COVER STORY • Structural Reform of Local Economies • 5
he Role of Finance in Local Revitalization TBy Seiji Jige Author Seiji Jige
Background to the Need for Local Revitalization attractive job opportunities locally”. To achieve this, each prefecture and municipality has been tasked with grasping its own • Decline of Local Populations Expected to Accelerate demographics and creating its own local version of the The Japanese population has been declining since 2011, but Comprehensive Strategy in FY2015. The national government is “locally” – outside of the three major metropolitan areas with the providing a common database to support the development of megacities Tokyo, Nagoya and Osaka at their core – some comprehensive strategies through the Regional Economy Society prefectures have seen their populations decline since the 1980s. Analyzing System (RESAS), which can be used online, and According to “Local Financing Meets the Challenge of Declining encouraging deliberations in councils consisting of representatives Populations”, a May 2015 report by the Financial System and Bank from industry, administrative agencies, universities and colleges, Examination Department of the Bank of Japan, the Tokyo population financial institutions, and labor unions in creating them. in 2030 is forecast to be 12.96 million, a 7.4% increase from 12.06 million in 2000, but the forecast for the “local” population outside of Specific Challenges for Local Communities the three metropolitan areas is 34.97 million, a decline of 16.6%, or & Orientation of Response approximately 7 million, from 2000. The magnitude of the impact can be put into perspective by • Renewal of Local Infrastructure comparing it with the total population of the three prefectures Much of the public infrastructure in Japan was developed during (Toyama, Ishikawa and Fukui) of the Hokuriku region, currently at the high growth era. As a result, the proportion of the infrastructure approximately 3 million. In Japan, where corporate headquarters and stock in Japan for which 50 years or more has passed since major universities are concentrated in Tokyo and other metropolitan construction is 53% for roads, 60% for drainage pump stations and areas, there has long been a tendency for high school graduates to sluice gates, and 19% for sewage pipes, to give some examples from leave their local communities to matriculate at major universities in an estimate by the Ministry of Land, Infrastructure, Transport and the metropolitan areas and remain there when they graduate and go Tourism. They are aging, which means that maintenance and renewal to work. The relocation of manufacturing capacity overseas in the costs are expected to rise. This is a particularly serious problem for 1990s also contributed to the decline of the resident population in local communities that must renew public infrastructure while their the regions. Another major reason was that locally based primary populations and tax revenues are declining. The “compact city” industries such as agriculture, forestry and fisheries failed to concept and the introduction of private sector funds to public generate new demand for jobs. Take the rise in the proportion of the infrastructure investment (specifically, the acceleration of the elderly that accompanies the population decline into account as well, introduction of PFI/PPP) are already being considered to meet this and we end up with serious concerns over the potential decline of challenge. The role of finance including the construction of financing regional economies. schemes that match the individual project characteristics is important for private finance initiatives (PFI) and public-private • Establishment of the Communities, People and Jobs Creation partnerships (PPP). However, the financial knowhow for PFI/PPP is Headquarters concentrated in major banks and the Development Bank of Japan The government set up an institutional framework to deal with this (DBJ). It is desirable for this knowhow to be broadly shared with situation by establishing the Communities, People and Jobs Creation local financial institutions. Headquarters in September 2014, and subsequently enacting the Communities, People and Jobs Creation Act. The purpose of local • Local Industry Promotion vitalization was determined to be the integrated promotion of efforts Industrial promotion by local governments used to focus on on three fronts: ① communities = “building local communities where attracting manufacturing facilities. The limits of this strategy are rich, fulfilling lives can be enjoyed in security”, ② people = “securing becoming clear with the overseas relocation of manufacturing human resources with great individuality and diversity as the pillars facilities and the advance of automated factories. This makes it of local communities”, and ③ jobs = “creating a wide variety of important to develop local industries and to secure successors for
20 Japan SPOTLIGHT • March / April 2016 existing local businesses. As for ways to develop local industries, take up the mantle. The executives and employees of the local upgrading tourism in light of the growing number of inbound financial institutions are currently being looked to in playing this role. tourists in recent years, as well as efforts to give new life to agriculture, forestry and fisheries (primary industries) by integrating Major Banks & the Development Bank of Japan them with manufacturing (secondary industries) and service (tertiary industries) value chains into senary (primary (1) + secondary (2) + • Major Banks tertiary (3) = senary (6)) industries, and taking advantage of an aging There are 10 major financial institutions including the three society to develop healthcare and nursing care businesses are being megabanks (Tokyo-Mitsubishi UFJ, Sumitomo Mitsui, and Mizuho), considered among other things. The specifics are expected to be Resona, and Sumitomo Mitsui Trust. They all have business worked out through the process of elaborating the local versions of operations in metropolitan areas, and the megabanks in particular the Comprehensive Strategy. Equity-oriented risk money will be are globally-oriented. Thus, although they do have an interest in local important for funding these business succession, industrial revitalization, it has not become an important management issue for reorganization, and business startup efforts. them.
• Human Resource Development • Development Bank of Japan The most important and serious challenge is securing the “human The DBJ was established in 1999 as a government financial resources” to undertake the task of local development. Local institution through a merger between the Hokkaido-Tohoku government officials are constrained by their responsibilities as Development Finance Public Corporation, whose purpose was local public servants, while ambitious people in the private sector are development in the Hokkaido and Tohoku regions, and the DBJ, leaving for the urban areas that offer plenty of business whose purpose was local development in the rest of Japan in opportunities. addition to industrial development nationwide including energy and transport. It was privatized in 2008 as a stock company as the first in Current State of Local Financial Institutions a series of privatization projects. Although the government still retains 100% ownership of the DBJ, it issues its own bonds and • Types and Number of Local Financial Institutions borrows from local financial institutions. With a total of 15 trillion In Japan, local banks, which take the form of stock companies, the yen in funds, it is around 1/10th to 1/20th the size of the megabanks, shinkin banks and credit unions that take the form of cooperatives, and comparable to the other major banks. In contrast to the largely and agricultural cooperatives in the agricultural and forestry sectors short-term orientation of ordinary banks, the DBJ provides long-term are the local financial institutions responsible for finance. Of financing and risk money. particular importance to local governments are the local banks (64 Although lending to big business and large-scale projects members of the Regional Banks Association of Japan and 41 accounts for the bulk of lending, approximately half of the members of the Second Association of Regional Banks) and shinkin businesses with which it does business are local businesses, and it banks (267). There are 47 prefectures and 1,718 municipalities (of has 10 local branches, one in each major region. The local economy which 790 are cities) in Japan. On average, there are two local banks being one of its business domains, it set up its own headquarters in per prefecture and a shinkin bank in each of the main cities. Local September 2014 to support local revitalization. financial institutions are also an important source of jobs for people who have received higher education. The Role of Finance in Local Revitalization
• Management Challenges Local Financial Institutions Face and • Functions Expected from Finance in General Their Engagement in Local Revitalization Finance has two roles, broadly speaking. One is the money bank Local banks and shinkin banks have local operation bases. As function as the provider of funds, examining the feasibility of a industrial structures change and populations decline, their lending variety of business plans, giving advice as the occasion warrants, activities are on a downward trend, forcing them to maintain overall and providing or making arrangements for a wide range of financing. profits by managing their excess funds in the financial market on The other is the knowledge bank function, supporting the plans of government bonds and the like. This means that reviving the local businesses and local governments by providing information and economies as their operating base and securing local lending networks. opportunities are extremely important management challenges for The following is an introduction to examples of efforts by function. these local banks and shinkin banks. Thus, they have a major stake For the reasons explained above, local banks and shinkin banks play in the success of local revitalization. the main role, while the DBJ, where I work, offers broad-based support Developing the local economy also requires human resources to for local revitalization mainly through cooperation with these banks.
Japan SPOTLIGHT • March / April 2016 21 COVER STORY 5
CHART 1 CHART 2 Examples of collaboration between Example of DBJ-local bank local banks & DBJ – to create “power undertaking – Shizuoka Gas joining to earn” (largely risk money-related) IPP project in Thailand O r i pr c I araki Revitalization Fund J an A Shi a Ga a i i l cal a ppli r in h T ai r i n in an r a in p ra i n Local Musu u Setouchi Business Succession Fund J ac ir pr rr har in i 100 i iar SG an P r H l in Hir hi a an Sa an T a an ir r a in n r Shi a Ga ai a ac irin r a ana n an p ra i n Seto Mirai Fund Hir hi a an M i i an Hir hi a Shin in an p r i an il in l cal n r r Shin in an Shi ana i Shin in an Hir hi a Mi ri Shin in an J pp r in Shi a Ga par icipa i n in h pr c pr i in ri n in l i h Shi a Hir hi a r i p ra i Hir hi a r i ni n i Shin i an in r r h lp r i ali h l cal c n in Shin iai P in r in l cal l c rici pr c a ll in i p r i c h l i n pr i r in i NCB yushu Revitalization Fund i hi ipp n i an I c ppl ar a in h incr a in l r la n r c r Shi a Ga ill c n in pr l cal l i n an ill al pl r h r a ar ainl in A ia reat ast Japan arth uake Disaster Recovery & ro th Support Fund ide-area I a an an T h an I greement Concerning Revitalization of Tourism Industry in Setouchi Region O r i a ir p r plan IPP pr c in Thailan pr c ch h an Hir hi a an a a chi an A a an H a hi an I an O r i a ir p r plan IPP pr c Pr c ch Mina an in Thailan Tourism Revitalization Mother Fund I i a Par n r Shi a Ga J Shi a an pp r r r h r c ral r r in i i in a an in cl P r Plan In n in In n in Smart Mezzanine Fund AAAAAAAA an SM A I TM SGT r inar har pr r n ial har L ca i n A ph r an Sa Pra an Thailan M& rogram for Local Contri utions T p / a ral Ga ir GT /3 0M Syndicated Loan to Skynet sia ir ays G n ra i n apaci Ga P r SG T al Ga P r hina l p n S la Air a hi a an Mi a a i an Hi an Oi a an i h n h an Thailan In rial an rcial Op ra i n March 2 2003 S n h I a an Mi a a i Tai an a 32 2 2 12
in c cl a r in p r n ra i n Op ra in c pan Cross- order Support for Overseas I ctivities y Local as Company Seeking to a rn P r l c ric pan L Become Local nergy Solution Company Shi a an Joint Investment rogram in Overseas rivate uity Funds hi a an Shi a an Source: Development Bank of Japan Inc. (DBJ) Business lliance Concerning Support for Overseas ctivities of Client Businesses J ill Gr p 26 c lla ra in inancial in i i n
Source: Development Bank of Japan Inc. (DBJ) cooperation with the public-private sector fund Regional Economy Vitalization Corporation of Japan (REVIC) or the DBJ. Chart 1 is an • Specific Activities as Money Banks example of collaboration with the DBJ. Chart 2 (Shizuoka Gas joining The local banks are setting up a wide variety of funds for the an IPP project in Thailand) is a case where a local business was purpose of smoothing the way for financial success at their client helped with an injection of equity to grow by expanding into the businesses, revitalizing local businesses, promoting tourism, and so Asian market. Chart 3 shows an example of prefectures and local on. In many of these cases, the funds are being established in banks in wide-area collaboration as the seven Setouchi prefectures (Hyogo, Okayama, Hiroshima, Yamaguchi, Tokushima, Kagawa, and CHART 3 Example of DBJ-local bank undertaking Ehime), the seven local banks based there and the DBJ collaborate to – Setouchi brand promotion structure create the “Setouchi Brand” to be used jointly as the common brand for tourism and food products for business promotion. This is an
Th S chi ran Pr i n A cia i n Pri a in c example of the combination of money bank and knowledge bank April 2013 Have businesses and organizations H O a a a Hir hi a a a chi develop products that match functions. hi a a a T hi a pr c r Setouchi branding ◦L a r a li h S chi ran a h la hip r ani a i n Theme Leading Player ◦ il p S chi ran i a rall Business support ex. Accommodation- pr i n Cruise type cruises • Specific Activities as Knowledge Banks ◦Pr c l p n i anc h an ex. Setouchi r rc l p n pp r Food restaurants Many local financial institutions are cooperating with their local ◦Liai n r inancial pp r in r iar r ex. Onomichi in pp r r ani a i n a cia i n Cycling i i U2 governments in creating local versions of the Comprehensive ex. Setouchi Art Triennale Strategy. In addition to cooperating with local governments greement concluded et een Others the Setouchi Brand romotion ssociation (accommodations, ex. Setouchi individually, the DBJ also issues a wide variety of research reports hotels & DBJ Business Support romotion Office etc.) useful to local revitalization, and hosts workshops on creating in S pp r Or ani a i n Pr i n O ic a li h J l 201 《S chi ran pp r r 》 innovation locally in cooperation with the respective local finance l cal an c in h S chi Number of supporters: 248 Number of certified products: 328 pr c r J α bureaus of the Ministry of Finance, holds open classes for local Business support (as of November 2014) ◦ n i r i r p n in pp r r ri r la n rpri Accommodation businesses Restaurant businesses governments and financial institutions on the basics of PFI/PPP to ◦S ana n pp r r pr i in Retail businesses Manufacturers p r i ri r la n rpri Transport businesses prepare for local infrastructure renewal, and supports the creation of destination management organizations (DMOs) to promote tourism. greement concluded et een financial institutions ( greement includes esta lishment of usiness support promotion offices) • Results of Monitoring by the Government Or ani a i n c n i r in pp r r c r l cal an c in h S chi The following efforts are introduced in the “Monitoring Survey pr c r J ◦ n i r ha h in pp r Results regarding the State of Efforts regarding Local Vitalization: r c r h l li Notable Examples of Efforts by Financial Institutions Aimed at Local Source: Development Bank of Japan Inc. (DBJ) Vitalization” made public by the Communities, People and Jobs
22 Japan SPOTLIGHT • March / April 2016 Creation Headquarters Secretariat in December 2015 (https//www. Bank, Hiroshima Bank, Yamaguchi Bank, Awa Bank, Hyakujushi kantei.go.jp/jp/singi/sousei/pdf/1512_research_kinyu.pdf). Bank, Iyo Bank, Minato Bank, Development Bank of Japan> (1) Support for Creating Strategies (four examples) (5) Turning Agriculture, Forestry and Fisheries into Growth • Analysis of local industries using tax data and its use for Industries (two) supporting creation of the local versions of the Comprehensive • Efforts through the NCB Kyushu Sesary Industry Support Fund Strategy Japan SPOTLIGHT • March / April 2016 23