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

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  • Nobuki Mochida

    (Faculty of Economics, University of Tokyo)

Abstract

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.

Suggested Citation

  • Nobuki Mochida, 2008. "Subnational Borrowing in Japan : from 'Implicit Guarantee' to Market Discipline and Fiscal Rule," CIRJE F-Series CIRJE-F-541, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2008cf541
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2008/2008cf541.pdf
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    References listed on IDEAS

    as
    1. J. Kornai & E. Maskin & G. Roland, 2004. "Understanding the Soft Budget Constraint," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 11.
    2. Alexander Plekhanov & Raju Singh, 2006. "How Should Subnational Government Borrowing Be Regulated?Some Cross-Country Empirical Evidence," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 1-4.
    3. Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182297, December.
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    Cited by:

    1. Tomomi Miyazaki, 2010. "Local Public Sector Investment and Stabilization Policy : Evidence from Japan," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 6(1), pages 153-166, February.

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