Thread,
The following is a rather dated article. But it also reflects the
depth of the Japan problem in another rather unpublicized area.
The article is rather long, so you may not wish to continue.
JAPAN'S CITIES ARE SINKING IN DEBT
The country's next big financial mess is here
Among the world's great metropolises, no city seems better managed
or more prosperous than Tokyo. The smoothly running subway,
the immaculate parks, the unobtrusive police booths at every
major corner, the absence of dangerous slums, the well-maintained
schools--it all gives the impression of a carefully planned,
well-tended place, a marvel of urban engineering. Western visitors
are always hard-pressed to find evidence of Japan's crisis when
they roam the Tokyo streets, taking in the sights of the Ginza or
sipping latte from one of Starbucks' newest outlets.
Yet looks can be deceiving. In the past few days,
Tokyo city officials have come clean on their own version of the
Asian crisis--a gargantuan budget emergency that could cost billions
to fix. And Tokyo isn't the only Japanese city in need of some major
financial renewal. In fact, the news coming out of Japan's prefectural
and municipal offices is fiscally terrifying. Briefly put, the local
Japanese governments are broke, or very nearly so. They are going
through a financial collapse that poses another major challenge
besides the banking crisis (table). And if the central planners in
Tokyo think that Japan's city halls can finance new public works to
revive the economy, they may be in a for a very nasty surprise.
''HIGHLY DANGEROUS.'' To get a sense of what's going on, it's
important to realize the role that the prefectures and city
governments of Japan have played in building public works, keeping
construction companies prosperous, and generating jobs. For decades,
the Ministry of Finance has shuffled off much of Japan's deficits
onto the local governments. The Diet would order up some public
works, and the central government would foot the bill for many of
them. But the governments of Tokyo, Kyoto, Osaka, Nagasaki, and
other localities would also issue bonds in their own name to pay for
many of the new fishing ports, harbors, and other projects of
questionable value.
It was a clever way to keep a lot of the spending off the books of
the central government. Says Tokyo University government-finance s
pecialist Naohiko Jinno: ''It's somewhat like the way big Japanese
companies use their subsidiaries to keep their own finances in shape.
'' Since 1992, the government has budgeted $300 billion for public
works. Local governments were told to come up with 28% of that amount.
The freewheeling spending benefited lots of politically connected
companies and gave many mayors big budgets to play with. But now
local officials are in a panic because the overspending has brought
them to the brink: The governments of Tokyo, Osaka, and Kanagawa,
the prefecture for Yokohama, have edged close to insolvency and may
have to fall under central government supervision to sort out their
debt mess. It's as if New York, Chicago, and Los Angeles all reported
acute fiscal crises at the same time. ''We are moving into a highly
dangerous, critical condition,'' concedes Tsutomu Ushioda, a budget
official with the Tokyo metropolitan government.
Not only are these cities taking huge hits from sliding corporate
and personal tax revenues but they are still being strong-armed by
the central government to assume more debt to help bankroll a $124
billion public-works package announced last April. Yet few regional
governments now have the stomach to borrow more. Already, Japan's
local government debt is roughly 2% of gross domestic product,
well over twice the level for regional governments in other
industrialized nations. Debt at five of the most leveraged
prefectures comes to $90 billion. Some of the figures make Japan's
cities look like wobbly emerging-market states. In 1996, Kanagawa
ran a budget deficit equal to nearly 24% of its annual expenditures.
Nagasaki, Hyogo, Akita, and Kochi are in similar straits.
Moreover, many of these cities are now waging a quiet revolt against
the central government. Recent legislation has given the localities
a little more autonomy from Tokyo, and they are using that wiggle
room to delay the projects they have been forced to budget for.
While public-construction starts sponsored by the central government
are holding steady, those launched by local governments have dropped
20% this year from 1997. As a result, Finance Minister Kiichi
Miyazawa's pledge that Japan would spend its way out of recession
may not prove true at all. That's especially troublesome since the
big Oct. 7 rally in the Nikkei was based partly on hopes of a huge
spurt in public-works spending. ''There's considerable doubt that
this one remaining source of demand in the economy will have anything
more than a modest impact,'' figures analyst Ron Bevacqua of Merrill
Lynch & Co.
Truth to tell, the government should not be recycling Japan's vast
savings pool into public concert halls, resort spas, and generous
social services. For one thing, it does a lousy job of allocating the
money. In the Tokyo area, some $30 billion has been dispensed to
build such projects as a lavish metropolitan headquarters and two
international exhibition centers that were unneeded, notes Yasunobu
Watanabe, a Tokyo prefectural assemblyman and member of the Japan
Communist Party. ''They should have reviewed, frozen, or canceled
these projects,'' says Watanabe.
LARGEST SPREAD. The spending spree has left Tokyo prefecture with $2.2
billion in debt-service costs this year. Those obligations will rise
to $3.7 billion in 1999, and the government will be hard-pressed to
cover them. In a sign that investors are getting edgy about all the
local debt in Japan, the spread between 10-year municipal bonds and
similar central government bonds has widened to 50 basis points--the
largest gap ever seen, according to the Japan Local Bond Assn.
Now the cities have to raise money with new levies. The Osaka
government may hike the entrance fee for public high school students
tenfold to cover a steep drop in tax revenues. In Tokyo, politicians
are thinking about scrapping the ''silver pass,'' or free ticket on
any types of public transportation. Little by little, ordinary
Japanese are going to have to shoulder more of the costs of social
services until governments can lower their debt levels to sustainable
levels.
As the recession deepens, it may even be necessary to bail out
Japan's cities. But that presents a conundrum: If the central
government needs to spend billions saving the banking system, how is
it going to come up with extra sums to save Tokyo, Kanagawa, and the
other metropolitan areas?
Also, if the cities call a halt to their public works, then
Japan's construction companies--already well in arrears on loan
payments to the banks--could get into deeper trouble. And that,
of course, would cause more woe for the banks. A separate issue:
As banks start calling in loans of all kinds to shore up their
capital bases, local companies will be starved for credit and be
forced to shutter plants and lay off workers. That pain will reach
the prefectures in the form of even lower tax revenues. Slowly but
surely, the crisis is making its presence felt in every city, town,
and hamlet.
By Brian Bremner and Miki Tanikawa in Tokyo
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