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Make Japan Great Again

How to halt mass migration out of Japan’s prefectures

Mike Newman President & CEO Analogica K.K.

February 8th, 2017


The sad tale of Yubari City

Economic woes

Hokkaido in trouble

Akita the oldest prefecture in

Japan

Flocking to the big smoke

Merging towns

Tohoku most troubled

Depopulation

The state of inter-prefectural migration – a disturbing summary

The campaign poster on the cover page is from Yubari City in Hokkaido – “No money but love.”

Yubari is notable for five things. First, it is the region that produces Japan’s most expensive melons,

the type you see beautifully encased in a satin-lined pine box with a price label of US$200. Second,

it had to declare bankruptcy in 2007. Third, its population has fallen from 117,000 in the 1960s to

around 21,000 in the 1990s to less than 8,900 today, falling 19% in the last 5 years alone. Fourth,

the average age of the city’s residents is set to hit 65 by 2020. Fifth, taxable income continues to fall

with estimates that government coffers will swell by a woozy 25% of the levels seen 20 years ago.

Their claim that Yubari has the lowest divorce rate in Japan doesn’t seem to be stopping residents

from divorcing it. In fact, as we learnt in our Crime in Japan series, economic woes are preventing

more couples from divorcing but even some that break their vows end up living under the same roof.

The problem is so prevalent that the National Police Agency had to invent a new category for

domestic violence to tally the sharp rise in cases in 2014 of divorced couples living together.

Hokkaido’s woes are not just limited to Yubari. Sadly, the northern island holds 6 of the top 15

prefectures across Japan experiencing an exodus of its citizens. Hokkaido has 85 villages with less

than 5,000 residents. Over the last 5 years in percentage terms, Yubari has seen a greater flood of

people than Minamisoma, a town in Fukushima Pref. on the 30km exclusion zone border to the north

of the crippled Fukushima Daiichi nuclear reactor.

Akita Prefecture has the highest percentage of 65yo+ citizens in Japan at 33.2% of the prefectural

total. Over 27% of its workforce is in construction and manufacturing. In what world, can a community

avert such a skewed employment picture? If the working aged populace is leaving with their kids

(high school enrolment is down 22% in 5 years), one of the highest natural population declines and

Akita has the second highest prefectural debt per capita what need is there for new construction

projects or the rationale for a corporate to expand local production?

Perhaps not surprising, many citizens are seeking new fortunes in the major cities – Tokyo, Osaka,

Nagoya, Yokohama, Saitama and Chiba are capturing the socio-economic spoils. One name that

did surprise was Fukuoka in the southern island of Kyushu. Fukuoka Pref. can claim 3 of the top 20

fastest growing cities in Japan.

Around 20 years ago, the Japanese government embarked on a program known as

‘Shichosongappei’ （市町村合併）which loosely translates as mergers of cities and towns. However

as much as that plan to sensibly merge public services was – e.g. waste collection, councils, schools

and hospitals – the cities (especially to the north) have continued to shrink. Age is a big factor which

shows up in prefectural GDP/capita as well as suicide rates.

Cities in the northern prefectures (Tohoku) face the biggest challenges. The Great East Japan

Disaster of March 2011 has only exacerbated the move out of these areas. Eight of the top 10 places

for fastest rates of depopulation are in Tohoku. Shikoku, and cities on the Japan Sea coast are also

at the mercy of residents pulling up roots. We colour code these prefectures to show how our ‘basket’

correlates highly.

Our biggest concern in summary

Our biggest concern remains that of rapid acceleration of depopulation going forward. Things seem

normal until the Rubicon is crossed. Then the damned flood can’t be dammed. As the productive

http://custprd.com/rsch/Crime%20in%20Japan%20-%20Nuclear%20Family.pdf

http://custprd.com/rsch/Crime%20in%20Japan%20-%20Nuclear%20Family.pdf


Similar to German

reunification

Japan’s policies failing

Debt: Resident

Detroit

workforce looks to abandon its roots in search of sustainability we fear that corporates also face a

big dilemma. As was experienced with German reunification workers flocked to more economically

viable areas in the West scorching those businesses in the East. East German regions had to hike

wages significantly to stem the tide, ruining profitability. Even today the East has significantly higher

unemployment rates than the former West as businesses in the former communist bloc went to the

wall (no pun intended).

The Japanese government’s plans to revitalise the regions are not working because economic

reversals all hinges on confidence. The chicken and egg argument is simple. If corporates fear not

enough workers will remain to justify production and workers think long term quality of life will be far

more sustainable in economically healthier areas, growth won’t happen in the regions.

As regional Japan continues to shrink, the pressure will then be put back on the fiscal status of the

prefectural governments. The Japan Local Government Bond Association (JLGBA) highlights that

the financial strength index (FSI) of Shimane is the poorest in Japan. To put that in the context of

Detroit, which declared bankruptcy in 2013. Detroit has approximately $30,000 debt per resident

today. Looking at Shimane Prefecture its citizens carry around $14,000 prefectural government debt

per resident. Given the working age population of 54% (and falling) that number balloons to around

$26,000 per working age resident. Debt servicing (around 16% in Shimane) is one thing but in the

last 6 months, yields have begun to climb. As we know debt financing can turn on a dime.

Source: Custom Products Research, Japan Statistics Bureau

Although Detroit is incomparable on most measures to Japan it does highlight what a city can look

like when economic fortunes reverse. 30% of Detroit’s residents disappeared in 15 years. From the

highest per capita income in America during the 1960s it now languishes toward the bottom. 40%

live in poverty and the state suffered the ignominy of half the 350,000 home owners paid no property

taxes in 2011.

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Fig. 1 - Prefectural Debt/30% fall in working age Citizens (¥)

Legend:Yellow -TohokuGrey - HokkaidoMauve - Shikoku/Kyushu/Japan SeaGreen - Fukuoka

http://www.pref.shimane.lg.jp/admin/seisaku/zaisei/jyokyo/zaimushohyo/h26_zaimushohyo.html


Polish style tax reform

The sorry tale of Yubari

The Solution – Polish style tax reform

Our solution is to adopt a Polish style tax reform which simplifies the system and gets the 70% of

corporations that don’t pay tax to contribute. Poland doubled corporate tax revenues on a halving of

tax rates in short order as a result of making tax avoidance (not evasion) no longer worth it. Japan

must take risks – it has nothing to lose.

Source: Custom Products Research

Let’s look at the problem and solutions more deeply.

Here yesterday, gone today

Yubari City is a tragedy. Its population is 90% lower than it was in the 1960s. Yet its legacy is likely

to be repeated as other cities fade out. These ghost towns are not merely dying because its elderly

citizens are shuffling off this mortal coil, the youth and working aged population are seeing little

prospects for the future and are congregating in the more populous areas which offer much more

viable economic scope.

Let us begin with the fastest depopulating cities in Fig.3.

-0.027

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Fig. 2: 10yr current bond yields by prefecure (%) vs 10yr yields 6mths prior

Generic 10yr Yield - July 2016 Generic 10yr Yield - Jan 2017



Hokkaido & Akita..

Aged population

skewed


While many of these cities in Fig. 3 are relatively small (ranging from 3,500 to 65,000) the larger

cities in Hokkaido (Chitose and Sapporo have moved a mere +2% in the past 5 years) while all

others are at stall speed or falling. In the case of Akita Pref. all cities are in retreat, Fig.4.


When we analyse the population pyramid we note that Akita tops the highest 65yo+ population in

the nation at 33%, Fig. 8. In the following charts, we’ll highlight Fukuoka (especially Fukuoka City)

as a hot spot outside the main metropoles. As the largest city in Kyushu it seems to be attracting

firm population growth which looks sustainable.

-19.0-18.5

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-12.2 -12.1 -11.9-11.7 -11.7 -11.5

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-10.0 Yubari Minamisoma Utashinai Rikuzentakata Tosashimizu Akabira Oga Kumano Ashibetsu Kesennuma Bibai

Hokkaido Fukushima Pref Hokkaido Iwate Pref Kochi Pref Hokkaido Akita Pref Mie Pref Hokkaido Miyagi Pref Hokkaido

Fig.3 : % Rate of population change (2010-15)

Wiped out by tsunami in Mar 2011

On the 30km exclusion zone border north of Fukushima Daiichi nuclear plant

28,39533,230

46,620

25,330

54,746

32,057 27,530

82,77392,214

79,993 74,153

33,098

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150,000

200,000

250,000

300,000

350,000

Oga Kitaakita Yuzawa Nikaho Noshiro Kazuno Semboku Daisen Yokote Yurihonjo Odate Katagami Akita

Fig. 4: Disappearing Akita Prefecture (2010-2015) - fall in population over 5 years

Population % Rate of population change (2010-15)


Fukuoka looks vibrant

Osaka anomaly

Age a factor


We can see in Fig. 5 that quite a lot of Fukuokan towns have seen solid growth over the past 5

years. If we roll out the 15-year average we can clearly see that Fukuoka Pref has been the strongest

regional area of all. It should come as no surprise that the metropoles of Tokyo, Yokohama

(Kanagawa Pref), Saitama, Chiba Pref and Nagoya (Aichi Pref) has claimed the bulk of the exodus.

As Fig.6 shows, only 9 out of 47 prefectures have experienced net annual population inflows over

the last 15 years.

Even Osaka saw average outflows of 7,200 per annum although part of that is to do with its close

proximity to Hyogo & Nara prefectures and rising numbers of commuters taking advantage of

cheaper property and relatively short journeys to work in Japan’s second largest city.


Boiling down deeper into the data we see how age is a factor. When looking at the 0-14yo and 65yo+

populations by prefecture there is little surprise, Figs. 7-8. All of Tohoku has a 0-14yo population

below the national average and 5 out of 6 have 65yo+ populations above the national average.

Fukuoka Prefecture is the opposite. Hokkaido falls on the wrong side of both categories.

192,554 228,200 206,974

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Chuo-ku Hakata-ku Nishi-ku Fukutsu Fukuoka Higashi-ku Onojo Kasuga Minami-ku Sawara-ku Dazaifu

Fig. 5: Fighting Fukuoka Pref (2010-2015)

Population % Rate of population change (2010-15)

66,653

3,650

903

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Fig. 6: Average Annual Prefectural Migration over the last 15 years


Okinawa the youngest

Shimane the same as 1920


Okinawa is the prefecture with the youngest population. As far as its towns are concerned, Okinawa

is still seeing mild net migration. The largest city of Naha has grown 1.1% over the last 5 years

although smaller towns are growing faster. Only Miyakojima is sliding.


When we look at population growth in the period since 1920, some sad tales are told. Shimane

Prefecture on the Japan Sea coast has not grown at all in almost 100 years. Kanagawa Prefecture

on the other hand has ballooned almost 6x, Fig.9. All prefectures in Tohoku, bar Miyagi (Sendai)

have seen population growth rates under the national average over the respective period.

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Fig.7: Japan's 2015 Population - 0-14yo


33.2%

30.5% 30.2%29.5%

28.9% 28.7%

26.3%25.5%

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Fig.8: Japan's 2015 Population - 65yo+



GDP/Capita

Crime


When digging a bit deeper into the economics of the prefectures, it is clear to see that those with a

GDP/capita below the national average are those seeing an exodus of population, Fig.10. Naturally

all of Tohoku and Hokkaido are on the wrong side of the curve.

Source: Custom Products Research, Japan Statistics Bureau, Ministry of Finance

Two other sets of data to analyse the plight of these regions is the incidence of crime and suicide

rates by prefecture, Figs. 11-12.

In a somewhat counter-intuitive looking chart for a law-abiding country, perhaps a good indicator for

relative economic strength is crimes committed. The economic rationale for crime would be the

ability for the ‘second hand’ grey market to thrive in stolen goods. In the Tohoku region, crimes

committed per 100,000 population take the bottom four places which is unlikely to be solely down to

the inability of pensioners to literally outrun the law.

58

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Fig.9: Population change in the prefectures between 1920 & 2013 (%)


4,423

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Fig. 10: GDP/Capita by Prefecture (¥1,000)



Suicide

Residents to teacher

Source: Custom Products Research, Japan National Police Agency

Perhaps a more depressing statistic is to analyse the incidence of suicides in the prefectures. Sadly,

our worst fears are confirmed yet again. All of Tohoku is above the national average. Clearly, many

see little way out of hardship. We note the Japanese National Police Agency records that suicides

by age group show the 65yo+ age group to represent 40% of the total in 2014 up from 27% in the

early 1980s. Tohoku as we showed earlier has population rates of elderly above the national

average.

Source: Custom Products Research, Japan National Police Agency

We took a slightly more abstract way of looking at the state of prefectures using the incidence of the

number of residents per teacher. Once again, the idea that teachers would look to seek schools in

regions with a sustained future, Fig. 13. Fukuoka is once again the standout among the regional

areas by a substantial margin. Despite Kyushu possessing higher than national average 0-14yo

populations, the teacher numbers seem to be lagging growth.

1424.4

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1200

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1600

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osh

ima

Toya

ma

Nag

asak

i

Oit

a

Ao

mo

ri

Yam

agat

a

Iwat

e

Aki

ta

Fig. 11: Crimes Committed per 100,000 by Prefecture (%) in 2014


30.3

28.9

26.4

26.1

24.

8

24.7

24.5

23.8

23.6

22.7

22.6

22.4

22.3

22.3

22.1

22.1

21.9

21.8

21.8

21.6

21.3

21.2

21.1

20.6

20.3

20.3

20.3

20.1

20.0

19.8

19.8

19.8

19.7

19.5

19.4

19.4

19.1

19.1

18.9

18.9

18.7

18.3

18.2

18.1

17.2

16.9

15.7

15.7

15

17

19

21

23

25

27

29

31

33

Yam

anas

hi

Iwat

e

Aki

ta

Niig

ata

Miy

azak

i

Toya

ma

Fuku

shim

a

Ko

chi

Shim

ane

Kag

osh

ima

Nag

ano

Ao

mo

ri

Miy

agi

Ehim

e

Gif

u

Yam

agat

a

Toku

shim

a

Jap

an

Toch

igi

Gu

mm

a

Fuku

oka

Ho

kkai

do

Nag

asak

i

Hyo

go

Shiz

uo

ka

Shig

a

Wak

ayam

a

Oki

naw

a

Hir

osh

ima

Toky

o

Oit

a

Saga

Tott

ori

Ch

iba

Ibar

aki

Mie

Sait

ama

Yam

agu

chi

Kyo

to

Ku

mam

oto

Aic

hi

Kag

awa

Fuku

i

Nar

a

Ish

ikaw

a

Oka

yam

a

Kan

agaw

a

Osa

ka

Fig. 12: Suicide rates by Prefecture (per 100,000) - 2014



Teachers/ School

Change in schools

Source: Custom Products Research, Ministry of Education, Culture, Sports, Science and Technology.

Teachers per school in each prefecture paints a similar picture. Fukuoka comes up positively on this

measure. Much of Kyushu on the other hand slips below the national average. Shikoku and the

Japan Sea prefectures also feature poorly.

Source: Custom Products Research, Ministry of Education, Culture, Sports, Science and Technology

Analysing the net change in the number of middle/high schools in 2015 vs 2009 also backs up the

claim that many of the identified regions are not only bleeding teachers and students but scuttling

schools. The sixteen highest percentage school closures by prefecture in that period were in Tohoku,

Shikoku, Kyushu and Japan Sea coast towns, Fig. 15.

2823.6

2411.3

2195.9

1968.6

1848.6

1686.7

1379.3

1000.0

1200.0

1400.0

1600.0

1800.0

2000.0

2200.0

2400.0

2600.0

2800.0

3000.0K

och

iK

ago

shim

aSh

iman

eSa

gaO

kin

awa

Iwat

eM

iyaz

aki

Nag

asak

iYa

man

ash

iA

om

ori

Tott

ori

Wak

ayam

aYa

mag

ata

Oit

aFu

kush

ima

Kag

awa

Toku

shim

aA

kita

Fuku

iTo

yam

aK

um

amo

toIs

hik

awa

Nag

ano

Yam

agu

chi

Oka

yam

aM

ieEh

ime

Shig

aK

yoto

Gif

uH

okk

aid

oM

iyag

iIb

arak

iN

iigat

aG

un

ma

Nar

aH

iro

shim

aTo

chig

iSh

izu

oka

Hyo

goN

atio

nal

Ave

rage

Osa

kaFu

kuo

kaA

ich

iC

hib

aSa

itam

aTo

kyo

Kan

agaw

a

Fig. 13 - Population: Teacher ratio per prefecture (2015)


58.6

52.2

47.6

37.4

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

Osa

ka

Sait

ama

Oki

naw

a

Aic

hi

Kan

agaw

a

Ch

iba

Fuku

oka

Kag

awa

Mie

Shiz

uo

ka

Kyo

to

Yam

anas

hi

Miy

azak

i

Nar

a

Hyo

go

Toch

igi

Shig

a

Miy

agi

Ku

mam

oto

Ibar

aki

Nat

ion

al A

vera

ge

Saga

Gu

nm

a

Oka

yam

a

Kag

osh

ima

Wak

ayam

a

Yam

anas

hi

Fuku

i

Toky

o

Ko

chi

Toku

shim

a

Oit

a

Ish

ikaw

a

Nag

ano

Toya

ma

Ehim

e

Niig

ata

Tott

ori

Yam

agat

a

Hir

osh

ima

Nag

asak

i

Aki

ta

Ao

mo

ri

Fuku

shim

a

Iwat

e

Shim

ane

Yam

agu

chi

Ho

kkai

do

Fig.14 - Teachers per school by prefecture (2015)



Akita seen a 22% fall in

students

I

Fiscal state of prefectures


If we dig one level deeper into students enrolled in middle/high school, the impacts are even worse,

Fig. 16. Akita has seen a 22% decline in high school students over the last 6 years versus the

national average of -4% and Fukuoka at -2.2%. 18 of the worst 21 prefectures once again fall into

the basket of what we have identified as depopulating zones.


The Statistics Bureau also posts some interesting subject matter on the fiscal state of the

prefectures. Put simply, the danger faced by state and local governments is simple. While everyone

faces a national tax levy in some form (income and/or consumption tax), local taxes are only paid if

one lives there on Dec 31st. This paints a rather disturbing picture because the worse off fiscally a

prefecture is, the higher the likelihood of crimped services thanks to higher debt burdens. However,

a resident can pull up the tent pegs and relocate to a healthier prefecture and there is nothing the

incumbent prefecture can do about it. Therefore, the future burden is exacerbated and the likelihood

of further local bankruptcies is heightened.

-17.5%

-10.5%

-4.9%

-2.3% -1.6%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Yam

agat

aIw

ate

Aki

taK

ago

shim

aK

agaw

aK

um

amo

toN

agas

aki

Ish

ikaw

aH

okk

aid

oK

och

iFu

kush

ima

Ehim

eM

iyag

iA

om

ori

Saga

Shim

ane

Oki

naw

aIb

arak

iH

iro

shim

aTo

chig

iYa

mag

uch

iW

akay

ama

Gu

mm

aM

ieG

ifu

Oka

yam

aN

atio

nal

Ave

rage

Oit

aN

iigat

aYa

man

ash

iN

ara

Fuku

oka

Hyo

goM

iyaz

aki

Toya

ma

Kan

agaw

aN

agan

oK

yoto

Toky

oC

hib

aO

saka

Tott

ori

Toku

shim

aSa

itam

aSh

iga

Shiz

uo

kaA

ich

iFu

kui

Fig. 15 - % change in number of Middle/High schools (2015 vs 2009) by prefecture


-21.6%

-16.7%

-10.2%

-4.0%

-2.2%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

Aki

ta

Ao

mo

ri

Fuku

shim

a

Nag

asak

i

Yam

anas

hi

Niig

ata

Wak

ayam

a

Miy

azak

i

Yam

agat

a

Kag

osh

ima

Iwat

e

Shim

ane

Ho

kkai

do

Ehim

e

Ko

chi

Fuku

i

Oit

a

Toku

shim

a

Ku

mam

oto

Yam

agu

chi

Saga

Nar

a

Nag

ano

Gu

mm

a

Tott

ori

Ibar

aki

Miy

agi

Hir

osh

ima

Mie

Gif

u

Nat

ion

al A

vera

ge

Toch

igi

Shiz

uo

ka

Toya

ma

Oki

naw

a

Ish

ikaw

a

Oka

yam

a

Hyo

go

Fuku

oka

Kyo

to

Sait

ama

Osa

ka

Toky

o

Ch

iba

Aic

hi

Kag

awa

Kan

agaw

a

Shig

a

Fig. 16: Net % change in students enrolled in High School 2015 vs 2009



Future burden ratio

Financial strength index

Bond yields


The future burden ratio is the ratio of the debt currently held by local governments (the amount of

repayment of municipal bonds and the amount equivalent thereto) as a percentage of fiscal intake.

It is considered to be dangerous waters if it exceeds 400% in prefectural governments and 350% in

the municipalities. In FY2011, Yubari City had a future burden ratio of 891%.


The financial strength index (FSI) reflects the financial strength of local and prefectural governments.

It is derived by dividing basic financial revenue by financial spending. An FSI closer to or exceeding

one is considered healthy. Closer to zero is a poor score. Once again, the FSI by prefecture shows

the depopulating prefectures are suffering much greater than those growing. It makes sense. Higher

populations should lead to improving tax take.

Looking at the current 10-year bond yields we note that the usual suspects have seen the sharpest

rises and highest levels, Fig.19. While the Japan Local Government Bond Association (JLGBA)

333.0

247.7 241.2

187.0

49.7

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

Hyo

goH

okk

aid

oN

iigat

aTo

yam

aK

yoto

Fuku

oka

Hir

osh

ima

Aki

taIb

arak

iIw

ate

Yam

agat

aSh

izu

oka

Kag

osh

ima

Ish

ikaw

aYa

mag

uch

iYa

man

ash

iA

ich

iO

saka

Sait

ama

Oka

yam

aSh

iga

Gif

uK

um

amo

toK

agaw

aM

ieW

akay

ama

Toku

shim

aM

iyag

iN

atio

nal

Ave

rage

Nag

asak

iN

agan

oSh

iman

eFu

kui

Nar

aO

ita

Ch

iba

Gu

nm

aEh

ime

Ko

chi

Ao

mo

riK

anag

awa

Fuku

shim

aM

iyaz

aki

Saga

Tott

ori

Toch

igi

Oki

naw

aTo

kyo

Fig. 17: Future Burden Ratio by Prefecture (%)


0.93

0.60

0.47

0.40

0.280.23

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Toky

oA

ich

i

Kan

agaw

aC

hib

aSa

itam

aO

saka

Shiz

uo

ka

Ibar

aki

Hyo

go

Fuku

oka

Toch

igi

Gu

nm

aH

iro

shim

a

Mie

Miy

agi

Kyo

toSh

iga

Gif

uO

kaya

ma

Nat

ion

al A

vera

geFu

kush

ima

Nag

ano

Ish

ikaw

a

Kag

awa

Toya

ma

Niig

ata

Yam

agu

chi

Nar

a

Ho

kkai

do

Ehim

e

Yam

anas

hi

Fuku

i

Ku

mam

oto

Oit

a

Yam

agat

aIw

ate

Ao

mo

riSa

ga

Wak

ayam

aK

ago

shim

a

Miy

azak

iN

agas

aki

Toku

shim

aO

kin

awa

Aki

taTo

tto

ri

Ko

chi

Shim

ane

Fig. 18: Financial strength index by Prefecture (%) - 2015


http://www.chihousai.or.jp/english/


Shotgun weddings

What industries employ?


Switching gears to the prevalence of marriage during pregnancy or post child-birth (i.e. shotgun

weddings) our depopulating prefectures have a higher incidence. With a falling population,

businesses find it harder to justify operating there no doubt leaving residents with fewer things to do

compared to the cities.

Source: Custom Products Research, Ministry of Health, Labor & Welfare (MHLW)

This would also point to the prevalence of job opportunities in each prefecture. As two extreme

examples, we look at Akita and Aomori and look at Tokyo and Kanagawa as bellwethers. Fukuoka

is for illustrative purposes only. What sort of jobs employ in each prefecture?

-0.027

-0.295

0.619

0.559

0.260

0.184 0.175

0.059

-0.400

-0.200

0.000

0.200

0.400

0.600

0.800

Iwat

e A

kita

Ao

mo

ri Y

amag

uch

i Y

amag

ata

Oki

naw

a T

ott

ori

To

yam

a N

agan

o S

him

ane

Ho

kkai

do

Eh

ime

Osa

ka H

yogo

Kag

osh

ima

Nar

a K

um

amo

to O

ita

Fu

kush

ima

Ko

chi

Sag

a T

oku

shim

a F

uku

i N

agas

aki

Niig

ata

Sh

iga

Kag

awa

Yam

anas

hi

Ibar

aki

Oka

yam

a M

ie M

iyaz

aki

Gu

mm

a H

iro

shim

a F

uku

oka

Kan

agaw

a K

yoto

Ch

iba

Sh

izu

oka

To

chig

i S

aita

ma

Gif

u M

iyag

i W

akay

ama

Aic

hi

Ish

ikaw

a T

oky

oJa

pan

Fig.19: 10yr current bond yields by prefecure (%) vs 6m prior yields

Generic 10yr Yield - July 2016 Generic 10yr Yield - Jan 2017


42.4

37.

5

36.

736

.2

36.0

34.6

33

.5

33.0

32.9

32.

6

31

.4

31.2

30.6

30.2

30.1

29

.9

29.8

29.

4

29.

4

29.2

27.9

27.7

27.7

27.7

27.

6

27.4

27.3

26.

92

6.7

26

.6

26

.6

26.2

25

.3

25.2

24

.92

4.8

24.

3

24.0

22.9

22

.82

2.8

22.6

22.5

21.8

21.

7

21.6

19.5

19.5

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Oki

naw

a

Saga

Fuku

shim

a

Ao

mo

ri

Ku

mam

oto

Nag

asak

i

Miy

azak

i

Aki

ta

Iwat

e

Yam

agat

a

Ibar

aki

Kag

osh

ima

Oit

a

Shim

ane

Ko

chi

Tott

ori

Fuku

oka

Miy

agi

Wak

ayam

a

Ehim

e

Fuku

i

Ho

kkai

do

Gu

nm

a

Niig

ata

Oka

yam

a

Toch

igi

Yam

agu

chi

Toku

shim

a

Mie

Ish

ikaw

a

Yam

anas

hi

Shiz

uo

ka

Nat

ion

al A

vera

ge

Kag

awa

Hir

osh

ima

Gif

u

Nag

ano

Osa

ka

Toya

ma

Sait

ama

Ch

iba

Nar

a

Hyo

go

Aic

hi

Shig

a

Kyo

to

Toky

o

Kan

agaw

a

Fig. 20: % of Marriages as a result of unplanned pregnancy (shotgun wedding) - 2009



Akita skewed unsustainably

Source: Custom Products Research, Ministry of Health, Labor & Welfare (MHLW)

It is evident that Akita has too large a percentage of its populace in agriculture and with over one

quarter of workers in construction and manufacturing, the risk of depopulation should mean that

building projects (especially private sector) and manufacturing sustainability would be poor. Visits

several years back to companies such as Takeuchi (6432) and Hokuto (1379) in Nagano Pref have

highlighted the risks of losing employees and escalating wages to keep them. In Takeuchi’s case

line workers needed to have special qualifications to move its digging equipment which meant that

they had to hike wages double digit percentages to keep workers from moving out of Nagano. On

top of that it was actively hiring foreign labourers to address the looming shortfall. Akita will

undoubtedly face more acute problems.

Ag/Fishery MiningConstructi

onManufact

uringUtilities IT/Comm Transport

Wholesale/Retail

Financial/Insurance

RealEstate

ScienceRelated

Hotel/Bar/restaurant

DailyServices

EducationHealth/W

elfareCompound Services

Other

Aomori 1.63% 0.12% 10.34% 12.72% 0.42% 1.25% 6.16% 22.86% 2.98% 1.81% 2.19% 8.55% 5.37% 2.39% 13.52% 0.82% 7.16%

Akita 1.62% 0.12% 10.26% 16.95% 0.41% 0.93% 5.01% 21.24% 2.86% 1.41% 1.89% 8.35% 4.53% 2.22% 14.08% 1.22% 6.68%

Fukuoka 0.39% 0.03% 7.26% 11.68% 0.41% 2.67% 6.53% 22.34% 2.99% 2.62% 2.53% 9.70% 4.51% 3.31% 13.79% 0.46% 8.78%

Japan 0.64% 0.04% 6.94% 16.56% 0.36% 2.91% 5.91% 21.04% 2.85% 2.64% 2.98% 9.71% 4.56% 3.08% 11.07% 0.61% 8.10%

Kanagawa 0.19% 0.01% 6.41% 14.45% 0.25% 3.35% 6.17% 19.61% 2.05% 3.26% 4.54% 10.41% 4.84% 3.56% 12.04% 0.42% 8.42%

Tokyo 0.04% 0.01% 5.41% 8.17% 0.36% 9.09% 5.41% 22.18% 4.78% 3.97% 4.88% 9.84% 4.04% 3.72% 7.45% 0.23% 10.41%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Fig. 21: Employment sectors by prefecture as % of total (2012)

Aomori Akita Fukuoka Japan Kanagawa Tokyo

2.67%

0.64%

0.39%

0.06%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Miy

azak

i

Iwat

e

Kag

osh

ima

Ho

kkai

do

Sh

iman

e

Ko

chi

Oit

a

Ao

mo

ri

Aki

ta

Niig

ata

Nag

ano

To

tto

ri

Nag

asak

i

Ku

mam

oto

Eh

ime

To

kush

ima

To

yam

a

Yam

agat

a

Sag

a

Yam

agu

chi

Kag

awa

Fu

kui

Ibar

aki

Fu

kush

ima

Mie

Gif

u

Ish

ikaw

a

Gu

mm

a

Hir

osh

ima

Wak

ayam

a

Miy

agi

To

chig

i

Sh

iga

Yam

anas

hi

Jap

an

Oka

yam

a

Oki

naw

a

Ch

iba

Sh

izu

oka

Fu

kuo

ka

Kyo

to

Hyo

go

Nar

a

Aic

hi

Sai

tam

a

Kan

agaw

a

Osa

ka

To

kyo

Fig. 22: Agriculture/Fisheries - Employment as a % of total by prefecture (2012)



German reunification

Source: MHLW

It also brings to light the subject of the reunification of Germany in 1989. Workers in the former East

saw the employment opportunities in the West were far more lucrative and abandoned on masse

leading to large employment shortages and rising bankruptcies in the former communist bloc. The

situation became so acute that businesses in the East were forced to raise wages significantly to

stem the flow. Unfortunately, they were left with lower skilled workers and today unemployment rates

are much higher than the average because of the brain drain to the West.

While Japan faces this challenging demographic the plight of bankruptcy of towns from depopulation

will be exacerbated, Fig. 25.

10.34%

9.20%

7.26%6.94%

5.10%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

Ao

mo

ri S

him

ane

Aki

ta N

iigat

a Iw

ate

Miy

agi

Fu

kush

ima

Yam

agat

a F

uku

i H

okk

aid

o O

ita

Yam

agu

chi

Ko

chi

To

yam

a T

ott

ori

Kag

osh

ima

Miy

azak

i S

aga

Ibar

aki

Nag

asak

i O

kin

awa

Wak

ayam

a N

agan

o Y

aman

ash

i E

him

e Is

hik

awa

Oka

yam

a K

um

amo

to C

hib

a T

oku

shim

a K

agaw

a F

uku

oka

Gif

u T

och

igi

Sai

tam

aJa

pan

Gu

mm

a H

iro

shim

a S

hiz

uo

ka K

anag

awa

Mie

Aic

hi

Sh

iga

Osa

ka H

yogo

To

kyo

Nar

a K

yoto

Fig.23: Construction - Employment as a % of total by prefecture (2012)


13.79%

9.71% 9.70%

8.24%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

13.00%

14.00%

15.00%

Oki

naw

a Y

aman

ash

i K

yoto

Ko

chi

Ch

iba

Hyo

go N

ara

Nag

ano

Nag

asak

i K

anag

awa

Ish

ikaw

a H

okk

aid

o T

ott

ori

Miy

azak

i O

ita

Osa

ka G

ifu

To

kyo

Wak

ayam

a K

ago

shim

aJa

pan

Fu

kuo

ka K

um

amo

to A

ich

i S

hiz

uo

ka S

aita

ma

Mie

To

kush

ima

Sag

a T

och

igi

Eh

ime

Yam

agu

chi

Fu

kui

Sh

iga

Niig

ata

Kag

awa

Miy

agi

Sh

iman

e Y

amag

ata

Fu

kush

ima

Ao

mo

ri G

um

ma

Hir

osh

ima

Aki

ta Iw

ate

Oka

yam

a Ib

arak

i T

oya

ma

Fig.24: Hotel/Bar/Restaurant - Employment as a % of total by prefecture (2012)




126,193

91,933

42,860

27.5%

41.3%

25%

27%

29%

31%

33%

35%

37%

39%

41%

43%

30,000

50,000

70,000

90,000

110,000

130,000

150,000

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

2042

2043

2044

2045

2046

2047

2048

2049

2050

2051

2052

2053

2054

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100

2105

2110

Fig. 25: Japan's projected population ('000s) and the % of 65yo+ demographic

Population 65yo + (%)

60.2%

49.6%

45%

47%

49%

51%

53%

55%

57%

59%

61%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

2042

2043

2044

2045

2046

2047

2048

2049

2050

2051

2052

2053

2054

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100

2105

2110

Fig. 26: Japan's dwindling Labour Force ('000s)

Labour Force Labour force as % of total population


Economic plans are

unrealistic

Part-time growing

Employment agencies

Source: Japan Institute for Labour Policy & Training

Comparing Fig. 18 to Figs. 27-28 and we see why the plight of regions such as Akita and those

suffering demographic challenges will be crushed even with the government’s own optimistic ‘zero

growth’ and ‘economic revival’ scenarios. While much of these scenarios rely on productivity growth

the sad reality is that in the industrial areas Akita relies on now will see sharp declines of 10-40%

over the next 15 years. Hardly the most helpful stats to arrest further depopulation. What is worse is

that slowing activity only compounds on the downside.

Add to that the prospect of a higher incidence of part-time work and the ability for the elderly to trade

out of a terrifying retirement is worsened, meaning consumption is curtailed and pinching at the one

area that could help create jobs.

One dilemma in the data is the employment referrals by government unemployment agencies for

middle or advanced aged staff (45yo+) shows that around 25% of them end up with work in a fixed

term capacity of more than 4 months, Fig. 29. That is to say around 30,000 get placed per annum,

hardly a positive statistic. Perhaps the following statement explains part of the problem.

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%Fig. 27: The employment outlook on the 'economic revival' scenario (%)

Economic Revival (2020) Economic Revival (2030)

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0% Fig. 28: The employment outlook on the 'zero growth' scenario (%)

Zero growth (2020) Zero growth (2030)


Inflexible workers

The dole shop

Impact of PT vs FT

Former Jobu University Professor and economist Nobuo Ikeda commented on the problems and

shortcomings of Japan’s lifetime employment system, “Salarymen, who are typically hired right out

of school in a batch . . . will start by learning (elementary skills) on the job. These include company

specific skills learned by watching more experienced workers, like personal skills, meaning they

aren’t useful in other companies…as companies rarely hire mid-career.”

Source: Statistics Bureau

In an interview with the government employment agency, Hello Work, in January 2016 the agency

noted the dilemma of dealing with Sharp’s voluntary redundancies. Of the 820 former Sharp workers

that registered with the Nara Prefecture agency, only 261 had found alternative employ. The biggest

issue is that 80% of those are over 50 years old and many have false expectations on their ‘real

value’ expecting the next job will pay similar salaries, benefits and title. Most still have housing loans

and education expenses outstanding.

Fig. 30 bears this out even better. The long running trend of full-time work in a regular capacity has

given way to a lot more part-time (lower paying) jobs which involves less other costs like insurance,

retirement and so on. This change puts pressure on the household budget.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Fig.29: Mid career introductions of unemployed persons (45yo+) and employment success ratio

Cases of Introduction Ratio of introductions where people found employment


Women in workforce

Employment quality falling

Save on wages


Fig. 31 shows that since 2003 more women are employed part time than full time. With PM Abe

looking to encourage more women back into the workforce to offset the declining (working)

population by expanding day-care centre places, job prospects will increasingly be part time.


What we can deduce is that the quality of employment is deteriorating. While the employment rate

in the recent decade has fallen contrary to1997-2003, the instance of lower paid part-time work has

grown since then from 30% to 37.4% of the total. For women, this is now 56%. If PM Abe wishes to

grow the economy, higher numbers of part-time workers will make the journey that much harder.

PM Abe has acknowledged that issue. This coming May he wishes to introduce a policy which

requires equal wages for full-time and contract hires. However, recruitment by firms will only be

marginalised should the law be introduced.

The Japanese Institute for Labour Policy & Training (JILPT) makes the case for employer’s reasons

to hire non-regular employees clear in Fig. 32. “To economise on wages” and “to economise on non-

labour costs” are the two highest categories.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Fig. 30: Full-time vs. Part-Time Trend as a % of total employees in Japan (%)

0

200

400

600

800

1000

1200

1400

1600

Fig. 31 : Full time vs Part-time Female Employees ('000 people)

Women Regular Employees Women Non-regular employees

http://www.jil.go.jp/english/lsj/detailed/2014-2015/all.pdf


Lack of Opportunities

Why females work part time

Fig. 32: Employer’s Reasons for Hiring non-regular employees (%)


While convenient work hours are a high factor for part-time workers note that “lack of regular

employment opportunities” is the most consistently high factor for male employees selecting non-

regular jobs, Fig. 33.

Fig. 33: Male Employee’s Reasons for selecting non-regular employment (%)


Female non-regular employees showed similar trends to that of men with regards to being unable

to secure regular employment, but “domestic reasons” (38%) was a high factor however 47% said

that “supplementing household income” was second to convenience in work hours (50.7%). In short

the labour market is preventing stable employment which adds to individual concerns.

It is the smell of fear. Pressure to prevent losing one’s job is a factor in the steady increase in labour

disputes. Between 2002 and 2013, labour disputes almost trebled, Fig.34. Bullying and harassment


Lessons from Detroit

Poverty

Cut in services

(which are obviously less palatable for companies to have floating in the public domain) as a percent

of total disputes has ballooned from 5.8% to almost 20% over the same period, Fig. 35.


Lessons from Detroit, Michigan

Detroit does not share Japan’s aging issues but it does paint the picture of what happens to a city

that faces long term decline in its population. From a peak of 1.8mn people in the 1950s the city has

shrunk to 1/3rd that level. The city declared bankruptcy in 2013 making it the largest municipal

bankruptcy in America.

40% of the city is now below the poverty line. In 1960 the city had the highest per capita income in

the nation. Long term debt has ballooned to $20bn or more than $30,000 per resident. Some 78,000

homes are unoccupied in the city, and in 2011 half of the occupiers of the city's 305,000 properties

paid no tax.

40% of the street lights do not work, 67% of public parks have been permanently closed since 2008

and the police force has been cut by 40% in the last decade. Most police stations are closed 16

hours a day and response times are around one hour.

Source: US Census

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Fig. 34 : Bullying & Harrassment Claims as % of all Labour Disputes

Bullying/Harrassment Bullying as % of all cases

6% → 20%

100,000

150,000

200,000

250,000

300,000

350,000

Fig. 35 : Total Labour Dispute Cases

21,019

993,678

1,849,568

951,270

677,800

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2015

Fig. 36: Detroit Population (1850-2015)

http://freakonomics.com/2011/03/23/detroit-is-dying-quickly/


America’s population is still

growing

Debt: GDP

Interest payments

While Japanese prefectures maybe depopulating a la Detroit, they lack the ability to recover even if

incentives are implemented as the American population continues to grow in numbers while Japan

shrinks. Detroit has shrunk 30% in the last 15 years. In Fig. 37, we note the number of towns that

have less than 5,000 people. Nara is home to 5 villages that have fallen 20% in the last 5 years.

While the scale is different, the rate of decline hits a certain point and heads into freefall most likely

as supermarkets, post offices, banks and petrol stations can’t justify serving such tiny markets.


Is it really that bad?

Of course, it is easy to postulate that the plight of the regions is bleak. However, looking at pure

prefectural debt/GDP ratios it is not awful optically.


Shimane has a prefectural debt: GDP ratio of 60%. It pays 16% of its tax intake on interest payments.

This is not the highest in Japan by any stretch but bond markets are fickle things. Sure, the Bank of

Japan can increase prefectural bond purchases to prevent the rate from going higher but the exodus

is not slowing. Shimane has lost 10% of its middle/high school pupils in the past 5 years. While some

85

28

16 15 13 128 8 8 7 7 6 6 5 5 5 5 4 4 4 4 4 3 3 3 2 2 2 2 2 1 1 1 1 1 1

0

10

20

30

40

50

60

70

80

90

Ho

kkai

do

Nag

ano

Oki

naw

a

Ko

chi

Nar

a

Fuku

shim

a

Ku

mam

oto

Ao

mo

ri

Toky

o

Gu

nm

a

Yam

anas

hi

Oka

yam

a

Wak

ayam

a

Miy

azak

i

Kag

osh

ima

Aki

ta

Niig

ata

Gif

u

Kyo

to

Shim

ane

Tott

ori

Toku

shim

a

Aic

hi

Iwat

e

Yam

agu

chi

Kag

awa

Yam

agat

a

Oit

a

Fuku

i

Fuku

oka

Ehim

e

Miy

agi

Sait

ama

Kan

agaw

a

Nag

asak

i

Toya

ma

Fig. 37: Towns in Japan with less than 5,000 people (2015) by Prefecture

60%

24%

0%

10%

20%

30%

40%

50%

60%

70%

Shim

ane

Aki

ta

Tott

ori

Ko

chi

Iwat

e

Ho

kkai

do

Toku

shim

a

Kag

osh

ima

Yam

agat

a

Yam

anas

hi

Miy

azak

i

Ao

mo

ri

Niig

ata

Fuku

i

Ish

ikaw

a

Toya

ma

Wak

ayam

a

Nag

asak

i

Oit

a

Saga

Nar

a

Ku

mam

oto

Yam

agu

chi

Kag

awa

Ehim

e

Hyo

go

Nag

ano

Fuku

shim

a

Gif

u

Oka

yam

a

Miy

agi

Mie

Hir

osh

ima

Kyo

to

Shig

a

Fuku

oka

Ibar

aki

Shiz

uo

ka

Oki

naw

a

Osa

ka

Gu

nm

a

Aic

hi

Toch

igi

Sait

ama

Ch

iba

Kan

agaw

a

Toky

o

Fig. 38: Prefectural Debt/Prefectural GDP (%) - 2014


When it goes pear shaped

Lacking assets in Regions

How they derive tax

Future Burden Ratio

may have graduated, it would be safe to assume they are relocating to other prefectures with their

working age parent(s).

Were we to see a similar exodus from Shimane as has happened in Detroit (or Yubari for that matter)

debt/working person would grow to $33,000. Shimane’s 16% debt servicing ratio would likely head

north of 30% of annual tax revenue even when conservatively estimating refinancing rates and lower

tax revenue intake. Moreover debt: GDP would balloon because relative GDP would decline as well

putting upward pressure on effective future borrowing costs. Within the prefectures, smaller villages

and towns may head the way of Yubari and suddenly bad debt could spill over into a domino effect.

Recall Yubari’s tax collections are only one-quarter of what they were two decades ago so in the

more acutely aging areas, we could well see assumptions on a prefecture like Shimane over the

long term become unsustainable.

Therein lies the problem. The debt is not likely to change much yet the revenue side of the ledger

will continue to slide. Of course, the ¥200 trillion of prefectural/municipal debt (relatively unchanged

for a decade) pales in comparison to the national debt of ¥840 trillion. Yet many of the regions do

not possess the same level of asset creation that can reduce the net burden.

34% of tax revenues by prefectures derives from resident’s tax and 42% of municipalities fill their

coffers by fixed asset taxes, Figs. 39-40. If tax payers migrate to new prefectures they not only hit

the prefecture revenue collection (note you need to be resident on Dec 31st to have to pay residents

tax. If you move to another prefecture between Jan 1-Dec 30th the residents tax is paid to your new

place of residence. If more people look to leave depopulating regions, then the natural impact on

fixed assets will fall in lockstep.

Source: Ministry of Finance

As the JLGBA and Ministry of Finance note it is considered to be dangerous waters if the future

burden ratio (FBR) exceeds 400% in prefectural governments and 350% in the municipalities. As

we mentioned earlier, Yubari’s tax revenues fell 75% in two decades. Hokkaido would only need to

have a 20.7% fall in tax revenues to trigger the 400%.Akita would require just under 40% cut in tax

revenues.

Individual Residents Tax, 34%

Local Consumption

Tax, 18%Automobile

Tax, 10%

Others, 14%

Corporate Enterprise Tax, 18%

Corporate Residents Tax, 6%

Fig. 39: Prefectures Tax Revenue

Fixed Asset Tax, 42%

Individual Residents Tax, 34%

City Planning Tax, 6%

Others, 8%

Corporate Residents Tax, 10%

Fig. 40: Municipalities Tax Revenue


Rescue Plan

Who pays tax?


What did Yubari do?

To be fair, Yubari became a pilot case for how to handle a bankruptcy. In the FY2009-2029 Financial

Rebuilding Plan, public officials would be cut from 269 in FY2006 to 134 in FY2009 to 103 by

FY2010. Standard salaries for public servants would be cut 30% and subsidies would be trimmed

40%. The tax rate on fixed income was lifted to 1.45% from 1.4% and municipal income tax from 6%

to 6.5%. Services such as garbage collection are separate charges. Yubari City issued a ¥32.2bn

special deficit covering bond. Yubari’s real debt repayment ratio is ranging between 80-90% of tax

revenue per year until 2026.

The bigger issue will be what might happen if a string of Yubari’s come under similar bankruptcy

proceedings.

What should Japan do?

In Japan, 97% of the income tax burden is borne by the top 47% of earners. Over two-thirds of

Japanese SMEs (corporations capitalised under ¥100mn) pay no tax. While the government has

progressively eased the corporate tax rate from north of 50% in the 1990s to just over 40% during

most of the 2000s to under 30% by 2018 companies have avoided chipping in to the national coffers.

Fig.1 shows clearly that despite corporate tax rates coming down, the impact on the number of

corporates reporting losses to the tax office remains largely unchanged.


16.8%

20.7%

39.7%

55.7%

73.2%

87.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Hyo

go

Ho

kkai

do

Niig

ata

Toya

ma

Kyo

to

Fuku

oka

Hir

osh

ima

Aki

ta

Ibar

aki

Iwat

e

Yam

agat

a

Shiz

uo

ka

Kag

osh

ima

Ish

ikaw

a

Yam

agu

chi

Yam

anas

hi

Aic

hi

Osa

ka

Sait

ama

Oka

yam

a

Shig

a

Gif

u

Ku

mam

oto

Kag

awa

Mie

Wak

ayam

a

Toku

shim

a

Miy

agi

Jap

an

Nag

asak

i

Nag

ano

Shim

ane

Fuku

i

Nar

a

Oit

a

Ch

iba

Gu

mm

a

Ko

chi

Ehim

e

Ao

mo

ri

Kan

agaw

a

Fuku

shim

a

Miy

azak

i

Saga

Tott

ori

Toch

igi

Oki

naw

a

Toky

o

Fig. 41: % fall in Prefectural Tax Revenue required to trigger 400% danger level FBR

69.6% 69.2% 69.4% 69.9%69.5% 68.8% 68.4% 67.8% 68.0%

71.1% 72.6%67.9%

37.0%

38.0%

39.0%

40.0%

41.0%

42.0%

43.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2013

Fig. 42 : Do Corporate Tax Rates really influence Corporate Behaviour?

Total # of Corporates Filing Losses (LHS) Corporate Tax Rate (%) RHS

GFC GFC

http://www.mof.go.jp/pri/research/seminar/fy2015/tff2015_s5_03.pdf

http://www.mof.go.jp/pri/research/seminar/fy2015/tff2015_s5_03.pdf


Poland’s plan

Japan drip feeds tax cuts

Japan & Poland demographics

similar

Poland faced similar issues but in 2004 introduced sensible taxation reform which lured long term

tax avoiders/evaders from their lairs. Authorities introduced a flat business tax (19%) and its impacts

were so favourable that the government saw a 50% increase in income reported by those corporates

in higher tax brackets before the change and a 50% increase in reported income from individuals

that fell into upper income tax brackets. In 2009 income tax rates at the top were slashed from 40%

from 32% Despite this income tax receipts jumped 17%. Since 2004 tax receipts soared 56.4%. It

clearly proved that lowering taxes created much higher tax compliance. There was a psychological

factor at play – the cut ‘encouraged’ honesty.

Japan on the other hand continues to drip feed corporate tax cuts at such slow rates that there is

little perceivable reason to change behaviour. Instead of burying the dwindling number of diligent

tax payers ever more Japan must reform its tax code. We estimate a flat tax with similar outcomes

to what Poland experienced would shrink the annual budget deficit by two thirds.

Poland’s population has similar dynamics to Japan, albeit a few decades behind. Population

numbers have stagnated at around 38 million in the last decade and the Central Statistical Office of

Poland (CSOP) is forecasting by 2050 that it falls to around 34 million. Poland’s 65+ year old

demographic will be one-third the total population versus 2/5ths in Japan by 2050.

Source: Central Statistical Office of Poland (CSOP), Statistics Bureau

14.99% 13.06% 12.14%

70.27%63.69%

55.17%

14.73%23.25%

32.69%

0%

20%

40%

60%

80%

100%

2013 2030 2050

Fig. 43: Polish population by age cohort

0-14 15-64 65+

31,000,000

32,000,000

33,000,000

34,000,000

35,000,000

36,000,000

37,000,000

38,000,000

39,000,00020

14

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

Fig. 44: Polish Population to 2050

12.5% 10.3% 9.7%

60.7%58.1%

51.5%

26.8% 31.6%38.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2030 2050

Fig. 45: Japanese population by age cohort

0-14 15-64 65+80,000,000

85,000,000

90,000,000

95,000,000

100,000,000

105,000,000

110,000,000

115,000,000

120,000,000

125,000,000

130,000,000

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

Fig. 46: Japanese Population by 2050

http://stat.gov.pl/en/topics/population/population-projection/population-projection-2014-2050,2,5.html


Tax payer

pool shrinking

Consumers lack confidence

Benefits of tax cuts

Impacts

Personal income tax

Naturally Japan’s income tax payer pool is shrinking as the working population declines. None-the-

less if Japanese authorities stick to orthodox tax policies and try to squeeze more revenue from

wherever it can by raising taxes it will only discourage growth and stagnate the economy further.

Put simply Japan must put its fortunes into the hands of its citizens. Note I did not say ‘back’ in the

hands. The government has rarely extended the private sector a free hand but the statistics speak

for themselves. Fewer Japanese are paying income tax and even fewer corporates are even

bothering to report profit so they are not stupid. The government must come to the conclusion that

lowering tax rates considerably will be the only antidote.

If taxes came into line with Singapore or Hong Kong it would make Japan a far more desirable place

for multinationals to establish headquarters in the region. This would kill three birds. It would

stimulate much needed skilled foreign migration, drive property market transactions and provide

employment which all leads to more tax dollars. As capital attracts capital were Japan to reform in

such a major way, Japan’s equity markets would react to this new-found sense of purpose.

While we can applaud the direction of corporate tax in Japan, effective tax rates when a company

adds local taxes, municipal taxes, prefectural taxes, enterprise taxes becomes closer to 40%, Fig. 6

more than double its Asian rivals. Proposals to trim large sized national corporate tax rates from

25.5% to 23.9% have been agreed. SMEs earning less than ¥8mn are subject to a 19% tax rate but

will stay at 15% until April 1st, 2017. We don’t wish to trawl into the intricacies of local tax law but

Japan needs a change that “jolts” people and corporations to action which is not a one-way street.

We run through the psychology of taxes in a later section.

Fig. 47 : Tax burden on corporate income in Japan (2014)

Source: National Tax Agency(NTA)

For Personal Income Tax (PIT) in Japan, rates are effectively 50% in the top bracket when local

taxes and the 2.1% special income tax for reconstruction (i.e. to pay for the 2011 Great East Japan

Disaster) which ends in 2037 are added on top. None-the-less Japan’s income tax burden is being

increasingly borne by the wealthy. In 2012, half of total earners paid no direct tax, Fig. 48.

https://www.nta.go.jp/tetsuzuki/shinkoku/shotoku/tebiki2015/pdf/43.pdf


Tax take

Source: Japanese Ministry of Finance

Mind the Gap - Japanese tax collection as it stands

Japan’s national deficit struggles to close. Expenditures, post the bubble period have comfortably

exceeded tax revenue, Fig. 49.

Source: Ministry of Finance (MoF)

In 2015, the consumption tax comprised the largest component of filling the Japanese government

coffers. Personal income tax has also declined from a peak of 40% toward 30% of the total tax take.

In 2015 corporations made up around 20% of total tax take. While higher than it was in 2009, it is

still well below the peak of 2008 (38%), Fig. 48. Corporate taxes are below the level of 2001.

Share of Tax (1974) Share of Tax (1988) Share of Tax (2012)Share of Income

(1974)Share of Income

(1988)Share of Income

(2012)

Top 0.7% 20.5% 26.40% 29.18% 17.4% 15.19% 15.58%

Top 6.3% 58.5% 57.21% 65.74% 42.9% 33.67% 38.19%

Top 8.8% 64.2% 72.72% 73.00% 47.2% 45.57% 44.37%

Top 27.6% 86.1% 89.87% 92.99% 69.0% 68.85% 70.53%

Top 47.1% 89.8% 95.26% 97.14% 74.5% 82.21% 83.91%

Bottom 52.9% 10.2% 4.7% 2.86% 25.5% 17.8% 16.09%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Fig 48: Japanese Share of Taxes & Income by Tax filings (Individuals)

Top 0.7% Top 6.3% Top 8.8% Top 27.6% Top 47.1% Bottom 52.9%

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Corporate Tax 11.8 11.2 9.1 9.4 10.2 13.1 16.4 16.7 10.6 6.0 7.8 8.8 8.7 10.0 11.0

Personal Income Tax 18.6 15.8 13.8 13.8 13.2 12.8 16.5 16.3 15.6 12.6 13.5 13.5 13.9 14.8 16.4

Consumption Tax 9.8 9.5 9.7 10 10.6 10.5 10.3 10 9.8 10 10.2 10.4 10.6 15.3 17.1

Total Expenditures 84.8 83.7 82.4 84.9 85.5 81.4 81.8 84.7 101 95.3 100.7 97.1 100.2 95.9 96.3

Tax Revenue 47.9 43.8 43.3 45.6 49.1 49.1 51 44.3 38.7 41.5 42 42.3 43.1 50 54.5

0

20

40

60

80

100

120Fig 49: Japan Tax Revenue by type & Expenditure (¥ trillion)

MIND THE GAP


Tax system cumbersome

My Number system

70% of small business pays no

tax


One must also question the collection costs for the tax authorities. As a business owner in Japan

the nature of tax payments is cumbersome. After registering the company with the Ministry of Justice,

I need to register with the Tokyo tax office, then lodge documentation for the Minato ward and fill in

half a dozen forms with carbon paper triplicates and put my registered seal (company chop) in 20

places which no doubt gets filed in 5 different departments.

We do not have to look very far to see the shortcomings of using paper records when digital could

boost efficiency, arguably what the introduction of My Number seeks to address. In 2010, Japanese

authorities stumbled over the fact that many people were collecting the pensions of their relatives

that died decades ago. They discovered 77,000 people aged over 120 listed as still alive and 884

aged over 150. One woman that was born in 1837 was still listed as living, meaning she’d be turning

179 this year. Another retiree collected ¥50mn in pensions from her parents that died in the 1960s

Japan’s small-medium enterprises (SMEs) are the backbone of employment, comprising 70% of the

labour force and 99% of all corporations. While headline corporate tax rates are expected to drop to

29.97% in 2016 and 29.74% in 2018 from 32.1%, we need to look between the lines. Corporate tax

rate changes have had negligible impacts on tax intake. Economic conditions have a bigger bearing

on tax take than the tax rate changes.


0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2020E 2025E

Fig. 50: What fills the Japanese national coffers?

Corporate Tax as % of Total Tax Revenue Personal Income Tax as % of Total Tax Revenue

Consumption Tax as % of Total Tax Revenue Other Taxes

67.2% 67.8%73.1%

67.9%59.1%

53.8% 50.4%

25.1%19.8% 20.3% 23.4% 21.3%

42.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Fig. 51 : # of Corporates by size as a percentage reporting no taxable income in Japan, FY2014

http://www.cas.go.jp/jp/seisaku/bangoseido/pdf/en2.pdf

http://www.theguardian.com/world/2010/sep/10/japenese-centenarians-records

http://www.japantimes.co.jp/news/2015/05/08/national/crime-legal/woman-86-suspected-cashing-dead-parents-pensions-half-century/#.VzGipzB96Uk


Tax loss carry

forwards

Tax burden skewed

Tax losses could be carried forward 9 years and offset up to 80% of each year’s taxable income. To

slow down companies using this method, tax authorities have reduced this to 65% for fiscal years

between April 1st, 2015 and March 31st 2017 and 50% thereafter.

Source: Statistics Bureau (FY2014)

Fig.51 shows that 98% of companies in Japan pay only 24% of the corporate tax intake. That’s right

– 2.5mn corporations pay less than one-quarter of the tax burden.

Breaking this down by industry we can see clearly (Fig. 53) that the tax burden is shared pretty

unevenly. Consolidated corporations make up 0.1% of all companies in Japan yet paid 12.8% of the

tax burden in FY2014. The construction industry made up almost 16% of corporations by number

but only paid 5.3% in tax. Of course this is skewed by the revenue base of each industry, Fig. 55.


1 millionyen or

less

Morethan 1million

yen

2 5 10 20 50 100 500

Morethan1billion

yen

5 10Consolcorps

Taxes paid by corporates as % of total 1.1% 0.1% 3.3% 7.7% 3.4% 8.4% 7.8% 9.7% 3.9% 9.0% 5.5% 27.2% 12.8%

% Corporations 9.29% 1.70% 45.54% 28.95% 5.96% 5.84% 1.84% 0.56% 0.07% 0.12% 0.03% 0.04% 0.05%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%

Fig. 52: % of corporates by size paying tax & their tax burden as % of total

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Consolidated corporations

Mining

Textile manufacturing

Agriculture, forestry and fisheries

Chemical manufacturing

Printing and publishing

Food manufacturing

Finance and insurance

Iron, steel and metal manufacturing

Machinery manufacturing

Transport, communication and public utilities

Other manufacturing

Drinking and eating places, hotels

Wholesale trade

Real estate

Retail trade

Construction

Service

Fig. 53 : % of Corporate Tax paid by industry

% of Corporations Taxes paid by corporates


F&B tax dodge

Consolidated tax

Broken down by the type of industry we can see that 80% of restaurants, bars and hotels report no

tax payment. While running, successful restaurants poses a challenge one could argue that high

levels of cash transactions would potentially lead to grey economic practices.


Fig. 54 shows the average revenue base of companies by industry in millions of yen. Consolidated

corporations are naturally much larger businesses compared to mom & pop real estate agencies,

restauranteurs, or farmers.


Of interest, Fig. 56, of the few corporates that actually pay tax, average tax rates are skewed.

Perhaps mining companies wrote off more tax losses from previous years or had more aggressive

42.3%

64.1%

65.4%

65.8%

65.9%

66.0%

66.2%

66.2%

66.4%

68.6%

68.6%

71.3%

73.4%

73.7%

74.3%

78.5%

79.0%

79.5%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%


Real estate


Service

Construction



Wholesale trade

Mining




Other manufacturing

Retail trade

Food manufacturing




Fig. 54 : % of Corporates reporting losses by industry

129.8

178.8

213.5

246.4

256.0

378.3

433.2

435.7

445.4

647.3

848.5

1,003.4

1,007.8

1,048.9

1,645.9

1,682.7

1,703.8

236,375.0

- 50,000.0 100,000.0 150,000.0 200,000.0 250,000.0

Real estate



Construction

Service

Other manufacturing


Retail trade



Food manufacturing


Wholesale trade


Mining




Fig. 55: Average Revenue (¥mn)/# of corporates


Poland tax jolt

write off cycles for fixed assets. Old economy style industrials tend to dominate the lower tax

brackets.


What is clear is that current tax policy is having little effect on behaviour. 70% paying no tax over

many decades despite the drip feed cuts requires more heavy handed responses.

The Polish experience with Flat Tax – this is how a ‘jolt’ works

Poland had long been suffering from a lack of tax receipts no thanks to high levels of corporate and

personal income tax rates which pushed more money into the ‘grey economy’. Poland took the bold

step by surmising if they cut tax rates by a large enough amount (cut to a flat rate of 19% from the

progressive 19%, 30% & 40% brackets) businesses would stop bothering to go out of their way to

dodge the tax man, Fig. 57. The effects were profound.

Source: Ministry of Finance, Eurostat

4.7%

15.2%

18.1%

19.8%

19.8%

21.1%

21.4%

21.6%

22.1%

22.3%

22.4%

22.4%

22.4%

22.9%

23.1%

23.1%

23.3%

24.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Mining








Construction


Food manufacturing

Real estate

Other manufacturing



Service

Wholesale trade

Retail trade

Fig. 56: Average National Corp Tax rates (%) paid by companies by industry (2014)

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Fig. 57 : Tax Collection - Polish jolt vs. Japanese halt

Polish Tax Receipts (EUR mn) Japanese Tax Receipts (JPY bn)

Poland introduces corporate flat tax reform

GFC


Tax jumped on tax

cut

Simple is best

Personal (PIT) and Corporate income tax (CIT) receipts behaved in the following way. Since 2004,

PIT receipts jumped 69% and CIT by 45%. The lift in economic activity driven by the changes drove

consumption tax intake by over 55%. Over the same period, Japan’s PIT rose a measly 5%, CIT fell

17.2% and consumption tax receipts were flat, Fig. 58.

Source: OECD

Poland’s population faces similar long term demographic challenges as Japan does but at 50%

gross debt to GDP its economy is in a less risky position, Fig. 59.

Source: IMF

While Poland (which still uses the zloty) benefitted from EU accession since 2004, tax reforms were

a key factor in driving positive tax collections. Although progressive tax rates remained in force for

personal income tax, the Polish made provisions that allowed individuals of these businesses, at

their request, to pay a 19% flat tax which carried certain restrictions on other benefits. Poland has

also made it clear that taxpayers that do not disclose sources of revenue and income will be taxed

75%. Transparency is clear. Japan should adopt a similar system to capture a wider share.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

0

50,000

100,000

150,000

200,000

250,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

Fig. 58: Poland Tax Progression (Zloty mn)

Consumption Tax (LHS) Personal Income tax/Capital Gains

OtherTaxes Corporate Income Tax/Capital Gains

+69%

+55%

+45%

+55%

-20

0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Fig. 59: Net Debt: GDP (%) - Japan vs Poland

Poland Japan

http://www.paiz.gov.pl/polish_law/taxation/pit


Unemployment rates in Poland plummeted in 2004 from around 20% to around 6.5% before the

GFC and in recent years trended back to those lows.

Source: Eurostat

Poland has a two-tier PIT with 18% up to c.US$22,000 (ZLN85,528) and 32% above it, reduced from

40% in 2009. Other taxes are as follows;

private lease (at the taxpayer’s request - 8.5 per cent tax on registered income);

dividends (19 per cent flat tax),

interest on savings (19 per cent flat tax),

gains from capital funds (19 per cent income tax);

gains from the sale of securities (19 per cent income tax);

selling private properties (as a rule, 19 per cent income tax);

awards in competitions, gambling, premium sale (10 per cent flat tax);

income of controlled foreign company (19 per cent income tax).

Poland has a 23% consumption tax which generates around 22% of total tax receipts versus Japan

at 8% and 31% respectively. Tax receipts in Japan have risen steadily since the collapse of Lehman

Brothers but expenditure far outstrips collection leaving further debt raising to fill the gap, Fig.49.

0

5

10

15

20

25

Jan

-01

May

-01

Sep

-01

Jan

-02

May

-02

Sep

-02

Jan

-03

May

-03

Sep

-03

Jan

-04

May

-04

Sep

-04

Jan

-05

May

-05

Sep

-05

Jan

-06

May

-06

Sep

-06

Jan

-07

May

-07

Sep

-07

Jan

-08

May

-08

Sep

-08

Jan

-09

May

-09

Sep

-09

Jan

-10

May

-10

Sep

-10

Jan

-11

May

-11

Sep

-11

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

Jan

-14

May

-14

Sep

-14

Jan

-15

May

-15

Sep

-15

Jan

-16

Fig 60: Polish Unemployment Rate (%)

Flat tax introduced


Polish health contributions

Add back other taxes

If Japan copied Poland

Fig. 61: Other contributions paid by employee/employer in Poland

Source: http://www.paiz.gov.pl/polish_law/taxation/pit

So even if Poles end up paying 9.76% of their gross salary in retirement insurance or 9% in health

insurance there is a sense that there is a direct benefit rather than pouring it into a vacuous pot.

Fig. 62: National tax burden on personal income in Japan

Source: National Tax Agency(NTA)

Japan’s national income tax rates are high. The rates in Fig. 61 do not account for local taxes (c. 10-

11%) or the special tax for reconstruction (2.1%). So, a top bracket earner would pay around 50%+

income tax. Throw on property taxes, consumption tax and vehicle taxes and all of a sudden, we are

nudging 60%+

If Japan copied Poland’s example

If Japan replicated the success of Poland’s tax reforms and was able to achieve similar growth rates

in receipts, then the annual Japanese national budget deficit would more than halve to around ¥15bn

http://www.paiz.gov.pl/polish_law/taxation/pit


A 19% flat tax

Listed stocks by prefecture

Source: NTA, Custom Products Research

If Japan introduced a 19% flat tax (including all other regional, local and other taxes) and corporates

reported a 50% higher income (those companies incorporated below ¥1bn) and 50% of the non-tax

paying corporates paid ¥1.5mn in tax then Japan would collect around ¥12.5 trillion yen (+¥2.4bn)

based on FY2013 tax take. If we analyse the general recurring margins of around 4.3% for the

majority of smaller companies, any efficiency uptake through competition by 1% would see this

number at around ¥15 trillion.

Prefectural Stock Performance

When we analyse stocks and performance by HQ location, we see that companies in Fukuoka

appear way down the list. In market cap terms, Toto Ltd ranks 156th in Japan. In outright performance

over 12 months the best performer Kyudenko ranks 62nd. Of course, the bulk of companies reside

in the Big Smoke but we think that the population statistics are very telling as to where future relative

growth will be experienced. Naturally many Japanese companies do not exclusively sell ‘at home’

as it were but if there was ever a more telling signal of ‘faith’ in the future Fukuoka looks to be lit up

in neon.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2020E 2025E

Total Expenditures 84.8 83.7 82.4 84.9 85.5 81.4 81.8 84.7 101 95.3 100.7 97.1 100.2 95.9 96.3 100.0 100.0

Tax Revenue 47.9 43.8 43.3 45.6 49.1 49.1 51 44.3 38.7 41.5 42 42.3 43.1 50 54.5 83.1 85.7

0

20

40

60

80

100

120

Fig. 63: Japanese National Budget Deficit (¥trillion)


Fig. 64; Prefectural Performance – 3~5 year returns (aggregated where companies have HQ)

Average Median Average Above 100¥bn

Mkt-cap Median Above 100¥bn

Mkt-cap

Prefecture 3-Year Return

5-Year Return

3-Year Return

5-Year Return

3-Year Return

5-Year Return

3-Year Return

5-Year Return

Aichi 37.2 146.6 24.1 112.4 46.1 183.8 32.4 140.7

Akita 36.5 69.9 36.5 69.9 na na na na

Aomori 28.2 58.6 28.2 58.6 na na na na

Chiba 40.2 135.0 25.8 70.0 50.0 165.8 54.5 188.5

Ehime 39.1 53.3 32.5 26.6 45.7 80.0 45.7 80.0

Fukui 57.2 303.1 48.9 256.2 48.9 256.2 48.9 256.2

Fukuoka 60.9 269.8 41.4 150.5 59.1 188.6 29.6 122.3

Fukushima 18.7 34.3 23.5 21.4 36.3 92.7 36.3 92.7

Gifu 48.7 197.9 30.9 121.7 48.3 209.8 43.0 104.3

Gunma 40.9 112.3 32.7 87.0 60.9 106.7 81.9 55.5

Hiroshima 23.4 109.1 28.6 75.1 23.1 137.5 33.3 148.7

Hokkaido 53.3 216.4 17.7 207.4 64.0 246.7 25.6 326.7

Hyogo 59.8 184.1 25.9 121.7 80.7 250.4 30.6 138.8

Ibaraki 38.9 57.2 38.9 57.2 39.3 40.4 39.3 40.4

Ishikawa 85.9 376.9 41.6 203.3 118.3 675.6 118.3 675.6

Iwate -7.4 39.5 -7.4 39.5 na na na na

Kagawa 34.4 101.9 25.6 122.8 11.5 62.2 8.6 47.1

Kagoshima -2.1 8.4 21.1 -21.5 25.0 131.6 25.0 131.6

Kanagawa 49.6 165.9 44.1 140.4 56.7 178.7 59.4 149.5

Kochi 83.5 166.8 83.5 166.8 na na na na

Kumamoto na na na na na na na na

Kyoto 49.3 171.4 37.3 131.8 54.9 175.2 42.0 139.3

Mie 99.6 191.4 17.3 54.4 17.3 54.4 17.3 54.4

Miyagi 38.0 70.1 20.7 72.4 20.7 83.6 20.7 83.6

Miyazaki 28.6 94.8 28.6 94.8 na na na na

Nagano 38.3 274.0 11.5 66.6 53.9 370.3 15.1 76.9

Nagasaki 49.4 77.6 49.4 77.6 na na na na

Nara 16.7 2.3 16.7 2.3 16.7 2.3 16.7 2.3

Niigata 52.2 122.3 36.5 97.5 42.5 146.7 36.7 156.7

Oita 20.5 86.9 20.5 86.9 na na na na

Okayama 40.1 98.4 36.1 91.5 3.8 23.2 3.8 23.2

Okinawa 46.7 115.2 26.6 82.6 64.4 134.2 71.3 82.6

Osaka 46.8 168.5 34.0 107.6 47.7 150.5 38.7 117.0

Saga 24.0 68.1 24.0 68.1 12.6 80.1 12.6 80.1

Saitama 44.9 141.3 25.4 117.3 87.7 154.7 81.9 132.6

Shiga 25.3 138.6 17.7 172.3 19.7 134.6 17.0 186.0

Shimane 36.1 68.5 36.1 68.5 36.1 68.5 36.1 68.5

Shizuoka 36.7 133.0 35.0 100.8 55.6 162.2 50.2 145.0

Tochigi 73.7 145.8 58.9 110.2 90.2 211.4 90.2 211.4

Tokushima 39.1 36.0 39.1 36.0 39.1 36.0 39.1 36.0

Tokyo 42.9 191.3 26.2 123.3 46.9 193.2 31.1 128.9

Tottori 199.0 493.4 199.0 493.4 na na na na

Toyama 21.9 66.0 3.6 34.5 -1.7 27.2 -3.1 30.4

Wakayama 54.8 229.7 36.8 192.2 68.2 346.9 68.2 346.9

Yamagata 15.2 27.0 15.2 27.0 na na na na

Yamaguchi 23.0 110.7 15.8 57.6 28.6 148.6 23.6 144.5

Yamanashi 21.2 96.8 24.9 77.1 21.2 96.8 24.9 77.1



Aging society

Debt service ratios

Poland seems a simple way

forward

Summary

The 10th anniversary of Yubari’s bankruptcy occurs this year. However, our studies seem to confirm

that the trend of depopulation in many of Japan’s prefectures will accelerate. Whether it be plunging

high school student numbers, an exodus of working age residents seeking longer term job security

or incompatible employment by industry trends.

Gaining access to municipal budgets and balance sheets is opaque. At a prefectural level we get

some idea of what is going on with budgets but the sharper rate of depopulation could well become

a bigger issue sooner than the considered norm.

An aging society only tips the apple cart of dependency ratios on a smaller workforce. Even the

‘economic revival’ scenario of the government points to rapid deceleration in traditional industries

putting further pressure on tax revenue collection at local, prefectural and national levels.

While the JLGBA paints a rosy picture about sustainability of debt service ratios, future burden ratios,

fiscal strength indicators and recent bond market moves show how rapidly things can change when

confidence is rattled While not anywhere near concerning levels yet, a succession of municipal

bankruptcies could well skew refinancing options. As it stands now bond markets are mildly pricing

in differences. The law of low interest rates means that any panic in bond markets could cause not

only more punitive interest payments but the slowdown in growth would make their impact on

budgets more acute. Taxing Japanese citizens more is not the answer. 70% of SME’s do not pay

tax for the very reason they are too high and complex. Poland had similar problems and they worked

out cutting corporate taxes fro 40% to 19% would free up the grey economy and the result was a

doubling of tax revenues.

Poland offers far better longer term tax solutions to Japan. Burying Japanese in higher taxes is the

wrong way. While headline rates are championed as being cut, a wealth of stealthy local and other

taxes take back what was supposed to be gained. It needs to stoke the entrepreneurial spirit because

frankly there is no other alternative and nationalising the debt via the BoJ will ultimately backfire.

The mass ETF buying by the BoJ which was supposed to push equities to levels which would

encourage Mrs Watanabe to spend her winnings in Mitsukoshi have been shoved between the

mattress. Japan’s authorities inspire very little in the way of new methods of reversing decades of

stagnation. Power has to be put back in the hands of the people as public policy has failed and will

continue to fail. Without swift action the depopulation and pressure on the prefectures will

exacerbate.

Make Japan Great Again (#MJGA)


Important Disclosures:

This material was prepared for you and is for your information and use only. This material should only be distributed to other members of that organization on a need to know basis and should not be distributed or disseminated to any other person or entity.

This material is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other instruments mentioned in it. This material is based on current public information that Analogica KK ("Analogica") considers reliable, but we make no representation that it is accurate or complete, and it should not be relied on as such. No investment opinion or advice is provided, intended, or solicited. Analogica offers no warranty, either expressed or implied, regarding the veracity of data or interpretations of data included in this report. This material is provided with the understanding that Analogica is not acting in a fiduciary capacity. Opinions expressed herein reflect the opinion of Analogica and are subject to change without notice.

The products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. The value of and the income produced by products may fluctuate, so that an investor may get back less than they invested. Value and income may be adversely affected by exchange rates, interest rates, or other factors. Past performance is not necessarily indicative of future results. If a product is income producing, part of the capital invested may be used to pay that income. © 2015 Analogica KK. All rights reserved.

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Office Locations

Tokyo Michael Newman President & CEO Analogica KK

+81-80-4446-8200 [email protected]

Contact

Headquarters 942 Win Aoyama 2-2-15 Minamiaoyama, Minato-ku, Tokyo Japan 107-0062

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