"Subnational Borrowing in Japan : from 'Implicit Guarantee' to Market Discipline and Fiscal Rule"

In many countries, local borrowing is an important source for long-term development projects such as roads, bridges, and waterworks. Local borrowing for such projects is justified on the ground that benefit of these projects often last decades and the cost of these projects should be borne by future tax payers. However, there are serious concerns with issuance of local bonds by decentralized local governments. Local governments in Japan would not default on their borrowing because of such "implicit government guarantee." As a result, lenders and tax payers have lost incentive to monitor subnational government because they view their investment as protected by a central government. The purpose of this paper is to review the local borrowing in Japan. At first, the transition from administrative control to rule-based, market oriented system is described. Following this, soft budget constraint and effectiveness of market discipline is investigated. Third, bank lending and local bonds as a way of financing long-term infrastructures are compared. Finally, we shed light on the credibility of local bonds in Japan and offer some proposals.

"Measuring Fiscal Needs: Japan's Experiences"

The Local Allocation Tax (LAT) plays important role in fiscal equalization in Japan. The purpose of this paper is twofold: reviewing the key themes and issues of the LAT; and considering package of reforms designed to revitalize Japan's fiscal equalization program and to establish a sustainable basis for the future. We argue that the addressing expenditure needs in equalization should be retained, to do so will require improvement in the way of addressing expenditure needs. In addition, The LAT formula should be redesigned so as to encourage local government to deliver services in the most cost-effective manner. First, it should be based more systematically on objective criteria (e.g. size of school age population, remoteness indices) rather than actual endowment, such as public infrastructure. Second, the reliance on discretionary elements, including special LAT and various aspects of modification coefficient used in the LAT calculation, should be reduced and, in general, the formula made more transparent.

"Local VAT in Japan: sustainable foundation for future"(in Japanese)

Local VAT had been introduced in Japan in FY1997. Several problems became evident with the current system. The purpose of this paper is to identify these problems in detail and to suggest reform options in the light of international experience and the fiscal federalism literatures. We argue that contrary to traditional wisdom, it is possible to allow local governments to set their rate of VAT independently, within the framework of revenue-sharing arrangement on the basis of consumption statistics. To do so, however, requires some changes in the current systems;(1) when origin prefecture imposes local VAT on the 'final sales' rather than the 'central VAT liability', even if each prefecture levies the tax at variable rates, calculating tax under the input tax credit mechanism leads to an appropriate outcome; (2) our new allocation formula on the basis of 'revenue potentials' allows local governments to set their tax rate independently. In addition, we argue that in the view of exactness, Harmonized Sales Tax in Canada that derived consumption statistics from inter-regional Input-Output table is ideal for allocating tax revenue to the destination region. Until inter-regional input-output table will be designated by the government, some feasible reform package should be adopted: (1) deduction exempt final sales from designated statistics; (2) removal of employees' share; (3) increase in the weight assigned to population share and decrease in the weight assigned to designated statistics.

"Fiscal Equalization in Japan: Assessment and Recommendations"

Intergovernmental fiscal relations in Japan have been strained in recent years. This paper seeks to assess the Japanese equalization transfer in the light of the theory of fiscal federalism. This paper argues that the case for equalization lies in offsetting net fiscal benefit (NFB) differentials across jurisdictions. It has been shown that the case for equalization and its design depend on the type of public good being provided as well as the mode of finance. Moreover, where equalization is called for, its form and level can be very different depending on whether the relevant policy goal is that of fiscal equity or fiscal efficiency. Studying the institutional context, we arrive at the conclusion that the system of equalization transfers in Japan is consistent with the application of those principles.

"Intergovernmental Allocation of Value Added Tax in Japan: International comparison" (in Japanese)

There seems to be broad consensus in the literature that comprehensive VATs are most appropriately assigned to the central level of government. Japan's Local Consumption Tax is unique in the sense that it combines origin-based piggy backing on the national VAT with a clearing system that is intended to reflect the destination principle indirectly. This paper seeks to assess LCT in the light of general criteria; equity, efficiency and administrative simplicity. Studying international experiences and recent development of tax theory, this paper argues the case for destination principle as a principle of tax on interregional goods and service flow. Finally, we investigate the way in which discretion on tax rate setting can be allowed to Japan's local consumption tax.

Does local spending have repercussion from tax structure?: Evidence from Japan

The original intention of this article is to explore what are the driving forces for the local tax structures. Is tax policy determining the local expenditure portfolio, or is the relationship the other way around? We expect some research venturing to explore the interplay between the local expenditure responsibilities and tax policy. This article examines these fresh issues in the light of Japan’s recent experiences, and tries to bring not only analytical framework but also qualify information on local tax structures. The motivation is that we can test causality through regression models using the notion of Granger causality. So far it is often said that expenditure has not been decided by making tax revenue given, instead expenditure may be decided for a certain reason and for financing it corresponding revenue is ‘guaranteed’ in Japan. As local public sector has evolved from ‘agency’ model to ‘autonomy’ model, this stereotypical way of thinking will come into question. This article shows that it is possible to have some repercussions from the tax structure to expenditures

Subnational Borrowing in Japan : from 'Implicit Guarantee'to Market Discipline and Fiscal Rule

In many countries, local borrowing is an important source for long-term development projects such as roads, bridges, and waterworks. Local borrowing for such projects is justified on the ground that benefit of these projects often last decades and the cost of these projects should be borne by future tax payers. However, there are serious concerns with issuance of local bonds by decentralized local governments. Local governments in Japan would not default on their borrowing because of such "implicit government guarantee." As a result, lenders and tax payers have lost incentive to monitor subnational government because they view their investment as protected by a central government. The purpose of this paper is to review the local borrowing in Japan. At first, the transition from administrative control to rule-based, market oriented system is described. Following this, soft budget constraint and effectiveness of market discipline is investigated. Third, bank lending and local bonds as a way of financing long-term infrastructures are compared. Finally, we shed light on the credibility of local bonds in Japan and offer some proposals