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Table of Contents

Vol. 147 : The Role of Fiscal Investment and Loan Program in Macroeconomy and Social Capital Development

Summary of Articles

Status of Functions of Public Quasi-Equity Funds in Japan
—Possibilities and Risks of Public-Private Funds—

By MITSUSADA Yosuke (Professor, Sanno University School of Management)
By KAWAKITA Hidetaka (Professor Emeritus, Kyoto University)

This paper analyzed three hypotheses concerning public-private investment funds. The analysis obtained the following three major conclusions:
(1) Under some existing investment projects, it has been possible to pursue policy objectives and profitability, and those projects have been effective in inducing other investments. On the other hand, regarding risk factors, the analysis indicated the presence of the risks that policy objectives may be susceptible to discretionary interpretation and that private businesses may be squeezed out. Most of the funds so far recollected are investments in large-scale projects, while there are expectations for future recollection of funds from small-scale projects.
(2) The governance exercised by the government over public-private funds has worked to some degree, as funds for which cumulative losses had expanded were subjected to review at a relatively early stage. As for risk factors, the investment period for some public-private funds (which has been set under the sunset clause) has been extended, which means that the governance over organizations operating the funds may not necessarily be functioning adequately.
(3) With respect to training of personnel to acquire investment skills, people who have left public-private funds after cultivating investing experience tend to be working successfully in the private sector. As for risk factors, the analysis indicated the need for strict enforcement of the sunset clause.

Keywords: public-private funds, fiscal investment and loan program, industrial investment, venture capital

JEL Classification: G10, G20, G30, H50

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Economic and Financial Effects of Credit Guarantee as Means of Policy-Based Finance

By GOTO Yasuo (Professor, Faculty of Social Innovation, Seijo University)

Since the financial crisis that occurred around the year 2000, the presence of credit guarantee as a means of policy-based finance has grown. In the meantime, expectations have tended to fall on credit guarantee programs not only to exert the microeconomic effect of raising the efficiency of finance for small and medium-size enterprises (SMEs) but also to play a role in supporting the entire economy in times of recession. This paper analyzed the relationship between credit guarantee and short-term economic fluctuations on a time series basis through a Granger causality test using panel data. As a result, while we recognized the presence of a causal relationship from real economic factors, such as economic fluctuations to credit guarantee programs, little causality was observed in the opposite direction. Regarding the relationship between finance-related variables, such as gross loans, and credit guarantee, generally speaking, the direction of causality was also only from the former to the latter. In addition, we aggregated and processed particular data related to SMEs in our own way in order to examine the relationship between credit guarantee, particularly in terms of liability assumption, and borrower companies' business performance from the perspective of the impact on economic growth. As a result, we found that the percentage of poorly performing companies was lower among companies that assumed guaranteed liabilities than among ones that did not. As far as the results of our analysis on aggregated basis, credit guarantee programs do not have an overly large presence. On the whole, we may give the assessment that credit guarantee programs are being operated only to the extent necessary for playing a supplementary role in supporting the real economy.

Keywords: credit guarantee, economic cycles, Granger causality, excess liabilities, zombie companies

JEL Classification: C23, E32, H81, L25

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Challenges for Improving Efficiency of Fund Supply in Agricultural Sector

By NAKATA Masao (Professor, Faculty of Economics, Seijo University)

This paper analyzes how public financial institutions should supply funds by looking at the case of financing in the agricultural sector and identifies the challenges that must be overcome in order to facilitate flows of investments and loans to industry. While Japan's agriculture has been declining for many years, its importance has been recognized once again because of growing awareness about "food security" and the reassessment of the multifaceted functions of rural villages amid the increasing frequency of natural disasters. Moreover, in recent years, the government has actively implemented policy measures to turn agriculture into a "growth industry." While sectors where "market failures" could create serious problems are becoming fewer and fewer due to the Japanese financial markets' growing maturity, agriculture is one of the few sectors where public finance can perform a "market-complementing" role. To achieve the goal of turning agriculture into a growth industry, it is essential to expand the amount of funds supplied to it from private-sector financial institutions. Therefore, public financial institutions engaging in policy-based finance should strengthen cooperation with the private financial sector, including in the sharing of information and knowhow, with respect to both loans and investments (funds).

Keywords: fiscal investment and loan programs, policy-based finance, agricultural finance, sixth industry, program to promote investments in agricultural, forestry and fishery corporations, agricultural funds

JEL Classification: G20, H81

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Thoughts on How to Address Aging of Infrastructure and on Financing of Replacement Investments

By NEMOTO Yuji (Professor and Chief of Economics Course of Public/Private Partnership, Graduate School of Economics, Toyo University/Director, Research Center for Public-Private Partnership)

In Japan, the multitudes of infrastructure facilities developed in the high-growth period of the 1960s to 1970s are aging across the board. If the situation is left unattended, severe accidents could occur, including the collapse of bridges, tunnels and roads, and the bursting of water pipes followed by water supply disruptions, putting the people's lives and property at serious risk. Signs of disasters waiting to happen are already starting to appear.

To resolve this problem, aged infrastructure facilities should be quickly replaced. However, replacing all existing infrastructure facilities is estimated to cost a staggering 12.9 trillion yen per year.

Rather than trying to secure the necessary funds by increasing government bond issuance or raising tax rates, the government should implement various resourceful measures to reduce the size of replacement investment cost, such as reorganizing public facilities (making facilities available for use by multiple regions, replacing tangible facilities with intangible properties, consolidating redundant facilities, promoting common use of facilities, and equipping facilities with multiple functions), introducing preventive maintenance, and adopting a risk-based management (RBM) approach. Those measures are estimated to lower the total replacement cost by 40%. If the measures are applied nationwide, the required annual replacement cost would be reduced to 7.7 trillion yen.

There are two points of discussion to be considered here. The first point is how to obtain the consent to the reorganization from people currently using facilities that may disappear as a result. The second point is how to finance the replacement cost, which would still be huge even after the reorganization.

On the question of how to form a consensus, the paper cites the case of an ongoing social experiment under a priority research project of Toyo University. In particular, a special deliberative polling system devised by Toyo University is expected to be effective. Under this system, votes are taken twice anonymously, with relevant explanations provided to the voters before the second voting.

On how to finance the cost, the paper cites the following three categories of infrastructure as examples of facilities for which the needs for investments are particularly strong: (a) hub facilities centering around consolidated schools equipped with the functions of other public facilities, (b) infrastructure facilities for which the beneficiaries make fee payments, including waterworks and sewage systems, and (c) infrastructure facilities that do not generate cash flow, such as roads and bridges. The paper points out that those infrastructure facilities should be financed mainly through the PPP (public-private partnership) approach, rather than the traditional approach. Specifically, the paper proposes financing schemes such as (a) a service-purchase type PFI (private-finance initiative), (b) granting of the right to operate public facilities, and (c) availability payment (including the use of public REITs).

All those schemes involve some risks. The fiscal investment and loan program is expected to provide funds to specialized financial institutions with sufficient expertise to take risks or to supply risk money, including in the form of establishing specialized investment funds.

Keywords: infrastructure, PPP, PFI, consensus building

JEL Classification: G32, H76

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Fiscal Investment and Loan Reform and Local Government Bonds

By TOMITA Toshiki (Guest Scholar, Nomura Institute of Capital Markets Research)

Since the turn of the century, the flow of funds to local governments has changed drastically. The share of fiscal loan and investment funds in the flow has declined significantly, while funds raised from the capital market have increased steeply. Has this change helped achieve the goal of the fiscal investment and loan reform and the decentralization reform, which is to promote the autonomy of fiscal management by local governments?

The waves of decentralization and financial liberalization since the end of the 20th century triggered a series of reform measures, as the Basic Policy on Economic and Fiscal Management and Reform 2001 gave the go-ahead for changes. The measures included reforming the way of distributing tax grants to local governments through the reduction of supplementary funds for projects and the expansion of reserve revenues, abolishing a licensing system for issuance of local government bonds, introducing flexibility into negotiations over issuance terms for local government bonds, and adopting early corrective measures under the Act on Assurance of Sound Financial Status of Local Governments. Chapter I examines what changed and what did not as a result of those reforms. On the surface, the reforms may appear to have brought about decentralization and a shift to fund-raising from the market, but the core principle of the 20th-century local government fiscal system—that the central government provide fiscal guarantee for the total amount of expenditures under the annual local financing plan—has been maintained.

Chapter II considers why the bankruptcy legislation proposed in 2006 by an advisory body to the Minister of Internal Affairs and Communication failed to be enacted. In order to ensure that the certainty of redemption of local government bonds is evaluated by the capital market and that market discipline is imposed on local governments' fiscal management, it is prerequisite to introduce a bankruptcy system that explicitly lays down debt workout rules under which creditors can be held liable at the time of bankruptcy and the government is prohibited from bailing them out, as is the case with respect to state bonds in the United States. The presumed reason why bankruptcy legislation has failed to be enacted in Japan is that from the viewpoint of institutional complementarity, such legislation is not consistent with the long-established system of local government fiscal management centering on tax grants from central government, which has been maintained despite the reform implemented at the beginning of the 21st century.

Chapter III examines the drastic change in the flow of funds to local governments and the cause of the change. For the first two decades of the 21st century, the amount of loans extended by public financial institutions to local governments has declined steeply, whereas the amount of loans extended by private financial institutions and the amount of local government bonds held by them have continued to increase. This change is due to changes in the allocation of funds by category under the annual local government bond plan. Fund-raising activities by all local governments, including procurement of not only fiscal loan and investment funds but also private funds, are determined under the local government bond plan. The goal of increasing funds raised from the market under the fiscal investment and loan reform was implemented through the expansion of the scope of organizations eligible to issue publicly offered bonds and the introduction of publicly offered bonds jointly issued by multiple local governments. However, increasing funds raised from the market does not necessarily ensure that market discipline is imposed on local governments' fiscal management.

Chapter IV considers what kind of discipline is necessary for securing the certainty of redemption of local government bonds amid the lack of market discipline by looking at the cases of bonds issued as an extraordinary measure to cover a fiscal deficit and bonds issued in order to finance waterworks and sewage projects. Even though the central government may be committed to guaranteeing the provision of necessary fiscal funds, its own fiscal sustainability is not unquestionable given Japan's unprecedentedly severe fiscal condition. Therefore, it is essential to enhance the central government's fiscal sustainability by imposing discipline on the government's fiscal guarantee for local governments' expenditures. To that end, it is necessary the local financing plan should ensure compliance with the rule requiring that the total amount of general grants from central government and local tax revenue be effectively same in every fiscal year. In addition, regarding the deficit-covering local government bonds, it is necessary to ensure compliance with the rule requiring local governments that have issued lump-sum maturity redemption bonds to set aside reserves in a fund for future bond redemption. With respect to waterworks and sewage bonds, it is necessary not only to prohibit transfer of funds from the general account to waterworks and sewage projects in excess of the prescribed upper limit but also to significantly lower the upper limit.

Keywords: government debts, local government bonds, local government tax grants, local financing plan, local government bond plan

JEL Classification: E43, H63, H77

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State of Financing at Local Governments as Viewed from Indicators of the Assessment of Fiscal Conditions

By OHNO Taro (Professor, Research Center for Social System, Shinshu University/Senior Visiting Research Fellow, Policy Research Institute, Ministry of Finance)
By ISHIDA Mitsunari (Associate Professor, Faculty of Economics, Toyo University)
By KOBAYASHI Wataru (Professor, Faculty of Policy Informatics, Chiba University of Commerce/Senior Research Fellow, Policy Research Institute, Ministry of Finance)

From the viewpoint of checking the certainty of repayment of fiscal loans to local governments, the Ministry of Finance prepares the statement of administrative cash flow by modifying existing account settlement statistics in a way that focuses attention on the cash flow and assesses the fiscal conditions of local governments. This paper clarifies the characteristics of indicators used for assessing fiscal conditions (FY2017-2018) and considers the status of financing at local governments. In recent years, while the statuses of reserves and net debts at local governments have improved, the administrative current account ratio, which represents the account balance status, has declined, reflecting the increasingly severe situation of financing. As a result, the number of local governments for which "fiscal points of concern" have been recognized or are likely to be recognized in the future based on the diagnostic criteria for the assessment of the fiscal conditions has increased. It was found that the increase in such local governments is attributable in large part to growth in expenditures, including expenditures on equipment, financial assistance for the needy, and subsidies. It should be noted that when the amount of revenues from the hometown tax donation is large, the administrative current account ratio may appear on the surface to deteriorate. However, this does not have a significant impact on the results of our analysis. The assessment of the fiscal conditions of local governments are effective in grasping the status of their financing and are also useful academically.

Keywords: local governments, administrative cash flow statement, assessment of fiscal conditions, financing

JEL Classification: H70, H77

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Ministry of Finance, Policy Research Institute.