Japan’s Local Government Debt Control System

Japan's Local Government Debt Control System

Japanese local government bonds or loans are viewed as secure and almost the same as Japanese Government Bonds (JGBs).

The Ministry of Internal Affairs and Communications (MIC), which is responsible for matters related to local government finance in Japan, states that even though decentralization reforms have been executed and are still in progress, there are three reasons that assure the financial security of local governments. First, the central government provides them with solid support for necessary resources. Second, the MIC checks and controls local governments’ bond issuance or loan borrowing based on the “Consultation System”. Third, the control system of the fiscal soundness of local governments is effective. In fact, the Bank for International Settlements (BIS) risk weight for yen-based Japanese local government bonds is as low as JGBs, which is 0% in the standardized approach.

The local government system and the local public finance system

The following five points are noted about the local autonomy system in Japan. First, Japan is a unitary country with a subnational government system based on the concept of local autonomy. Second, the Japanese local government system is two-tiered, with 47 prefectures and 1,741 municipalities. Third, each local government has an assembly that serves as the highest decision-making body, and whose members are directly elected by their local citizens. The assembly decides on the establishment of ordinances and adopts budgets. Fourth, local governments operate according to the presidential system or chief executive system. Last, local governments have relatively large responsibilities and functions, but their activities are often limited by national acts and are under the control of central government ministries. Local governments execute a wide variety of functions that are closely related to the daily lives of local citizens. Local governments are engaged in almost all necessary public services excluding national defense and pensions. Comparing this with …continue reading