Chihousai no Keizai-Bunseki (The Economics of Local Government Bonds)

As the title suggests, this book applies economic analysis to issues concerning local government bonds in Japan. Similar to central government bonds, these bonds are a means by which the cost of building public infrastructure is borne not only by local residents at the time of construction but also by those residing in the area in the future. Furthermore, they are used to cover the shortage of funds for operating expenses, the so-called “deficit bonds.” Although economic research on local government bonds has been actively conducted overseas, there is a lack of comparable research in Japan. This book intends to fill this gap by conducting original empirical analyses on the subject as well as a survey of the literature.
 
Proper economic analysis cannot be performed without proper understanding of the reality. This book has therefore sought to highlight the challenges faced by local governments in Japan by examining the economic and institutional environments surrounding local government bonds, which have changed considerably in recent years. The issuance of local government bonds was “liberalized” in the 2000s. Indices showing the status of municipal debt have been developed through the Act on Assurance of Sound Financial Status of Local Governments (enacted in FY2008), and the system has since shifted from a permit to a consent system (FY2006) and then to a notification system (FY2012). Regarding the underwriting of local government bonds, the role of private funds has increased in relation to government funds subsequent to reforms made to the Fiscal Investment and Loan Program (FY2001). With respect to private funds, issuance conditions have diversified with an increase in the number of publicly issued bonds. Underwritings that do not pass through the bond market, such as those by commercial banks, have also been diversifying. In this environment, the financial literacy and “credit worthiness” of local governments have become increasingly important for securing long-term funding at low interest rates.
 
Research on this subject type requires an investigation of a wide range of stakeholders, including the central government as the designer of the system of local government bonds, local governments as issuers of local government bonds, and financial institutions as underwriters. In this regard, major research contributions have been made by the endowed chair of the Japan Finance Organization for Municipalities at the Faculty of Economics, University of Tokyo, and the “Dynamic Empirical Analysis of Local Government Bonds” project of the Grants-in-Aid for Scientific Research, in which the authors planned and participated. The former has held 25 forums and three symposiums over a period of six and a half years, at which the “live voices” of more than 2500 participants, including central and local government officials and specialists of financial institutions, were heard. For the latter project, we conducted a large-scale survey covering a wide range of institutions, from city and regional banks to agricultural cooperatives and credit unions. To the best of our knowledge, no survey of comparable magnitude has ever been conducted. Considering the invaluable nature of the survey, its results have been posted at the end of this book.
 
 

(Written by HAYASHI Masayoshi, Professor, Graduate School of Economics / 2020)