction, 20 percent to agriculture and 11 percent to transportation and other agencies–despite the sharp decline of agriculture’s share in the economy. Tax revenue flows disproportionately to the countryside, too: Nagaoka, a city of 190,000 people in Niigata prefecture, receives only one quarter the per capita tax transfers of several small towns nearby. Not surprisingly, those towns are fighting pressure to merge. “A certain level of inequality is inevitable, but something has to be done,” says Inoguchi, “Nowadays many bureaucrats understand that.”
It remains to be seen whether Japan’s political system can move fast enough to correct these imbalances. By the end of this fiscal year, according to official forecasts, aggregate local debt will reach $1 trillion–nearly three times what it was in the early 1990s. Church sees “no immediate prospect” that Japan can stabilize this problem. The hope is that even freezing the size of local government could ultimately shrink it–as its aging work force moves into retirement. Meanwhile, cartographers anticipate brisk demand for updated maps in newly merged towns.
From Hamamasu’s perspective, delay is good, but change is not entirely unwelcome. Locals know their town’s clinics and schools might close, forcing them to venture far from home to see a doctor, attend a class or otherwise utilize social-welfare programs. Yet even Kimura, while “worried that the quality of service for our residents will drop,” concedes that “on the other hand, merging would of course help us with money.” Besides, “the village will not be lost… We will always be here.” And if Hamamasu is beginning to accept the idea of change, perhaps Japan is, too.
