JAPAN

Japan is a unitary, constitutional monarchy and a parliamentary democracy. Japan’s constitution was promulgated in 1946 and came into force in 1947. The Head of Government (the Prime Minister) is elected by members of the Diet, and the Head of State is the Emperor. Legislative power is vested in the National Diet (Kokkai), a bicameral parliament composed of the House of Councillors (upper house) and the House of Representatives (lower house), whose members are directly elected by the people, for respective six and four-year terms. Three-fifths of the members of the upper house are elected by the prefectural constituencies.

The 1947 constitution established the principle of local autonomy for both residents and local public entities (Chapter 8, Art. 92) and conferred administrative power on local governments (Art. 94). The relation between the various levels of governments is stipulated in the 1947 Local Autonomy Law, which came into effect concurrently with the constitution. Various laws relating to local autonomy have been enacted, such as the Local Public Service Law, the Public Offices Election Law, the Local Finance Law, and the Local Tax Law.

Each local government has its own assembly, with members elected directly for four-year terms. Local assemblies have authority to approve budgets and to establish ordinances within law. In addition, administrative committees are established in education, public safety, etc. Prefectures are administratively headed by governors (chiji), while cities, towns, and villages are headed by mayors. The next local elections are planned for spring 2023. The governors of the prefectures are gathered in the National Governors Association, which has been active since 1947 to promote the proper functioning and progress of local autonomy, while the mayors of municipalities cooperate through the Japan Association of City Mayors since 1963.

In Japan, the push for decentralisation started during the post-World War II period, and was viewed as a means of achieving more democratic political outcomes. The promotion of a democratic system of local government was part of the national agenda. However, the model of central-local relations put in place remained quite centralised in practice, based on the agency-assigned function system. In the 1990s, an ambitious decentralisation programme was launched, including changes to local governments’ functions, an increase in the autonomy of local authorities, a revision of local governments’ financing, and a territorial reform based on municipal amalgamations.

This process was carried out through several steps over a long period, with the support of a Decentralisation Promotion Committee set up in 1995. The first “Decentralisation Promotion Reform” (1995-2001) led to the adoption of the Omnibus Decentralisation Law in 2000 - the cornerstone of the new wave of decentralisation in Japan. This law was followed by the Trinity Reform in 2004-06, which laid out the financial component of the decentralisation reform. In 2006, the Second Decentralisation Promotion Reform went further to reach these objectives: granting further authority to local governments and rationalising their functions; rationalising the power of central government on local authorities; and consolidating local administrative systems through municipal mergers. In 2014, a new system was introduced to promote decentralisation reforms based on consultation and proposals made by local governments themselves (“proposal solicitation method”). The government is currently pursuing its 12th law on decentralization, which was formulated in 2021 based on this new method.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
1 724 municipalities (shichouson) and 23 special wards within Tokyo		47 prefectures (todofuken)
Average municipal size: 72 991 inhabitants
1 747		47	1 794

OVERALL DESCRIPTION : Japan is a unitary country with two tiers of local governments, prefectures and municipalities, that have no hierarchical link. Prefectures and municipalities are specified in the Local Autonomy Law as the two basic types of local authorities in Japan.

REGIONAL LEVEL: The prefectural level of government in Japan consists of one metropolitan district (Tokyo), two urban prefectures (Kyoto and Osaka), one district (Hokkaidō), and rural prefectures. Population size and density varies widely between prefectures, especially between the most densely populated urban prefectures along the Pacific coast, and rural ones. In 2020, the medium size prefecture averaged around 1.6 million while 14.1 million lived in Tokyo, the most populous prefecture (but third smallest in size), and 0.5 million people lived in Tottori, the least populous prefecture. The density of population in Tokyo is estimated to be 90 times that of Hokkaido.

Regionalisation plans have been considered for decades, and new regionalisation projects were proposed in the 2000s under the term “Doshusei”, but reorganisation has not been scheduled yet. As stipulated by the National Spatial Planning Act, regions are responsible for drawing their own regional plans, in coherence with the National Spatial Strategies elaborated at the national level for a ten-year period.

MUNICIPAL LEVEL : Municipalities form the lowest level of government in Japan. The municipalities are not uniform, being subdivided in descending order into 20 designated cities, 772 other cities, 743 towns (machi) and 189 villages (mura). All of these local government units have their own mayors (or chiefs) and assemblies. Cities with a population above 500 000 inhabitants can be given the status of designated city (shitei toshi). According to the Local Autonomy Law, the 20 designated cities and the 23 Metropolitan Tokyo wards have a special status based on their population size, and they have more administrative and fiscal autonomy than the other municipalities. Designated cities are divided into wards (ku), each of which has a chief nominated by the mayor.

Several waves of mergers have drastically reduced the number of municipalities, from 9 868 in 1953 to 1 724 today. The first wave was "Shōwa no Daigappei" which reduced the number of municipalities from 9 868 in 1953 to 3 472 in 1961. The objective was to reduce the number of municipalities to one-third of the original number and to attain a minimum target size of 8 000 inhabitants per municipality. A second wave (“Heisei no Gappei”) took place from 1999 until 2010, which reduced the number of municipalities from 3 232 to 1 727, based on voluntary merger policy supported by a mixture of incentives.

As a result of these amalgamations, municipalities have grown in size, and as of 2020, 54% of Japanese municipalities had more than 20 000 inhabitants and only 15% fewer than 5 000 inhabitants, with an average municipal size of 72 991 inhabitants and a median size of 23 774 inhabitants.

HORIZONTAL COOPERATION: Inter-municipal cooperation is increasingly promoted, in particular through voluntary partnership agreements that are established under the Local Autonomy Act. The “Central Urban Area Initiative”, launched in 2014, promotes cooperation between a central city and its neighbouring localities through a cooperation agreement to promote regional dynamism and growth across Japan. As of 2022, 362 municipalities across Japan were involved in a Central Urban Area Initiative.

Local governments in Japan have a large array of responsibilities, with an asymmetrical decentralisation system at the regional and local levels. Despite no clear-cut separation, the prefectures have considerably stronger administrative powers than the municipalities. However, in many of these spheres, the central legislation often establishes uniform policies and standards for the whole country. The 1999 Omnibus Decentralisation Act abolished the former system of delegated functions (“agency-delegated functions” in which regional governors and mayors serve as regional representatives of the central government), which was in place under the 1947 Law on Local Autonomy. It significantly increased subnational autonomy and responsibilities, by revising the 475 previous laws.

Subnational governments have both “local own functions” and “statutory entrusted functions”, which remain under the supervision of the central government. According to the Local Autonomy Law, local governments are responsible for a range of functions in the fields of social assistance policies and public health, economic development, public infrastructure, public housing, and education, which put them at the frontline in the face of challenges posed by an ageing and decreasing population.

In addition, a network of 8 165 local public companies are active in public service delivery, especially in the sewerage (44% of all local public companies), water supply (22%) and hospitals (8%).

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Prefectural level	Municipal level
1. General public services (administration)	Communication and coordination affairs relating to municipalities	Internal administration; Family registers; Resident registrations
2. Public order and safety	Police	Fire fighting
3. Economic affairs / transports	Economic development; Public infrastructure; Prefectural roads; National highways, Harbours; Agriculture; Employment	Local roads; Local harbours
4. Environment protection	Forest and river conservation; Environmental protection	Sewage; Waste disposal; Parks
5. Housing and community amenities	Public housing	Urban planning; Public housing; Water supply
6. Health	Public health centres	Nursing
7. Culture & Recreation		Libraries; Citizens’ halls
8. Education	Upper secondary schools	Pre-schools; Elementary schools; Lower secondary schools
9. Social Welfare	Social assistance policies	Child welfare; Elderly; National health insurance; Ageing insurance

Scope of fiscal data: Cabinet-Order Designated Cities, cities, towns, villages and special wards at the municipal level; Tokyo metropolitan district, Kyoto and Osaka urban prefectures, Hokkaido district, and rural prefectures at the prefectural level.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: The legal framework of subnational finance in Japan is found in the Japanese Constitution (Art. 94), which enshrines the administrative autonomy of local public entities, as well as in the Local Autonomy Law and the Local Tax Law. The latter is the basic national law that stipulates the types of taxes and the means of taxation, and which gives prefectures and municipalities the power to levy and collect local taxes.

Public spending in Japan tends to be very decentralised, in particular compared with other OECD unitary countries, with shares of subnational government spending in GDP and in overall public spending significantly above the average (respectively 15.2% versus 12.1% of GDP and 39.5% versus 28.8% of public spending on average in unitary countries in 2019). The Trinity Reform, from 2002 to 2006, laid the financial basis of the decentralisation reform by setting up three major components: the creation of a tax-sharing system between the national and subnational level, a reform of the equalisation tax (local allocation tax) and the abolishment of several national earmarked grants. However, the level of decentralisation should not be overstated as subnational governments often remain “paying agents” on behalf of the central government, implementing policies designed by the different ministries.

Subnational government expenditure by economic classification
2019	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	6 525	15,2%	39,5%	100%
Inc. current expenditure	5 073	11,8%	35,1%	77,7%
Compensation of employees	1 722	4,0%	75,9%	26,4%
Intermediate consumption	1 011	2,4%	62,8%	15,5%
Social expenditure	927	2,2%	10,3%	14,2%
Subsidies and current transfers	-	-	-	-
Financial charges	74	0,2%	11,3%	1,1%
Others	4	0,0%	37,6%	0,1%
Incl. capital expenditure	1 451	3,4%	70,0%	22,2%
Capital transfers	247	0,6%	84,5%	3,8%
Direct investment (or GFCF)	1 204	2,8%	67,7%	18,5%

EXPENDITURE: In Japan, the share of subnational government expenditure in public expenditure and in GDP was in line with the OECD average in 2019 (respectively 40.2% and 16.2% on average in 2019). Municipalities are responsible for approximately 60% of total subnational government spending, against 40% for prefectures. Japanese subnational government share in public staff spending is particularly high compared to the OECD average in 2019 (61.8% for all OECD countries).

DIRECT INVESTMENT: Public investment is a key function ofJapanese local governments, as investment accounted for 18.5% of their budget in 2019, as compared to 11.7% on average in the OECD. The subnational government share in public investment is noteworthy, compared to the OECD average (56.3%) as well as the weight in GDP, representing 2.8% of GDP vs 1.9% in the OECD. Prefectures and municipalities were each responsible for around half of subnational government total investment in 2019.

Most subnational investments in Japan are dedicated to economic affairs (around 50%), as local governments are responsible for roads, bridges and harbours, among others. Indeed, infrastructure such as roads, waterfronts, sewerage, and seaports, which were developed during the high growth era (1955-1973), are rapidly aging. Other large categories of investment spending include education (16%), agriculture, forestry and fishery (10%) and housing (10%).

Yet in their mission, subnational governments are often limited to a role of implementing agents on behalf of the national governments. A large share of local investments are funded through the Fiscal Investment and Loan Program (FILP) and are guided by Japan’s National Spatial Strategy (NSS) in the areas of integrated territorial and infrastructure development. In addition, subnational governments are constrained to focus on projects with higher returns, due to their tight fiscal situation.

The central government is promoting the use of PPPs by subnational governments, which are still limited as subnational governments rely mostly on subsidies from the central government. Incentives to enhance the use of PPPs also require to take into account the maintenance and renovation of infrastructure in a context of tight subnational finances, in particular in the area of water and sewerage, airports, educational facilities and public housing. The use of PPPs is regulated by the 1999 Act on Promotion of Private Finance Initiative and in 2015 the so-called PFI Promotion Council has established a guidance for local governments for the use of the various types of PPPs. In 2019, the Japanese government launched the Public-Private Partnership Smart City Platform, which gathers representatives from the central and local governments, academia and the business sector.

Subnational government expenditure by functional classification
2019	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	6 525	15.2%	-	100%
1. General public services	663	1.6%	21.4%	10.2%
2. Defence	0	0%	0%	0%
3. Security and public order	416	1.0%	77.1%	6.4%
4. Economic affairs/transports	963	2.2%	53.0%	14.8%
5. Environmental protection	445	1.0%	89.0%	6.8%
6. Housing and community amenities	246	0.6%	52.0%	3.8%
7. Health	767	1.8%	17.3%	11.8%
8. Recreation, culture and religion	166	0.4%	90.8%	2.6%
9. Education	1 164	2.7%	72.7%	17.8%
10. Social protection	1 695	4.0%	18.5%	26.0%

Subnational governments dominate general government expenditure in most major public service sectors in Japan, such as education (primary, secondary and high school), economic affairs (notably transport infrastructure) and housing and community amenities. They are also responsible for the large majority (around 90%) of total public spending in the areas of environmental protection and recreation and culture. The main area of subnational government spending is social protection, in which they play a key role at the national level (in particular for child, elderly, public assistance and disaster relief).

Municipalities’ prime spending areas are social welfare (37% of municipal expenditure), followed by general public services, education and civil engineering. Contrastingly, prefectures spend more on education (21% of prefectural expenditure), followed by public welfare (17%), including health, and economic affairs (12%).

Subnational government revenue by category
2019	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	6 513	15.2%	43.0%	100%
Tax revenue	3 166	7.4%	39.2%	48.6%
Grants and subsidies	2 779	6.5%	-	42.7%
Tariffs and fees	382	0.9%	-	5.9%
Income from assets	45	0.1%	-	0.7%
Other revenues	141	0.3%	-	2.2%

OVERALL DESCRIPTION: Tax revenue was the main source of subnational government revenue in 2019 (48.6%), and the share of tax revenue in total subnational revenue has slightly increased in recent years thanks to fiscal reforms (+ 4 percentage points since 2013). Subnational governments in Japan rely on central government transfers for 42.7% of their revenue (below the OECD average of 50.5% in 2019), based on a tax sharing system established by the 2004 Trinity Reform. Japan has a traditionally strong system for inter-regional transfers to counteract regional disparities.

Recent reforms tend to reduce the share of earmarked grants, providing more leeway to subnational governments over their revenue, by introducing new revenue sharing rules. As of 2019, municipalities accounted for slightly more than half of total subnational government revenue (55%), while prefectures accounted for the remaining 45%.

TAX REVENUE: Tax revenue accounts for close to half of total subnational government revenue in Japan, and 15.2% of GDP. The share of subnational government tax revenue in public tax revenue in Japan is higher than the OECD average (39.2% versus 31.2% of public tax revenue in 2019).

The Local Tax Law provides for 12 types of prefecture taxes and 13 types of municipal tax. It specifies the tax base, the “standard rate,” the “maximum rate,” or the “fixed rate” of most of these taxes. However, local governments can set a rate that exceeds the standard rates through bylaws. Moreover, if local governments have specific needs, they can introduce new, non-statutory taxes, which are not stipulated in the Local Tax Law. Yet, these represent a very small share of their total tax revenues. In 2016, a tax reform was launched to correct the uneven distribution in tax sources across regions and the uneven distribution of local government corporation taxes, intended to minimise disparities in financial strength.

The primary subnational government tax is the resident tax (income tax) which is a combined prefectural and municipal tax calculated on the basis of 10% of the income earned in the previous year, regardless of the amount of income. It is levied both on individuals and businesses, and in 2019, both taxes combined represented around 51% of subnational government tax revenue. This system enables areas with a high concentration of businesses and high income, such as Metropolitan Tokyo, to be almost self-financing. By contrast, prefectures from more isolated areas on the Japan Sea coast cannot rely exclusively on this source of revenue, and more generally are less reliant on tax revenues. Overall, in 2019, the Prefecture of Tokyo was raising 2.4 times more tax revenues than the Nagasaki Prefecture.

At the regional level, in addition to the resident tax, prefectures also collect an enterprise tax (around 25% of prefectures’ revenue in 2019), a local consumption tax (26%) and an automobile tax (8%). Other taxes include light-oil delivery tax, prefectural tobacco tax, etc.

At the municipal level, the second highest tax is the fixed asset tax (property tax levied on lands, buildings and other types of tangible and depreciable business assets), accounting for approximately 41% of municipal revenue only in 2019. The standard rate for the property tax is fixed at 1.4% by the Local Tax Law, and the maximum tax rate is set at 2.1%. The value of the land and building is assessed by the municipality every three years, based on the fixed asset value criteria specified by the Minister of Internal Affairs and Communications. Other municipal taxes include the city planning tax (6% of municipal revenue), and a municipal tobacco tax (4%).

Overall, for the subnational government sector in general, the resident tax accounted for half of subnational government tax revenue (i.e. 3.8% of GDP). The recurrent property tax (fixed asset tax) was the second most important source, representing 25.6% of total subnational government tax revenue, amounting to 1.9% of GDP (vs. 1.0% of GDP on average in the OECD). The third biggest source was the consumption tax (11.6% of subnational government tax revenue and 1.4% of GDP).

GRANTS AND SUBSIDIES: Major inter-governmental transfers in Japan are based on the sharing of national taxes. The most important one is the Local Allocation Tax Grant (LAT), an equalisation grant. The LAT is based on national tax revenues drawn from the five major national taxes (33.1% of PIT and CIT, 19.5% of the consumption tax, 50% of the liquor tax and all local corporate tax revenues), which are then redistributed to subnational governments. Subnational governments receive between 25% and 34% of the receipts, based on their local fiscal capacity and expenditure needs. Therefore, no distribution is made to local governments with base revenues exceeding their financial needs. The LAT is broken down into an “ordinary” LAT (94% of funds) and a “special” LAT (6%), dedicated to extraordinary expenses such as damages from natural disasters. For two decades, LAT funding itself has been an issue as the grant’s base revenue has been inadequate to cover the local financial need. It still requires topping up from other funding sources, including the general account of the national government’s budget, and debt financing co-financed at 50% by local governments. In 2019, the LAT accounted for 17% of prefectures’ revenues, and 13% of municipalities’ revenue.

The second main transfer is the Local Transfer Tax, which is made up of the local gasoline transfer tax and other national taxes redistributed to subnational governments as a general grant. Other transfers include, for example, funds for local revitalisation and subsidies for the Overcoming Population Decline and Revitalizing the Local Economy, and national treasury disbursements. In 2019, around 17% of all grants were for capital expenditure, same as in 2016.

OTHER REVENUE: Other revenues include user charges and fees, revenues from property (sales of assets, rents, dividends) and social contributions. Japan subnational governments are expected to increase their user fees (i.e. for garbage collection, etc.) in the coming years to improve their overall revenue.

Subnational government fiscal rules and debt
2019	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt (consolidated)	13 524	31.5%	14.1%	100%	-
Financial debt	12 865	30.0%	13.9%	95.1%	100%
Currency and deposits	0	-	-	0%	0%
Bonds / debt securities	5 388	-	-	39.8%	41.9%
Loans	7 477	-	-	55.3%	58.1%
Insurance pensions	0	-	-	0%	-
Other accounts payable	659	-	-	4.9%	-

FISCAL RULES: The 2009 Act on Assurance of Sound Financial Status of Local Governments established new deficit and debt ratios to monitor the financial solidity of subnational governments and strengthen their fiscal discipline. The “Basic Policy on Economic and Fiscal Management and Reform 2015” tended to strengthen local fiscal discipline. As of 2019, no local government had a real deficit ratio exceeding 0%. The “Basic Policy on Economic and Fiscal Management and Reform 2018” sets two fiscal consolidation goals for the central and local governments: a primary surplus by FY 2025 and reducing the public debt-to-GDP ratio steadily.

DEBT: Subnational governments may borrow subject to certain conditions, and only to finance capital expenditure (“Golden Rule”). Subnational government borrowing in Japan is very high by international standards, above the OECD average as a share of GDP (27% in 2019). Yet, in contrast with their high share of subnational expenditures, the share of subnational government debt in total public debt is lower than the OECD average (22% in 2019), which can be explained by the significant level of Japanese public debt, reaching 224% of GDP in 2021. Subnational government outstanding debt is mainly comprised of financial debt (95%), the remaining coming from “other accounts payable”. Financial debt is composed of loans (58%) and bonds (42%, a slight increase since 2016).

Local bonds are funded either on the financial markets, by commercial banks, through citizen-participatory bond issuance, or through the Japan Finance Organisation for Municipalities (JFM), established in 2009. The JFM is funded by prefectures and municipalities and was designed specifically to provide subnational governments with long-term and low-interest rate funds. Since 2003, subnational governments have started offering joint local government bonds, based on Art. 5-7 of the Local Government Act. A consultation system with the central government replaced a prior approval system in 2006 for the issuance of local bonds. Before debt issuance, prefectures and municipalities, which are found fiscally unhealthy (based on their public liability indicators), must consult the upper level of government (the Minister of Internal Affairs and Communications or the prefecture governors) to obtain consent. For those that can issue bonds without consent, the head of the local government must report it to the assembly. Subnational governments are also active in issuing green bonds in the areas of sewerage, energy, and flood prevention, through the 2020 JFM Green Bonds Framework.

Every year, the Ministry of Internal Affairs and Communications drafts the Local Government Bond Plan to secure funding required by subnational governments, in line with the Fiscal Investment and Loan Program Plan of the Ministry of Finance. The FY 2021 LGB Program totalled JPY 13 637.2 billion, as compared with JPY 11 733.6 billion in FY 2020. The plan includes estimates of bond issuance by type and purpose.

In June 2021, during the COVID-19 pandemic, the Tokyo Metropolitan Government issued the country’s first municipal social bond, a JPY 30 billion five-year bond whose proceeds are earmarked specifically for projects with a measurable social benefit.

TERRITORIAL MANAGEMENT OF THE CRISIS: Japan reported its first case of COVID-19 on January 16, 2020. In Japan, the management of the crisis has been conducted regionally, via local Public Health Centres (hokenjo) at the prefectural level that played a pivotal role in the pandemic response. They are in charge of implementing the testing strategy through local institutions and local outpatient and testing centres. They are also responsible for active epidemiological investigation and health observation. Nationwide deliveries are managed via the vaccination system (V-SYS), which was the ICT system developed by the Ministry of Health to help medical facilities share information with the authorities, vaccine makers and other stakeholders. This system has proved efficient to fight against the pandemic. Recent studies have shown that the COVID-19 crisis has a stronger impact on the most socially disadvantaged Japanese prefectures. More cases and deaths were observed in prefectures with lower household incomes and higher proportions of disadvantaged populations.

In November 2021, with the objective to restart economic activities, the government initiated a vaccine-and-testing package, which aimed to allow local governments to make their own decisions regarding pandemic restrictions. However, the spread of the Omicron variant prompted the country to revise its policy in early 2022, leading the central government to halt the implementation to reinstate quasi-emergencies measures from the top in certain of the most vulnerable prefectures. When quasi-emergency measures are implemented, governors of prefectures may order restriction measures in specific areas within the prefecture, and refrain residents from travelling across prefectural borders.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Measures to support businesses and households have included the special deferment in 2020-2021 of the payment of the local income tax, and other tax adjustments relative to the fixed property tax and city planning tax.

Support to subnational governments was provided in the support packages (JPY 25.7 trillion), set up by the central government throughout the crisis in April 2020. It comprised local revitalization grants, amounting to JPY 1 trillion to help regions cope with COVID-19. These grants were meant to enable local governments to take necessary measures to prevent the spread of infection and support households and businesses within their jurisdictions depending on their circumstances. The grants were increased further in June 2020, part of the central government’s second supplementary budget (JPY 31.9 trillion), as well as the contingency reserve fund for COVID-19. Finally, a third supplementary budget measure was taken in January 2021, in addition to decisions to use reserve funds throughout 2021.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The COVID-19 crisis in Japan had an impact on local revenue, leading to a decrease in local taxes on economic activities (resident tax levied on individual and business income) and revenue from tourism. It is estimated that local tax revenues declined by 6.5% in 2021 compared with pre-COVID fiscal budgets. Therefore, the number of subnational governments collecting the LAT has increased for two years in a row (the number of local authorities classified as “non-subsidized” dropped from 22 to 54 in 2021). Decline in tax revenues was stronger for prefectures than municipalities, given prefectures’ larger reliance on enterprise taxes (representing in general around 25% of their tax revenues), which are cyclical, while municipalities rely more on property taxes (40% of their tax revenues), which are more stable. The central government has set up several measures to counter this impact, such as subsidies to cover pandemic-related expenditures.

On the expenditure side, subnational expenditure needs have remained high, in particular social welfare costs driven by an ageing population. The COVID-19 has triggered an increase in central, local and regional debt, which reached 36% of GDP in 2020. The Tokyo Metropolitan Government issued a JPY 60 billion yen five-year “COVID-19 response bond” to fund rescue financing for cash-strapped local businesses. However, credit pressures should be limited by low interest rates, and local debt is expected to decrease. To deal with the pandemic, prefectures have also extensively used their reserve funds. In July 2020, all 47 regions had already used 58% of their reserves. Due to the recovery of tax revenue at both the national and subnational levels in 2021, the issuance of extraordinary financial countermeasures bonds has been reduced in the 2022 Budget, as well as Local Allocation Tax Grants from the central government, to secure the same level of funds for subnational governments as in the previous year.

ECONOMIC AND SOCIAL STIMULUS PLANS: In November 2021, the Japanese government unveiled a massive stimulus package for 2021 and 2022, amounting to JPY 78.9 trillion (14.5% of GDP), of which JPY 36 trillion was for the fiscal year 2021. The package features four pillars of growth. First, it targets prevention and support against the spread of COVID-19. This includes the distribution by local governments of cash handouts to the population 18 years or younger. Second, it plans for the reopening of society and preparedness for future crises, including the constitution of a contingency reserve fund for COVID-19 of around JPY 6.8 trillion. Third, the package includes the revitalisation of localities and overcoming income gaps and disparities between urban and rural regions. Digital and green investments should help to overcome these disparities, through the deployment of digital technologies such as telework, drone delivery and autonomous driving to reach the most isolated areas, as well as a “digital garden city superhighway” to enable high-speed 5G communication and thereby increase attractiveness of all regional areas. This component encompasses general grants to local governments to cover the losses in local tax revenues caused by the COVID-19 crisis (JPY 17.4 trillion); JPY 166 billion to support implementation of digital technology in local governments (optical fiber and 5G); "Grants for the Promotion of Regional Development” (JPY 100 billion); and "Telework Promotion Project for Regional Development” (JPY 120 million)" programme. Finally, the package aims to enhance resilience and disaster management capabilities.