Fiscal Sustainability and Municipal Amalgamations in Japan

In Japan, the so-called “Great Heisei Amalgamations” were executed over the period from 1999 to 2010. During this time the number of municipalities decreased from 3,232 to 1,727. Some of the extant literature suggests that the reduction of local allocation tax (LAT) grants to smaller municipalities had provided a strong incentive for the voluntary amalgamations. In this study, through empirical analysis of a seven-year panel of rich financial data, the factors salient to these voluntary municipal amalgamations are considered from the perspective of participating local governments. The results demonstrate that fiscal unsustainability, which was largely caused by central government policies, was the main motivation for municipalities with low financial capabilities to amalgamate.