Fiscal Decentralization Reform in Japan : Approach, Policy and Practical Challenges

A number of countries have pursued fiscal decentralization within a broad context of political and economic policy reforms to improve the performance of their public sector. Fiscal decentralization can potentially improve the allocation efficiency of the public sector and increase the capacity of a nation to address its pressing economic, social and political problems. The effectiveness and sustainability of such an approach, however, is conditioned by the capability and efficiency of policy reformers to implement measures that have direct effect on the mobilization, allocation and rationalization of fiscal resources in the system. When political imperatives dictate the adoption of fiscal decentralization, however, the process would confront problems of the commons, capacity constraints and externalities that would limit the potential efficiency gains from decentralization on the performance of the public sector. This paper develops a theoretical and policy argument on the economic rationale for and concerns of pursuing fiscal decentralization in Japan and highlights some of the practical challenges in implementing fiscal decentralization policies. The paper discusses the recent fiscal policy reform measures in the country with respect to fiscal decentralization and outlines issue areas where fiscal policy could be used to address problem of horizontal and vertical fiscal imbalances, fiscal discipline, persistent budget deficit, and public debt.