Corporate Taxation and Regional Economic Development in Japan: A Panel Analysis of Prefectural-Level Data

Japan’s Business Location Promotion Law was enacted with the aim of revitalizing regional economies through decentralized industrial growth. This paper analyzes the effect of corporate tax policy—modeling tax burden as the marginal effective tax rate (METR) at the prefectural level—on regional economic development by estimating its impact on firms’ decisions about where to locate new facilities. The key findings can be summarized as follows: (1) The effect of corporate taxation on regional economic development—modeled as employment in the manufacturing sector—is significantly negative at the national level. However, when the country is split into two categories—Japan’s three major metropolitan areas versus all other prefectures (“provincial regions”)—the effect is not statistically significant in either category. (2) Several independent variables unrelated to tax burden also influence regional economic development. Notably, market characteristics—modeled as population size—has a significantly positive effect both at the national level and separately within each regional category. The nationwide model indicates that the effect of market characteristics is considerably larger than that of corporate taxation. (3) The public service of highway infrastructure has a significantly positive impact on manufacturing employment within Japan’s three major metropolitan areas.