An Economic Analysis on the Consultation System of Local Bond

The Consultation System of Local Bond began in Japan in fiscal 2006. This system allows local governments to issue local bonds as long as they consult with the national or prefectural government in advance, even in cases where they cannot obtain its consent. This can be interpreted as a greater degree of freedom being given to local governments that issue local bonds; however, although the issuance of bonds without national or prefectural consent is a symbol of this freedom, all bonds that have been issued to date have been with consent, despite more than four years passing since the system came into operation. This article specifies what fundamental changes took place along with the shift from the system that required permission for the issuance to the system requiring consultation, and examines from a theoretical and statistical standpoint the reasons why the only bonds being issued are those with national or prefectural consent. One reason why the only bonds being issued are those with national or prefectural consent is that as the upper limit for the appropriation percentage of local loans (chihousai jutou ritsu) is so high, consent is always given, so the system is no real restriction on the issue of bonds, and as such, local governments do not need to issue bonds without having obtained consent for them. Another reason is that the real debt service ratio used as a criterion for permission to raise local loans (jisshitsu kousaihi hiritsu) exceeds the value specified, causing them to require permission and disqualifying them from being able to issue bonds without consent. A third reason is that issuing bonds without consent is costly because local allocation tax (chihou koufu zei) measures do not apply in cases of funds used to redeem the principal and interest of local bonds that have been issued in excess of the upper limit mentioned above. In future, it is possible that bonds without consent may be issued mainly by those local governments to which the third reason applies, and it has been confirmed from statistical data on financial results that a little less than 10% of municipalities nationwide fall into this category.