Chapter 4. Policies to ensure Japan’s regional and rural revitalisation

The challenges facing non-metropolitan areas are not primarily about demography

The ongoing decline of many second-tier cities and rural areas in Japan is rooted not in demographic trends so much as in structural economic change. Indeed, Japan’s rural population began falling in about 1950, long before fertility dropped and the total population trajectory shifted towards decline.1 Many of its second-tier cities also began to lose population while it was still rising nationally. The principal factor at work was not low fertility or increasing longevity but the movement of labour out of rural activities, owing both to increasing productivity in agriculture and the shift in the structure of the entire economy towards industry and services, where agglomeration economies are particularly important and cities thus have an enormous advantage. Even second- or third-tier cities and rural towns have struggled in the face of such change. For a time, their lower costs and relatively abundant labour enabled some provincial towns and rural areas to benefit from industrial relocation, particularly of space- and labour-intensive industries. However, much of this activity moved offshore in the late 20^th century, and the evolution of the Japanese economy towards more R&D- and capital-intensive activities simply reinforced the advantages of the big cities (Elis, 2011). Non-agricultural rural activities have also been hit hard, most notably in the decline of many mining towns and the struggles of smaller ports in the face of consolidation in that sector (Coulmas and Lützeler, 2011).

Japan’s complex geography has long exerted a powerful influence on the evolution of regional policies. Although a huge part of the population is concentrated around the three main cities, the rest is dispersed over a very wide area. The country comprises more than 6 800 islands, of which 316 are inhabited. All, apart from the 5 main islands,2 have fewer than 70 000 inhabitants, but they are spread over such a wide area that Japan’s exclusive economic zone covers 4 470 km² – 12 times the country’s land area. Moreover, much of the country (and, in particular, of the main island of Honshū) consists of mountainous regions and complicated coast lines (35 000km in total). Altogether almost 70% of Japan is forested (comparable to the levels found in Nordic countries), much of that being quite mountainous as well; only 12% is cultivated, and roughly 8% is given over to roads, residential use and industry. As a result, the country is rich in terms of biodiversity, soil and water resources. However, infrastructure management, particularly for transport, is exceptionally complicated and costly, and many rural communities face unusually severe accessibility challenges. In addition, most of the country is vulnerable to natural disasters, most notably earthquakes, typhoons and tsunamis. Support for geographically disadvantaged regions has typically taken the form of infrastructure investments to improve connectivity, special conditions regarding tax sharing, support for some transport services (regular sea/air transport) and tax breaks for households and firms confronting specific local problems (e.g. for the construction of snow-resistant housing).

As urbanisation accelerated in the 1960s and 1970s, measures to support geographically disadvantaged regions were reinforced by special fiscal support for municipalities facing significant loss of population. These measures tended to focus on the rate of population decline. Not surprisingly, many of the beneficiary municipalities were also geographically disadvantaged. These early efforts relied to a great extent on the “traditional” instruments of regional policy used in other OECD countries: large infrastructure projects and tax breaks to encourage industrial location in particular places. These efforts only ever had a limited impact, and they were undercut from the 1970s onwards by a series of developments, including the oil shocks, which accelerated the structural shift towards high-value services (and thus towards Tokyo); globalisation, which has facilitated the transfer of manufacturing operations from Japan to overseas locations, a process that accelerated in the 1990s with the rise of the yen; and demographic shifts that made it harder for firms to recruit the labour they needed in many areas. Policy since the late 1990s/early 2000s has shifted again, towards reliance on innovation and cluster policies, though infrastructure policies remain important, as do tax breaks for, e.g. companies that relocate some headquarters functions to the regions (Ministry of Land, Infrastructure, 2014). These new approaches, particularly those concerned with innovation and entrepreneurship, are considered below.

Rural policy has changed considerably in recent years

For many years, rural development policy was almost coterminous with agricultural policy. Even as Japanese agricultural policy came to recognise the importance of multifunctionality, farming remained at the centre. Thus, the 1999 Food, Agriculture and Rural Areas Basic Act defined the stable supply of food and the preservation of multifunctionality as its key objectives.3 Sustainable agricultural production was seen as the means to achieve these two objectives, and rural hamlets were seen as important because they could support agricultural production by collective maintenance of land and water resources. This has lately begun to change, however, with the emergence of initiatives like the “sixth industry”, which is explored below. As will be seen, the challenge at present is to manage the trade-offs that sometimes emerge between facets of agricultural policy and rural development policy: in particular, this concerns the balance between the pursuit of higher productivity in farming and the desire to limit the depopulation of rural hamlets. More efficient rice farming might in many cases lead to an accelerated outflow of population. One of the major concerns of this chapter is how to manage these two objectives in tandem.

Regions and municipalities have also been increasingly active

As demographic pressures have mounted in recent decades, the local authorities themselves have tried an ever-wider range of strategies to combat population decline. Some of these have been purely local initiatives and others have been supported by the national or prefectural authorities. So far, nothing has stemmed the tide. The large cities have tremendous advantage in competing for younger people, in terms of the range of available job opportunities, educational opportunities and even “marriage markets”. The rise of two-income households tends to reinforce this advantage, because it is easier for both partners to find work in thicker labour markets. As a result, some places have competed to attract retirees instead, and not without success. However, the sustainability of some of the instruments employed is open to question: Elis (2011) notes that subsidies for real estate purchases can be substantial in some places, but it has become clear that cost escalation over time (as the newly arrived retirees grow older) is a problem. Other areas have pursued local policies to support fertility, including awards and even marriage brokerage offered by municipal governments.4 In some places, relocation subsidies, cheap housing and family-friendly services can indeed work, though this seems to be most promising in places close to a city offering employment and education opportunities.

The current push for regional revitalisation comes at a critical juncture

Japan has now experienced several decades of local and regional revitalisation initiatives. Such policies have been a recurrent priority of governments since the 1970s, in the form of policies aimed at industrial decentralisation, nodal development, relocation of the functions of the capital, decentralisation of corporate headquarters, “hometown revitalisation”, and the development of “regional core cities” and “wide community areas” (Sasaki, 2015). Even leading government ministers acknowledge that there is a need to explain how and why the current effort will be different;5 otherwise, there is a very real risk of cynicism about how much difference it will make. Some observers are already expressing concern about the failure of many subnational governments’ local revitalisation plans to engage critically with past policy failures, as well as inadequate assessments of local resources, capacities and demographic prospects (Nishimura, 2015).

Nevertheless, there are some reasons to think that this time can be different. First, the Masuda Report on the consequences of depopulation (Box 4.1), which appeared in 2014, has galvanised a large part of the political elite, particular those active in regional and local politics in places that are losing population. Secondly, public interest is also high. A Dentsu poll of 10 000 people conducted in April 2015 found that 80% were aware of the local revitalisation policy (though only about a third knew of its content) and three-quarters favoured steps to counterbalance the concentration of people and activity in Tokyo. Such awareness matters, because the “local revitalisation” initiative is predicated on developing a national popular movement: the aim is not to impose a central vision on the country from the top down but to use central leadership to mobilise bottom-up initiative in local communities (Kido, 2015). Thirdly, fiscal pressure is another factor setting the current effort apart from those of the late 20^th century or even the early 2000s: local revitalisation is seen as central to generating growth and to longer-term prospects for putting Japan’s public finances in order. Finally, the current effort to build and sustain a whole-of-government approach to revitalisation is encouraging, in view of the often confusing multiplicity of objectives and mechanisms that have prevailed in the past. Sustaining this effort will be critical.

Japan’s rural regions are still relatively prosperous by OECD standards

This chapter is devoted to the challenges facing Japan’s non-metropolitan regions, including smaller cities and towns, as well as rural areas. These are considerable. Nevertheless, it would be a mistake to focus on the problems to such an extent as to overlook some of the considerable strengths of such regions. Some of these have already been touched on in previous chapters, which have underscored the relatively low inter-regional disparities in general in Japan and, in particular, the fact that the income gap between predominantly rural (PR) and predominantly urban (PU) regions is among the lowest in the OECD. Rural regions in Japan also offer many advantages in terms of quality of life. This section reinforces that analysis by benchmarking predominantly rural Japanese regions against those of other OECD countries. While rural regions in Japan have tended to grow slowly – like all regions in Japan – they nevertheless exhibit certain strengths when seen in an OECD-wide context. In particular, GDP per capita in Japan’s predominantly rural regions was about 13.6% above the OECD average for such regions in 2012 (Figure 4.1), and only one Japanese PR prefecture was more than 10% below the OECD-wide average. Labour productivity in such prefectures was also about 10% above the OECD average in 2011 (Figure 4.2). This is particularly remarkable given that Japan’s economy-wide labour productivity is now below the OECD average (OECD, 2015a).

Figure 4.1. GDP per capita in predominantly rural regions, 2012

Source: OECD (2015b), Regional Statistics (database), https://doi.org/10.1787/region-data-en (accessed 10 September 2015).

 https://doi.org/10.1787/888933324967

Figure 4.2. Output per worker in predominantly rural regions

OECD and Japanese TL3 regions, 2011 or latest available data

Source: OECD (2015b), Regional Statistics (database), https://doi.org/10.1787/region-data-en (accessed 10 September 2015).

 https://doi.org/10.1787/888933324973

Growth has been weak but labour market performance has been relatively good

Not surprisingly in view of Japan’s national performance, the country’s PR regions have exhibited lacklustre growth performance in recent years. Even so, data for 2001-12 show the country’s rural areas very much in the middle of OECD rural regions when it comes to the growth of GDP per capita (Figure 4.3). As was seen in Chapter 1, of course, this owed much to population outflows rather than to strong aggregate growth performance. Those outflows have caused much concern, since many rural communities have been losing their most productive young people, but this smooth labour market adjustment has ensured that rural Japan does not experience the very high unemployment seen in many OECD rural regions. Indeed, as is clear from Figure 4.4, PR regions in Japan perform exceptionally well when it comes to labour market outcomes, especially unemployment. Labour force participation rates are above the average for PR regions in all but three of Japan’s PR prefectures. Employment rates are above, and unemployment rates below, the respective OECD averages in all of Japan’s predominantly rural regions.

Figure 4.3. Change in real GDP per capita 2001-12, predominantly rural OECD regions

2001 = 100

Source: OECD (2015b), Regional Statistics (database), https://doi.org/10.1787/region-data-en (accessed 10 September 2015).

 https://doi.org/10.1787/888933324981

Figure 4.4. Labour market performance: Rural regions in Japan and the OECD

2013

Source: OECD (2015b), Regional Statistics (database), https://doi.org/10.1787/region-data-en (accessed 10 September 2015).

 https://doi.org/10.1787/888933324999

A new scheme for National Strategic Special Zones is being put into place

A new scheme for “National Strategic Special Zones” (NSSZs) was launched in 2014 as part of the 2013 Japan Revitalisation Strategy (Box 4.2). Special zones have long been a prominent feature of Japanese regulatory reform efforts, most notably the Special Zones for Structural Reform (SZSRs) launched by the government in 2002; by the end of 2014, there were no fewer than 1 235 such zones. These created the opportunity to experiment and pilot reform ideas in specific places, and it was hoped that such experiments would be a way to circumvent bureaucratic resistance to reform. The SZSRs were created at the initiative of local governments. Although a number of reforms piloted in the zones were extended to the whole country and their impact on investment and employment creation appears to have been positive, they achieved only limited success. This was in large measure because many of the proposals ran into entrenched opposition, not least from some central ministries (OECD, 2015c). In 2011, seven “Comprehensive Global Strategic Special Zones” were created to improve the business environment in cities, while a number of “Comprehensive Special Local Revitalisation Zones” were created for agriculture, tourism and culture. They provided for tax, fiscal and financial support as well as regulatory exceptions. By September 2013, 41 such zones for local revitalisation had been designated.

The new zones differ from them in several important respects.

• The central government is playing a much stronger role in the definition and creation of the NSSZs, as well as in running them. Local political and business leaders are also deeply involved, so the approach is based on a search for social consensus rather than on top-down decision making.

• The NSSZs provide for the possibility of tax breaks and subsidies.

• The NSSZs are meant to be fewer but more significant; under the 2002 scheme, some 5 725 proposals for zones were put forward and 1 235 SZSRs were created. This time, there are just six, four for major urban areas and two focused on agriculture and rural regions.

The zones’ success will depend on the ability of the new structures, which bring together national government, local governments and business leaders, to advance and implement bold reforms. Although there is broad consensus on the need for deregulation, resistance to specific reform measures is often very strong. In the Fukuoka zone, for example, an attempt to relax employment protection for regular workers in venture businesses less than five years old was blocked (OECD, 2015c).

SME policies need to make the sector more dynamic and more internationally integrated

As noted in Chapter 1, Japan’s small and medium enterprise (SME) sector is very large and constitutes the backbone of many local economies. However, it is not particularly dynamic. OECD (2015c) reports that government support constitutes 10% of SME financing – 20%, if guarantees are included. This helps keep many low-productivity SMEs afloat – so-called “zombie firms”, which would probably fail if they were forced to rely on market-based financing (Solomon, 2014). Indeed, bankruptcy rates in Japan have fallen steadily for a decade, at a time when, owing to the crisis, they have tended to rise in most countries (Solomon, 2014; OECD, 2015c). It is important to recognise that the problem with firm turnover identified in Chapter 1 is linked to efficient exit as well as easy entry: continued public support for inefficient SMEs is an impediment to entry as well as exit, since it distorts competition in favour of incumbents and allows weak enterprises to soak up investment and other resources that might have been more efficiently deployed elsewhere. Given Japan’s productivity challenge, as well as its fiscal problems, it is essential to focus (limited) support on start-ups and to push SMEs towards more market-based financing. Government financing support should be limited to financing gaps that arise as a result of identifiable market failures and the cost of support (especially loan guarantees) should be sufficient to discourage heavy reliance on this source of finance.

This does not mean that there is no room for effective SME policies in Japan’s revitalisation. On the contrary, there are a number of steps that can be taken to help SMEs adapt and grow even while putting them under pressure to become more competitive. One way would be to build on the Ministry of Economy, Trade and Industry’s (METI) promising one-stop support initiative for SMEs to create a sort of “SME extension service”, comparable to the agricultural extension services that exist in many OECD countries. Agricultural extension is the function of providing need- and demand-based knowledge in agronomic techniques and skills to rural communities in a systematic, participatory manner; it helps farmers access scientific research and to apply that new knowledge to agricultural practices. Something similar could be done for SMEs (and start-ups) in respect of, for example, innovation and internationalisation. METI is already active in these areas, but it could help to bring as many such functions together under the aegis of the one-stop shops, which could in turn serve also as local platforms for collaboration among firms.

Internationalisation should be central to these efforts. METI’s 2011-13 Framework for Supporting SMEs in Overseas Business exceeded its targets and demonstrated the potential demand for such support, but more systematic efforts could be undertaken by national and subnational authorities to help SMEs overcome the barriers to integration in global value chains. While the indicators of low SME internationalisation in Japan are partly the result of their close links to large companies and the prevalence of indirect trading through general trading houses (shosha), METI research points to Japanese SMEs’ lack of experience, human resources, marketing and other know-how necessary for internationalisation (EJCIC, 2012). These are the same kind of obstacles facing SMEs in many countries (Wilson, 2007; OECD, 2009a). METI is active in these areas, but regional and local actors can also help their SME populations with these issues, particularly by organising the collection and dissemination of information and regional/local marketing efforts. On the basis of a comparative study of SME experiences in the Asia-Pacific region, APEC (2014) emphasises, among other things, the promotion of supply-chain finance and financial skills training, support for collaboration and clustering of SMEs, and assistance with standardisation and certification procedures (and, where possible, cross-border harmonisation of the same). Wilson (2007) underscores the importance of governments acting, at home or in international negotiations, to reduce the administrative burden of cross-border activities, the quality of advisory services and steps to encourage local networks to integrate into larger regional, national and international ones.

The potential pay-offs to such efforts are significant. METI analyses show a clear and positive correlation between SMEs’ outward foreign direct investment (FDI) and their rates of employment growth (EJCIC, 2012). Despite the fear that outward FDI might involve “outsourcing Japanese jobs”, it seems to be the case that such firms retain core functions in Japan even as they enhance their competitiveness by internationalising.

A range of programmes now exist to support innovation in Japanese regions

The OECD defines innovation as “the implementation of a new or significantly improved product (good or service) or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations” (OECD, 2011a). It thus encompasses a wide range of activities in addition to science-intensive research and development (R&D), including changes to production processes, management and organisation, training, testing, marketing and design. It is a social, institutional and geographical phenomenon, not just a technological or sectoral one. While science-intensive innovation tends to be concentrated in the largest cities, other forms of innovation can be, and often are, far more widespread. Moreover, there are opportunities for less populous areas to participate in high-tech innovation processes: Orlando and Verba (2005) find that incremental innovations associated with mature technologies are easier to anticipate than innovations in newly emerging technologies. This means that firms and investors involved in developing relatively mature technologies can plan in advance to locate in less populous, less costly places. Patent data tend to support this view. The implication is that policies that mitigate distance from thick markets and sources of knowledge spillovers can make less populous places more appealing to such innovators.

Japan’s regional innovation policies have long been characterised by cluster initiatives. There are various programmes to support industrial and knowledge clusters, depending on focused sectors and supporting ministries. The Ministry of Education, Culture, Sports, Science and Technology (MEXT) also promotes large-scale research collaboration among universities and companies for innovation, which could contribute to competitiveness of regions (Box 4.3). In addition, the Ministry of Economy, Trade and Industry (METI) has extensive programmes to revitalise SMEs through innovations. Although the initiatives by different ministries are gradually being integrated and co-ordinated, they remain rather fragmented and complex. For example, the Tokai region (Gifu, Shizuoka, Aichi and Mie prefectures), internationally renowned for its manufacturing (monozukuri) industry, has been supported by one knowledge cluster initiative, two industrial cluster projects and four regional innovation strategy support programmes. Most of these cluster projects are technology-oriented and organised by industrial sector (nanotechnology, life photonics, energy, etc.).

From the competitiveness point of view, regions and cities need to think about how to link these different activities and stimulate cross-sectoral interaction, which could lead further innovation, and how to diffuse the results of innovation to a large number of companies and residents. The problem with a purely sectoral approach is that many of the most important innovations occur between sectors – e.g. the emergence of handheld devices for telephony, Internet use and even the viewing of film and television. Strengthening connectivity will play a crucial role (in metropolitan Japan, this will be an important function of the Chūō Shinkansen, as seen in Chapter 3). For Japan, however, policies to promote networking of individuals and institutions in a global setting could be more urgent. Both METI’s Industrial Cluster Programme and MEXT’s Knowledge Cluster Initiative promoted exchanges and tie-ups with overseas clusters to some extent (Ministry of Economy, Trade and Industry, 2009; Ministry of Education, Culture, Sports, Science and Technology, 2009), although few joint innovation actions were found. Networked innovation can also open a new window for smaller cities and regions without full capacity to enter large-scale, international projects led by other cities and regions. Multinational enterprises and universities have a critical role to play as knowledge conduits for local SMEs. In order to support inter-urban networks, government financial support could prioritise joint projects undertaken by individuals and institutions located in at least two different cities/regions.

Since FY 2011, MEXT, METI and MAFF have selected regions that have proactive and prominent initiatives formulated through collaboration among local governments, firms and research institutions, and financial institutions as “regional innovation strategy promotion areas” and have built a system to offer support for continuous development from the research phase to commercialisation. As of FY 2014, there were 40 regions so designated, including 15 “regions for the enhancement of international competitiveness” and 21 “regions for the enhancement of research functions and industrial clusters”. The former are reckoned to have the basis for world-leading technologies and the potential to attract people and resources from overseas, while the latter have been selected for their potential to secure overseas markets in the future. The remaining four regions were selected to receive assistance in connection with reconstruction following the Great East Japan Earthquake.

Innovation and entrepreneurship must go hand in hand

Entrepreneurship has been recognised as one of the main engines of economic and social development. It is also critical to any innovation promotion effort, especially in non-metropolitan areas, where innovation is less likely to occur in large, established companies. New ideas and technologies do not create jobs or value added; entrepreneurs do. Innovative ideas, products and processes need entrepreneurs to bring them to market. According to a US National Commission on Entrepreneurship report (NCOE, 2001), innovation is the most important contribution of entrepreneurship at the local level. Together, entrepreneurship and innovation can generate economic growth and new wealth for a locality; and ultimately they improve quality of life for local residents (NCOE, 2001). Innovative entrepreneurship can have many local spillover benefits for existing local businesses (Acs and Audretsch, 1988; Acs and Varga, 2004; Drucker, 1984, 1985; Pavitt et al., 1987). In the second half of the 20^th century, small entrepreneurs in the United States were responsible for 67% of inventions and 95% of radical innovations (Timmons, 1998). They have fuelled job creation and economic growth.

For innovation and entrepreneurship to flourish, the costs of failure must be reduced

The problem for Japan is that, as seen in Chapter 1, its entrepreneurship performance looks comparatively weak by international standards. Entrepreneurship is not widely seen as an attractive or respected option (see the survey data in OECD, 2013), and entrepreneurial failure tends to be very costly, not least because entrepreneurs and small-business owners often have little choice but to guarantee company debt, borrowing against their homes and other personal assets. Business failure often means personal bankruptcy and loss of one’s home (Solomon, 2014). This a particularly strong deterrent to older people considering entrepreneurship. Some go so far as to argue that the social stigma and financial repercussion of failure are so great that the founders of failed businesses become social outcasts, a risk few Japanese wish to take; those with reasonably good employment prospects, in particular, will be less likely to consider entrepreneurship, an activity that may thus – by default – be left largely to those whose chances are poorer (Wadhwa, 2010; Makinen, 2015). In a 2012 survey, the share of Japanese who thought that failed entrepreneurs should have a second chance was the second lowest in the OECD area (OECD, 2013). Not surprisingly, the employment prospects of failed entrepreneurs in Japan do appear to be poor, as are their chances of securing the funding needed to try again. This is a particular problem, because in other countries successful entrepreneurs often succeed only at the second or third attempt – after they have learned from failure. If failed entrepreneurs are less likely to enter the field again, then more entrepreneurs will be first-timers, making first-time mistakes.6 Little learning will occur. This contrasts with the experience of places like Silicon Valley, where the motto of “fail fast, fail cheap, and move on” is often quoted (Lee et al., 2011).

This is something the government is determined to address, having set explicit targets for increasing new start-ups over the coming years. To some extent, this may entail a degree of cultural change, which may not be easy or quick. Numerous observers, including Prime Minister Shinzō Abe (Nash, 2015), suggest that Japanese society is relatively risk-averse (Tabuchi, 2012; Kopp, 2012), and some survey data do indeed point to this conclusion (Iwamoto et al., 2012). Cultural change is often a slow and difficult process, but it can occur and policy can help to promote it. As Lindbeck (1995) and others have shown, cultural norms and habits do not exist in a socio-economic vacuum: they are themselves shaped by rules, institutions and incentives.

Here there are some steps that Japan can take to stimulate entrepreneurship, in particular by making entrepreneurial failure cheaper. The bankruptcy reforms of the last decade have already had a palpable positive effect in encouraging entrepreneurship among young, high-skilled Japanese (Eberhardt, Eisenhardt and Eesley, 2014), and further reforms are planned. The Civil Code is to be revised so that SME managers and entrepreneurs can in part be released from personal guarantees on corporate debt in certain (still to be specified) circumstances. Since these amendments will take time to prepare, the government has already asked banks to allow personal debt forgiveness to managers of bankrupt firms under certain conditions (Solomon, 2014).7 As noted in Chapter 1, the Revitalisation Strategy also includes steps to promote venture capital, and METI’s start-up support programmes now include loans and guarantees that are unsecured, with no need for guarantees and even the possibility of funding for second-attempt start-ups. Interest rates are slightly lower for women, youth and seniors (Ministry of Economy, Trade and Industry, 2013). Entrepreneurship education is also taking root, with support from the government, but most programmes are still quite small. Regional and local authorities could do much here, expanding such programmes and designing curricula to reflect local conditions. Local communities, especially in rural areas, can also do much to increase social recognition of entrepreneurs and of the contributions their business ventures make to local revitalisation (OECD, 2011a).

Some rural areas are well-placed to attract entrepreneurs in knowledge-intensive services

As noted above, the shift towards an economy dominated by services initially reinforced the advantages of the big cities at the expense of non-metropolitan areas. However, this may be changing to some extent as a result of the growth of the information economy. Rural areas with attractive landscapes and amenities – and especially those that combine these attributes with good external connectivity – could make themselves into attractive locations for start-ups in knowledge-intensive service activities (KISA). A relatively new trend in entrepreneurship mixes knowledge-based competitiveness and services; it has been growing rapidly in amenity-rich rural areas of many parts of OECD countries since the turn of the century. OECD (2007) has published a list of KISA industries based on their International Standard Industrial Classification (ISIC). According to recent research (OECD, 2006; Martinez-Fernandez, 2010; Lafuente, Vaillant and Serarols, 2010; Vaillant, Lafuente and Serarols, 2011), KISA firms are both sources and carriers of knowledge that influences and improves the performance of clusters across all sectors of the economy. KISA firms cover management and business consulting, ICT, professional, health and legal services, together with insurance and financial services.

Although KISA firms have long been more common in large metropolitan areas, some rural regions have seen rapid growth in KISA, largely as a result of “amenity migration” (Vaillant, Lafuente and Serarols, 2011). Entrepreneurs and staff of KISA firms are often attracted to amenity-rich rural areas that are easily accessible to major urban areas. It is worth highlighting that, in contrast to technology-based manufacturing, KISA firms have tended to spread much more widely across rural territory. In Spain the autonomous region of Catalonia led the way in the growth of rural KISA firms, with up to 10% of new KISA firms created between 2003 and 2006 established in rural areas (Lafuente, Vaillant and Serarols, 2010). And while rural areas usually lag far behind their urban counterparts in knowledge-based firm creation (Roper and Love, 2006), the proportion of rural KISA firms in this amenity-rich region of Spain increased faster than in urban areas during the early 2000s (OECD, 2009b). The increased entrepreneurial activity of rural Catalonia has been accompanied by rising economic prosperity, with most parts of rural Catalonia benefiting from above-average economic growth (Lafuente, Vaillant and Rialp, 2007). In Japan, this sort of dynamic underlies the emergence of a small but growing IT cluster in the small town of Kamiyama (Box 4.4)

Although KISA firms are not intensive creators of employment, they generate economic spillovers for the (often low-density) communities in which they are located. Many KISA firms are one-person firms constituted by self-employed professionals. Apart from the fiscal benefits generated by the presence of KISA firms, they help retain wealth locally, as local firms and individuals use their services; and they create new wealth by generating revenues that complement existing services. Moreover, not only are KISA firms attracted to amenity-rich areas, they add to these amenities through the local supply of their services, as in the case of the Sunshine Coast (Box 4.5).

The promotion of new entrepreneurial activity must be conducted in parallel with the attraction and retention of talents. Because of the current lack of adequately skilled labour for these enterprises in many regions, encouraging an overly rapid increase in new knowledge-based start-ups, with its consequent requirements in terms of qualified labour, may simply lead these ventures to leave. New firms must be able to inject new ideas and innovations into the local industrial fabric so as to create a positive contagion effect and lead existing business owners to also adopt more modern business methods, albeit at a pace that a region’s labour market can sustain. Many local economies also need a greater diversity of consumer services to increase their attractiveness to entrepreneurs and highly skilled workers. New ventures in proximity services – everything from hair-dressing to restaurants – should therefore be valued, both because they provide much needed private proximity services and amenities, and because they help to integrate and optimise the economic contribution of segments of the population that may not otherwise find their place in the local economy.

The experience and skills of older people are an entrepreneurial resource

As noted in Chapter 1, encouraging entrepreneurship among older Japanese is an increasingly important priority. While much of the literature suggests that older people are less likely to take entrepreneurial risk, it also finds that older entrepreneurs are more likely to be successful, not least because they have more developed networks, more experience and, in many cases higher skills and more financial resources.8 Moreover, it appears that the propensity of older people to start businesses – whether simply to be self-employed or to build a job-creating business – is rising over time. The evidence also points to the degree to which relatively simple policy interventions can stimulate entrepreneurship among older people. Box 4.6 gives a summary of the main messages emerging from joint European Commission-OECD work on the issue. While some things, such as the tax and social security implications, are central government competences, many of the others are relatively low-cost actions that Japanese regions and towns may want to consider.

Online networking platforms are relatively simple to create and can be helpful for propagating a range of tools for would-be entrepreneurs. For example, the “Best Agers” and “female” schemes operating in a number of European countries use such platforms to organise training events, webinars, mentoring circles and other events (Kautonen, 2013). In the United Kingdom, the PRIME (Prince’s Initiative for Mature Enterprise) initiative offers information, training, workshops and networking events for older entrepreneurs; in addition, it provides free or low-cost business advice, either through referral to accredited advisors or volunteer mentors (Kautonen, Down and South, 2008). It has also provided micro-finance in the past. There may also be a need for help with access to finance: though many senior entrepreneurs are in a stronger financial position than their younger counterparts, EMN (2012) finds that age discrimination is very often a real problem when they do need access to credit. In some cases, they may be asked to take out additional insurance to cover the risk. At best, that implies additional costs, but very often it is even more of an obstacle: insurance companies can be as reluctant to cover older entrepreneurs as banks are to lend to them. Yet few public programmes to assist entrepreneurs with access to finance are adapted to the needs of older workers.

Seniors may also play a role in promoting entrepreneurship without going into business themselves. One should not overlook the entrepreneurial potential of older workers, particularly retired managers and executives, as a resource for younger entrepreneurs. This is particularly true with respect to the large cadre of retired or soon-to-be retired managers of SMEs. Individuals who know how to run small and medium businesses, particularly small- and medium-sized manufacturing businesses, must be seen as a rare and valuable resource for a region or locality. Research suggests that the hardest phase of development for new firms and sectors to finance is not start-up but the long – and usually loss-making – period of “learning-by-doing”, when the new entrepreneurs are ironing out the “bugs” in their processes (OECD, 2011b). The difference between survival and exit can hinge not on the overall character of the product or the nature of the production technology but on relatively small differences in quality control, the management of order flow and stock control, etc. A reduction of 1-2 percentage points in the share of defective products or a reduction of just a few hours in order turn-around times can be decisive. The shorter this learning-by-doing process is, the greater the firm’s survival chances. Experienced managers can help here, and many regions might consider organising programmes to match local businessmen with entrepreneurs, whether on a voluntary basis or as paid consultants.

Business successions present a challenge and an opportunity

While the growing propensity of older Japanese to express an aspiration to become entrepreneurs or self-employed is to be welcomed, the other reality that the MIC’s recent employment status surveys underscore is the ageing of the population of active entrepreneurs. In 1979, just 18.9% of Japan’s active entrepreneurs were above the age of 50 and only 6.6% above 60. Those shares grew steadily, decade by decade, apart from a brief decline in the late 1980s/early 1990s, and by 2012 fully 46.7% of active entrepreneurs were over 50 and almost one-third (32.4%) were over 60. This is more than just a consequence of population ageing – the older cohorts’ share of the active population rose from 25.2% to 38.6% over the same period. This matters, because it means that the future of a steadily growing share of Japanese SMEs is in question as their founder-owners approach retirement.

In many OECD regions, low birth rates combined with high numbers of business owners approaching retirement age mean that, over the next decade or two, there may be unparalleled shortfalls of business owners, with potential negative effects on local economies (OECD, 2011b). Succession issues have become one of the main concerns of business development officials in many OECD countries. In North American rural communities, for example, the baby-boom generation of entrepreneurs and business owners is retiring but there is a lack of rural youth available and willing to take up those businesses. In such places, many family businesses are run by the older generation, while the younger generation increasingly tends to migrate to bigger cities and often has little interest in continuing the family business. Many businesses stand to close, not because of financial problems but because there is no one to take over once the owner retires. A recent assessment by the Canadian community development programme, Canada Futures, found that the family ensures only a small minority of successions in non-metropolitan areas. For businesses that did not have a family member willing to take over the business, two-thirds had not developed a succession plan and over 80% of older owners planned to sell their businesses but were unable to find buyers. As a result, some 30.6% of retiring business owners decided to close their businesses (Camire, 2011).

This represents a challenge, but it is also an opportunity – an opportunity to attract new, younger talent to a region or locality. It is also a chance to infuse firms with new dynamism: the 2015 SME White Paper reports that the performance of SMEs in which founders handed over control to younger successors improved. However, smooth business successions must be planned well in advance. To avoid unnecessary closures, local business facilitators can help older entrepreneurs to develop succession plans. Experience elsewhere suggests that most businesses are far from being “sale-ready” when the time comes for the current owner to retire. When a family member does not take over, great care must be taken to make the business as attractive as possible to a prospective buyer. Business owners need to prepare and value their businesses. They have to review and upgrade their firms’ processes to optimise their attractiveness, and they often need assistance with this process.

METI’s SME Agency and the Japan Finance Corporation are both active in this area, with programmes to support smooth successions, including the transmission of skills and techniques, and assistance with financing. However, more can be done. Local business development officers can help connect buyers and sellers, providing information about businesses that are for sale to potential young entrepreneurs in the community, as well as to inbound investors and migrants who may be looking for an opportunity in the area. In fact, an inventory of potential business succession opportunities (possibly web-based) could help bring to a community people who might be attracted by the lifestyle and amenities it has to offer. It could also be a way to offer opportunities for women and older workers who wish to become entrepreneurs or alternative business strategies for locals who already work as self-employed entrepreneurs. The important thing is to help connect buyers and sellers (Clark, 2011). Local financial institutions need to be receptive to financing business transition opportunities within the community. Support in the form of leverage loans is often needed to ensure a smooth transition to the new owners. One valuable benefit to the buyer is the potential for local mentorship from the previous owner, often within the same community. Business facilitators should help ensure that, where possible, this option remains a part of any succession plan.

Thousands of rural hamlets face the risk of depopulation

One of the primary concerns of Japanese policy makers confronting depopulation is the fate of the country’s small hamlets, which are disappearing at an alarming rate. At present, there are around 130 000 agricultural hamlets9 in Japan; on average, they have around 30 ha of farmland, two-thirds of which consists of rice paddies, the rest being used for other crops. In 2010, there were about 198 households per hamlet, a figure that was up almost 2.5-fold since 1970 but some 7% down over the previous decade. However, median hamlet size rose from 48 to 50 households over the period, suggesting that the average has been hugely influenced by hamlets in proximity to cities, where the number of non-farming households rose very rapidly.10 However, only about 9-10% of households were actually engaged in agriculture; most live from non-farm income sources. Depopulation and ageing both are more advanced in rural hamlets and proceeding faster than in other areas of Japan, thanks largely to the emigration of young people to the cities, which reflects both the employment and consumption opportunities that cities offer and the drastic decrease in labour required for agriculture. A number of observers have expressed great concern about the prospect of tens of thousands of these hamlets simply disappearing (see e.g. Odagiri, 2012, 2015).

In fact, many of these hamlets are not facing any immediate threat. According to the agricultural census of 2010, two-thirds are within half an hour’s driving time of an urban centre, while over 90% are within 1 hour (Figure 4.5). In some cases, these urban centres may not be very large, but given that the criterion used requires a density of 4 000/km², they are unlikely to be small, because pockets of such very high urban density do not often appear in isolation. This implies that the vast majority of hamlets are effectively within the commuter belts of reasonably good-sized cities and, indeed, almost 56% of hamlets fall within zones associated with city planning.11 This is not entirely surprising: it reflects the facts that cities in Japan – as in most places around the world – have historically grown up fastest in places with satisfactory food supplies near at hand. Large-scale, long-distance trade in perishable foodstuffs is a relatively recent development, so the best farmland in a country is often in the immediate vicinity of its largest cities. That is one reason that the conversion of farmland for urban development is such a perennially difficult issue: it is not a matter of countries “running out of land” but a problem that arises because the best farmland is in the places where the pressure for urban development is greatest.12

Figure 4.5. Agricultural hamlets grouped by driving time to a city

Note: Densely inhabited districts are defined as contiguous census blocks with a population of at least 5 000 and an overall population density of at least 4 000/km².

Source: Agricultural census, 2010. Data provided directly by Official Statistics of Japan (Government of Japan).

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The fact that so many hamlets are clustered around cities does not mean that they face no challenges. In some cases, they, like hamlets deep in rural areas, perform important environmental functions, and they are often exposed to negative externalities from nearby cities. However, the survival chances of hamlets close to cities are probably greater than those of more remote places. Issues like connectivity are less of a problem for hamlets close to cities, and they have many more options when it comes to survival strategies, since they can be more attractive to commuters and retirees, and they may have particular appeal for young people wishing to start families. Attention to landscape and rural amenities can help them differentiate the quality of life they offer from that of nearby cities while retaining many of the benefits of proximity to urban services.

The rationale for policy towards small hamlets needs to be crystallised

Perhaps the most fundamental problem with respect to the survival of rural hamlets lies in the fact that the government has yet to define the rationale for supporting their continued existence. To say this is not to suggest that the authorities should simply turn their back on such communities and leave them to their fates. On the contrary, there are a number of reasons why the authorities do not want to see them disappear. The point is rather that it is impossible to devise efficient and effective policies to support the viability of agricultural hamlets without a clear understanding of what those reasons are. Once this rationale is clarified, it becomes possible to determine which policy interventions to preserve hamlets would make sense. This is a critical point because, given Japan’s demographic trends, there is no doubt that many hamlets will disappear and the resources to support their continued viability are in any case limited; the government cannot ensure the survival of all rural hamlets, and excessive dispersion of effort will undermine the effectiveness of policy. Of course, it is not for officials in Tokyo simply to decide which hamlets to maintain and which to close, but they will have to make decisions about infrastructure investment, support programmes and the like, and that requires a clear understanding of when, where and why policy should intervene to support hamlets’ viability. Some (probably many) hamlets that do not meet those criteria will still survive – they will find other strategies – and some that qualify for support may not prove to be viable in the long run. But national policies need to be framed so as to ensure that measures for the support of rural hamlets are broadly consistent with the broader goals of the Grand Design and the National Spatial Strategy.

One of the obvious concerns is the role hamlets play in agricultural production, particularly in managing rivers, irrigation systems and other watercourses. Major infrastructures (reservoirs, intakes, pumps and main canals) are usually operated and maintained by the Land Improvement Districts (LIDs).13 However, tertiary irrigation and drainage canals are generally managed by local residents (Figure 4.6). This would suggest a clear agri-environmental case for supporting many hamlets. However, much depends on the direction of agricultural policy. It is often assumed that agricultural production and the viability of rural communities go hand in hand, but this is not necessarily the case. Rice production is not labour-intensive, and efforts to foster the consolidation of rice farms in the interests of productivity reduce labour demand. While rice farms remain very small (2 ha on average, according to MAFF), the share of agricultural lands cultivated by large-scale (10 ha or more) farmers is increasing rapidly: it rose from 7.9% in 2000 to 18.7% in 2010. In many areas, there is a tension between the promotion of agricultural productivity and sustaining the population, especially where the main actors are large-scale farmers who take over land from small-scale producers (Box 4.7). In some suburban areas, though, farmland consolidation and the diversification of agricultural production are proceeding in tandem, which is helping to sustain or even increase the local population. That is why many prefectures prefer to diversify agricultural production and to promote collective farming in areas where rice is the major crop. In many areas, there has been a move towards community agriculture, in which a large number of small farmers operate as one larger organisation, contributing land, labour or capital as they are able. In hamlets close to cities, there is a lot of part-time farming. Both strategies help sustain hamlets’ population but at the expense of lower farm productivity.

Figure 4.6. Hamlets managing rivers and irrigation infrastructure

Source: Based on the data of the General counter of Official Statistics of Japan (2015), Census of Agriculture and Forestry, http://www.e-stat.go.jp/SG1/estat/List.do?bid=000001047529&cycode=0 (15 July 2015).

 https://doi.org/10.1787/888933325016

MAFF has unveiled a basic plan with a multi-faceted approach to rural revitalisation…

The policies for rural revitalisation in the 2015 Basic Plan for Food Agriculture and Rural Areas are grouped into three categories:

• The first group is to preserve multifunctionality via a new direct payment scheme focusing on collective action for the maintenance of irrigation and drainage facilities and a new initiative to foster the establishment of networks among neighbouring hamlets.

• The second category concerns the revitalisation of rural economies through the use of local resources. This includes support for the so-called “sixth industry”. “Sixth-order industrialisation” essentially involves the formation of integrated value chains encompassing production, processing, distribution and marketing by linking agriculture, forestry and fisheries producers to those with expertise in the secondary and tertiary sectors, particularly processing and marketing. The name reflects the fact that rural producers of (primary) agricultural commodities are engaged in processing (secondary) activities and in distribution/marketing (tertiary) operations – hence, 1 + 2 + 3 = 6. There are also measures to promote the consumption of local foods and to support the development of biomass and renewable energy, as well as greater use of ITC in farming and distribution.

• The third group of policies aims to promote urban-rural exchanges, like green tourism, children’s experiences of agriculture and rural life, and welfare farms to foster collaboration with the medical, welfare and food industries.

In principle, each of these three strands of policy has much to recommend it and is consistent with the “small stations” initiative and other elements of the broader revitalisation effort. A focus on multifunctionality would help to clarify the rationale for supporting hamlets and also the instruments to be used. The “sixth industry” initiative has already begun to bear fruit in some places (see below). It is unlikely to have a dramatic macroeconomic impact – urban areas will retain their advantage in secondary and tertiary activities14 – but it really does not need to anyway: successful sixth-industry initiatives are already showing that, in a thinly populated rural area, even a small niche activity can make a big difference. Much the same can be said of the attempts to promote migration from cities to rural areas: they will not alter the settlement pattern much but they can make a difference in local communities, particularly those well-placed to attract former urbanites.

Elements of the plan’s agricultural policies will also have important implications for rural development. It promotes the production of fruits and vegetables, as well as livestock products, which are higher value-added products and also require more labour. This is consonant with the aim of increasing farmers’ income from farming and with sustaining more farmers on the land. Another important twist in the plan is the decision to treat community farming groups as business farmers (ninaite, or literally “leaders”). Ninaite are considered to be the future of Japanese agriculture. They are defined in the plan as efficient and stable farmers whose lifetime income and working hours are equivalent to those of people employed full-time in other industries in their regions. In keeping with policies to favour productivity, the government is promoting farmland consolidation and the promotion of full-time farmers, they include certified farmers15 and those expected to be certified, as well as community farming groups. The plan states that the government will support business farmers with subsidies, loans, financing, etc., and promotes the corporatisation of farming. The public corporations for farmland consolidation to core farmers through renting and sub-leasing (farmland banks), which were established in each prefecture in 2014, are also now incorporated into the basic plan as part of the consolidation drive. A key priority for MAFF is creating conditions to attract younger people into full-time farming; the ministry estimates that Japan needs to double the number of new farmers who start farming and remain with it and to increase the number of farmers aged 40 or less to 400 000 by 2023. This is to secure roughly the number of farmers needed to maintain the current level of agricultural production.

…but more can be done to address non-agricultural facets of rural development

One major limitation of the 2015 plan is that its primary rural development component is still concerned with agriculture.16 The biggest policy measure in the rural development framework is the system of direct payments for maintaining irrigation and drainage facilities and agricultural roads but also for environmental protection and planting on roadsides. However, a policy focused on how local communities can support farm production and environmental/landscape management will not make hamlets attractive enough to draw young people into rural areas unless they are farmers. In fact, much more could be done by giving greater weight to other agri-environmental concerns, particularly landscape management. This would serve a dual purpose, advancing the goals of sustainable agriculture and also making hamlets more attractive places for non-farmers to settle. The share of direct payments in the total producer-support estimate17 for Japan is exceptionally low, at just below 22% in 2014, compared with levels of 58-83% in OECD Europe (the EU21, Norway and Switzerland), 78% in the United States and 100% in Australia. Moreover, the share of agri-environmental payments in total direct payments is also extremely low (Figure 4.7).18 In sum, just under 0.05% of producer support to agriculture in Japan consists of agri-environmental payments.

Figure 4.7. Share of agri-environmental payments in total direct payments to agriculture

Source: OECD (2015d), Producer and Consumer Support Estimates (database), OECD, Paris, http://www.oecd.org/agriculture/agricultural-policies/producerandconsumersupportestimatesdatabase.htm (accessed 10 July 2015).

 https://doi.org/10.1787/888933325020

There is certainly room to improve the environmental performance of Japanese agriculture: the nitrogen balance per hectare (kg/ha) is exceptionally high by OECD standards and remained stable in Japan between 1990-92 and 2007-09, while it fell by more than 40% in the EU15 and by over 30% in the United States – in both cases from lower initial levels. The reasons for this lie chiefly in fertiliser use per hectare, which in 2008-10 was 5.7 times the EU15 level and 18.7 times the US level (Shobayashi and Sasaki, 2014). Reorienting farm support towards greater emphasis on agri-environmental outcomes could do much to improve environmental quality in rural Japan, while making rural hamlets more desirable places to settle. A policy package to improve landscape management and agri-environmental performance would encompass regulatory measures, as well as direct payments. One factor complicating regulatory approaches lies in the difficulty of attaching cross-compliance conditions19 to direct payment policies, because Japan relies so heavily on price support via tariffs, and direct payments are very small. Farmers would therefore have every reason to resist the compliance burden. Yet a very large increase in agri-environmental payments would be very expensive to the budget, and a reduction in, e.g. tariff protection would not offset this fiscal cost.

One approach might be to earmark a portion of grants for local revitalisation for landscape management in such places. The problems with earmarks are well known (Chapter 2), but this may be a place to employ them, since small hamlets may find it hard to compete with other possible objectives if grants to municipalities are treated as general revenue. This is a common problem with integrating rural and regional development policies: when they are separated, farming interests tend to dominate rural policy but when they are integrated, urban interests prevail over rural. Either way, the needs of the non-farm rural economy can be squeezed. If rural hamlets are thought to have special value, then earmarking a portion of the revitalisation grants for them could make sense, while still leaving the design and implementation of policies to local governments. This would in fact be an approach quite similar to that used in the second (rural development) pillar of the EU’s Common Agricultural Policy (Box 4.8).

Land-use co-ordination represents another step that could be taken to improve rural landscapes and also to increase farm productivity: farmland consolidation could serve both objectives. That is why the government is currently encouraging the activity of farmland banks as a tool to reduce the transaction costs between retiring farmers and business farmers who want to consolidate land; the issue is not just how much land they farm but how big the contiguous plots are, as farming is much less efficient when the producer has to work a patchwork of scattered plots. An alternative model, which has emerged in Shiga Prefecture, also holds promise. The so-called “Shingai model” involves the formation of an organisation of landowners in a given hamlet; they act collectively to manage their land in such a way as to maximise the efficiency of the tenant farmers cultivating it. They operate on the basis that members do not concern themselves with the identities of the tenants who work their lands: the organisation works with the various tenants to facilitate consolidation (Shobayashi and Okajima, 2014). By setting pre-determined conditions for farmers, such an organisation can also address collective challenges like flood protection and landscape management. This could be reinforced by having LIDs charge cultivators rather than landowners for rehabilitation work on irrigation systems – this would create incentives for much more efficient water use in farming (Shobayashi, Kinoshita and Takeda, 2010).

The “sixth industry” initiative is a welcome innovation in rural policy

MAFF’s sixth industry policies touch on another crucial priority – creating more non-agricultural jobs in rural communities. This is surely the most important task of revitalisation: it is the job market that is the main factor drawing people to the cities, and it is clear that agriculture is likely to employ fewer people in the future, not more. Rather than trying to entice large companies to build factories in rural areas, the sixth industry policy aims to build on what is there already. The production of (renewable) energy, landscape preservation, leisure and tourism offer complementary opportunities to create thriving local economies. In some ways, this represents an extension of the idea of multifunctionality in agriculture, which is now extended across all three main sectors of economic activity.

The case for such policies stems from the need to address the peculiar challenges that confront rural economies. Low-density economies located far from major markets tend to face a number of common problems (for a summary, see Freshwater, 2012). First, and perhaps most important, the principal sources of growth tend to be exogenous to the region and are mediated to the regional economy via its export base. Since they can only produce a limited range of the goods and services they need, rural regions are of necessity oriented to exports of one sort or another (to the rest of the country if not always abroad), unless they benefit from ongoing income transfers. Otherwise, they cannot afford to import the goods they need from other places. Secondly, local markets tend to be thin, with weak competition. This can constitute a form of protection from external competitors (the market is costlier for them to access), but this protection is often overwhelmed by the scale and scope economies that city-based firms can exploit. That is why improved connectivity in such places often delivers bigger benefits to the city – in reducing transport costs, they make it easier for outsiders to penetrate the local market. Small market size is also a constraint on firm growth. Partly for this reason, firm populations in rural places tend to be dominated by small and medium-sized enterprises (SMEs), but these are often low-growth firms.

Low density economies are, almost by nature, characterised by limited diversification of economic activity. Smaller places cannot achieve critical mass or economies of scale in many activities. This also means that local producers often face thinner markets for their inputs – a lack of redundancy in markets can mean that weakness in one part of a supply chain harms other firms in the chain. It is not so easy to replace a supplier who fails or is under-performing in terms of quality or price. Low levels of diversification thus imply heightened vulnerability to external shocks. Moreover, in almost any sector in which production is mobile and there are potential economies of scale, firms are likely to move closer to the centres of demand. For small, remote rural places, this means putting a premium on other sources of competitive advantage, e.g. focusing on unique or place-specific qualities of products, where scarcity can add value. This is the logic that underlies the development and marketing of high-value agricultural products like French wines or local cheeses. It is also the basis for many of the strategies adopted in sixth-industry initiatives in places like the Seiwa area of Mie Prefecture (Box 4.9). Such strategies need to be founded on local assets that are relatively immobile, since mobile assets (including both human and financial capital) will tend to move to the places where they yield the highest return. The multi-faceted nature of the Seiwa area’s activities is also important: they do not rely on one activity or initiative to make all the difference. On the contrary, the different elements of the revitalisation effort reinforce one another.

In many cases, rural innovation arises not in laboratories but as a result of identifying new uses for local resources or new ways of marketing them. Haga (2014) points to the case of Kamikatsu, a small mountainous area on the island of Shikoku with a population of about 1 767 in 2014 (down from 4 000 in 1970). An outside entrepreneur, recruited by the municipality to come look at possible business ventures in the area, created a company that marketed tsunamono, decorative leaves to garnish traditional Japanese cuisine. From modest beginnings in 1986, the company grew to sales of more than JPY 200 million/year in 2000-13, employing 197 locals – mainly elderly women. In addition to business success, subsequent studies found that the women so employed were healthier and happier than their unemployed peers.

The small island municipality of Ama-cho in Shimane Prefecture offers an excellent illustration of how local revitalisation can occur in a rural setting (Box 4.10). Ama-cho’s experience is instructive in a number of ways, and the lessons it holds are relevant to remote rural communities that are struggling for survival elsewhere in Japan and, indeed, around the OECD. First, it is important to note that Ama-cho’s turn-around took time and that there were numerous false starts and failures: the town had been struggling with decline for decades before it hit upon a mix of policies that enabled it to change the trajectory. Secondly, there was no “silver bullet”, no single intervention that put the town on course for recovery; on the contrary, the change in Ama-cho’s fortunes has been the product of a multi-faceted strategy that involved measures to put public finances in order; innovation in public service provision (especially education); innovation and entrepreneurship that combines technologies from elsewhere with local assets; and a mix of public and private initiative, as well as public-private collaboration. Thirdly, Ama-cho’s turnaround was engineered locally; it was not the result of large-scale intervention or funding from without. Finally, Ama-cho has not turned in on itself but has rather reached out to the world, working to export its products and attract visitors and newcomers. One characteristic of many remote rural communities, particularly islands, is a failure to see residents as a fungible commodity: there is little interest in attracting newcomers and even selling one’s home to an outsider can be very badly seen in the community (Chavez, 2014).

The importance of these factors becomes all the clearer if one examines Ama-cho’s revival against the backdrop of some less successful cases. Chavez (2014), for example, considers the decline of one island community in the Seto Inland Sea, where the population has dropped from over 900 in the late 1990s to just 563 in 2014. Its challenges are in many ways similar to Ama-cho’s but the response has been quite different. A new port was built with central government funds in 2002 and the beach was upgraded with government funding at around the same time. New schools were built with central funds in the late 1990s. All of these new facilities are now largely empty, and the schools face the prospect of closure in the next few years. NGOs have worked on the island, promoting artist-in-residence programmes and the like. The island has excellent Wi-Fi, cheap housing and an attractive landscape. Chavez concludes that what the community lacks is local initiative: plenty of resources have been poured into the island from without and there are some attractive rural amenities and resources to hand, but the local community has not – yet – taken its fate into its own hands with entrepreneurial initiatives and an active commitment to drawing in outsiders.

Ama-cho probably also benefits from being a fairly small place. Relatively modest initiatives, based on place-specific local assets, can make a very big difference to a small community’s prosperity and well-being. Social capital and trust within the community have been critical ingredients in Ama-cho’s success, and these can be easier to foster in small communities, where residents know one another. In contrast to some other places, though, Ama-cho has worked deliberately to foster a strong sense of community that is still open and outward-looking, welcoming visitors and newcomers and encouraging people to try new things – even when there is a real risk of failure. The island tries to provide young people with opportunities to “learn by doing” that a big city could not give them. Small rural places are often thought to be very conservative and resistant to change, and sometimes they are, but a growing number of Japan’s rural communities are showing how they can embrace much more open and entrepreneurial attitudes to change.

The challenge for small and medium-sized cities, whose functions are fundamentally urban, may be far greater. Elis (2011) presents case studies of three rural towns on Honshū, who continue to struggle with the revitalisation challenge now that their primary economic raison d’être is gone (Box 4.11). What Elis observes, above all, though, is that the responses in all three cases are basically defensive/reactive – the emphasis has been on trouble-shooting and crisis management. Municipal mergers helped ease some public finance problems but were insufficient to change the dynamic. To their credit, all three towns assessed situation realistically and wisely avoided the continuation of policies predicated on the assumption of growing or even stable populations. Finally, it is striking how much the course followed by local actors was shaped by incentives set at national level (reduced transfers, merger incentives, etc.). Even when decentralisation gives local communities greater control over their fates, the structure of choices they face is often strongly shaped by national policies and international economic realities.

Tourism is complement for many strategies but not a sound basis for most

Tourism promotion is an important part of many local revitalisation strategies and, indeed, a central part of Japan’s national economic development strategy (Box 4.12). Its potential for rural areas, especially, is obvious. Local economies benefit directly from the influx of outside visitors, and many of the investments made to help attract tourists can also enhance the local quality of life. Indeed, many local “tourism development” programmes in OECD regions are as much about securing resources for local amenities as about really building a tourism sector (OECD, 2012b). Green tourism, in particular, can enhance quality of life and the environment if it helps local communities pay for their investment in greener production and local environmental improvements – as was the case in the Seiwa area (Box 4.9). However, it is important to bear in mind the limits of tourism as a basis for development. First, many places simply lack the necessary assets in what is, ultimately, a highly competitive market. Closely related to this are the risks associated with large-scale resort-oriented tourism, in particular, a field in which many Japanese municipalities invested in the past, often with little success (Elis, 2011). It is therefore encouraging that recent efforts are more modest and rely more on community initiative than large-scale construction. This is good news. A third consideration is that tourism in most places tends to be seasonal and the jobs that go with it tend to be both seasonal and low-productivity. Of course, there are areas where climate and other natural conditions make tourism profitable all year round and niche activities like cultural tourism that can support better jobs. These are, however, exceptions. Finally, there is the challenge of providing services in ageing areas, where local labour may be scarce.

None of these factors is a reason for a region not to develop tourist potential where it exists. However, they suggest that tourism usually makes a poor cornerstone for a development strategy. It makes a far better complement. Here, too, the examples of Seiwa and Ama-cho are instructive: tourism is not a stand-alone sector but a part of a more complex revitalisation effort, which seeks to leverage tourism activities to promote local products. Tourism in these cases is deeply embedded in a “sixth-industry” strategy. Apart from those places with truly spectacular tourist potential, like coastal resorts in warm climates, many successful tourist sectors are linked to other activities in the region – like wine tours in France or other forms of agri-tourism around the world. This suggests that experimentation with tourism and festivals as part of a regional branding and marketing strategy should be encouraged but that big investments in tourist facilities should be approached with caution and, as a rule, left to the private sector.

Renewable energy can play a role in revitalising rural areas

Renewable energy (RE) is another area that is increasingly seen as an important element of regional and rural revitalisation strategies. According to data from the International Energy Agency (IEA), wind, solar, biofuels and waste constituted 3.1% of Japan’s total primary energy supply in 2012, up from 2.6% in 2010, the last year before the March 2011 Great East Japan Earthquake. In light of the accident at the Fukushima nuclear plant, the government is committed to rapidly and dramatically expanding Japan’s use of RE. Since July 2012, a system of feed-in tariffs (FITs) has been in place to guarantee purchases of power generated from RE sources at prices that will cover the standard generation costs for a fixed period of time. Rural areas will of necessity attract a large portion of investment in RE deployment, because renewables tend to be space-intensive technologies.

RE deployment can provide host communities with several benefits, including: new revenues sources, in the form of taxes, royalties for land use or income from generation; new employment and business opportunities, especially when RE projects are well integrated within the local economy; and opportunities to participate in cutting-edge innovation and global RE supply chains. Even when the basic technology is imported from outside the region, local actors often adapt it to local needs and potential. However, these benefits should not be exaggerated. Experience shows that over-selling the economic benefits of RE to host communities (as has been done in many places) can lead to disillusionment later on (OECD, 2012c). In particular, it is important not to over-state its potential employment benefits: RE tends to have only a limited direct impact on local labour markets, because most of the long-term jobs arise along the supply chain, in manufacturing, specialised services, etc. Most projects involve an employment-intensive construction phase, but, with the exception of biomass, employment falls off thereafter. Maintenance and operations are no more labour-intensive than in conventional energy sectors.

Precisely because of its job-creation potential, biomass attracts particular interest in many parts of Japan. Ashibetsu City, formerly a prosperous mining community on Hokkaidō, has constructed a wood chip factory enabling the conversion of the residuals from forestry activities into energy, which replaces fuel oil in local public facilities. The municipality reckons that the change, effected with the help of JPY 33 million in start-up support from MIC and a loan of similar size from a local bank, has resulted in lower energy costs, higher employment and increased tax revenues.

Policies need to be designed well if the link between RE and rural development is to work

It is important to be sensitive to potential trade-offs among different goals associated with RE investment. These can be significant. For instance, large biomass heat and power plants can generate more employment opportunities in rural communities than wind and solar, but they may actually increase CO₂ emissions through land-use change and the transport of feedstock over relatively long distances. Similarly RE is in most instances a capital-intensive activity, but small-scale installations typically source labour and equipment from international suppliers, thus limiting the community impact in terms of job creation. The experience of OECD regions in North America and Western Europe suggests a number of lessons about the links between RE and rural development that could be helpful to Japanese policy makers at national and local levels (Box 4.13).

To date, most of the major “mega-solar” projects initiated after the FITs were introduced have been led by companies based around Tokyo; the potential to roll out smaller projects in rural areas is far from being realised. The three challenges identified by MAFF in connection with the RE-rural development nexus closely reflect the lessons identified in Box 4.13 above: the need for consensus-building in the affected regions; the need to ensure an adequate return to the local community; and the co-ordination of land use to ensure that other rural activities do not suffer unnecessarily. The ministry’s emphasis on consultation with local governments, developers, residents, experts and others is thus to be commended. Many of the biggest RE policy mistakes seen in recent years were the result of very sectoral, top-down approaches, which paid too little attention to local context or to the trade-offs between RE deployment and other goals (OECD, 2012c). Often such approaches were adopted in an effort to accelerate the shift to RE sources, but they led in many cases to delays and backlashes against RE promotion policies. Very strong investment incentives also triggered rent-seeking and unsustainable local booms, in some cases leading to policy reversals on the part of the authorities. Such reversals, in turn, undermined investor confidence, making it difficult to implement better-designed RE promotion policies later on.

The choice of national policy instruments and the level of support given to RE play a large role in decisions about the size and type of RE installation. For example, where high FITs are in place for long periods, they can lead to investments in places with limited potential or to investments that may distort local economies by attracting too much land, labour and capital into the renewable sector, thus damaging other industries. RE “booms”, like most other booms, tend to end in busts (OECD, 2012c). Similarly, the choice of instrument can bias investment towards large projects. If RE policy is essentially decoupled from local market signals the resulting set of installations may not achieve local or national economic development objectives. Because national strategies set the framework conditions for individual project decisions it is crucial to think about how the signals that policy provides influences action in different types of territory. This means that national policies not only have to be judged in terms of how well they reach aggregate goals for RE but also in terms of how they alter regional economic development options. National mistakes in policy, such as the excessive investments in solar photovoltaic triggered by overly generous FITs in a number of countries, can cause financial problems at the national level and may lock regions and localities into ill-considered investments that limit future regional development options.

When it comes to RE deployment, then, more haste can make for less speed. It can also make for weaker local impacts. When central authorities push to roll out RE projects as fast as possible, it is more likely that labour and other resources will simply be brought into a place from outside and backward linkages to the rest of the local economy will be weak. A more moderate pace of development can allow time for projects to be embedded in the local economy and also for consultations on the best ways to adapt projects to local conditions. Regional/local consensus building can help to avoid policy errors as well as to allay opposition to RE deployment.

Renewable energy can also support resilience

Resilience policies offer opportunities for initiatives linking revitalisation with greener energy. There is a risk that, in response to pressure from various sectoral lobbies, resilience spending will be devoted to expensive and redundant new infrastructure projects. Less expensive local approaches may better serve resilience goals and promote both greener energy and local revitalisation. The government’s current proposals include measures to promote the use of cross-laminated timber (CLT) in building construction and the use of natural barriers (as opposed to concrete) for disaster resilience. District heating and decentralised energy systems are among the approaches under consideration. Countries like the Netherlands and Denmark have in recent years moved very far very fast in demonstrating how to use district heat networks to capture and redistribute heat that would otherwise be wasted. The surplus heat produced by power plants, factories and public transport networks is funnelled into the network, eliminating waste, reducing carbon emissions, lowering fuel consumption and saving money. One advantage of Japan’s traditionally heavy investment in infrastructure is that the service corridors built for telecommunications and related cables in many places already have space for heat pipes. This makes it far easier and cheaper to move towards co-generation (simultaneous production of power and heat) in such places.

When it comes to the implementation of such ideas, the Japan Association for Resilience, founded in 2014, appears to be focused on greater local activism and, in particular, on drawing local public corporations into the energy business. Their ideas are modelled on the German Stadtwerke, municipally owned utilities. Germany has around 900 Stadtwerke that operate in energy, and they were among the major winners when German liberalised its power markets in 1998. They are also increasingly recognised as critical to that country’s ability to diffuse renewable energy, whose role in Germany’s power mix jumped from about 6% in 2000 to 30% in 2014. The Stadtwerke have helped drive this progress because they have organisational, financial and other heft together with a central role in servicing community demand for power.

To further this initiative, the Ministry of Internal Affairs and Communications in late 2014 established a study group on the deployment of “local energy systems led by local governments.” The ministry’s interest in this area stems not merely from its role as a lead ministry in dealing with SNGs but also from the fact that the ministry itself was formed by merging the Ministry of Home Affairs, the Ministry of Posts and Telecommunications (MPT) and the Management and Coordination Agency. The old MPT had jurisdiction over many underground infrastructure networks for communications cables, and the replacement of these communication cables with fibre-optic cables left considerable space in the communication networks. The focus of the MIC study group has been to examine the energy system plans of 14 local governments, which are centred on the use of forestry resources as a means of bolstering local economies. In May, the commission outlined the conditions for a national rollout of these kinds of initiatives based on the master plans of the 14 municipalities.

MIC sees the impending liberalisation of Japan’s retail power market in April 2016 as a critical opportunity for advancing on this front (Takaichi, 2015). The group has also been examining distributed energy infrastructure projects that combine power and heat to maximise local efficiency in energy operations as well as use revamped local public corporations to co-ordinate the projects. Here, the experience of the Netherlands may be instructive. IEA (2008) reports that, after a period of very fast growth in combined heat and power (CHP) supply and in district heating and cooling (DHC) systems, the Netherlands entered a period of much slower growth in these markets following power-sector liberalisation. The problem was not that such systems could not operate in liberalised power markets but that the policy framework for the sector was not so favourable after liberalisation. In particular, the IEA argued that CHP/DHC systems needed a modest but stable feed-in subsidy to sustain their expansion, bolstered by more stringent CO₂ emissions policies. It also noted that support programmes did not extend to useful production of heat. The Japanese authorities will need to monitor carefully the impact of retail market liberalisation on renewables and may need to adapt their policies once the market is opened up.

All this takes place against the backdrop of an expanding commitment within the European Union and elsewhere to district energy systems. The United Nations Environment Program, the US Department of Energy and other agencies are collaborating on a “District Energy in Cities” initiative that has concluded that advanced district energy systems could lead to dramatic cost savings as well as cuts in carbon emissions of 35 gigatonnes by 2050 (UNEP, 2015). Being focused on the efficient cogeneration of natural gas and biomass (wood scraps), the projects in Japan do not yet reflect this recent and rapid emergence of the multiple benefits from district energy systems. Systems in Denmark, Sweden and Germany, for example, use the district energy network itself as a means of storing intermittent energy supplies from solar, wind and other renewable sources. Advocates of this approach in Japan emphasise the opportunity to bolster the energy system and decentralise it through the deployment of cogeneration, as well as to increase reliance on RE. They see smart grids and smart communities as key networks in constructing the framework for this decentralisation of energy.

Geography and accessibility are major challenges for many areas

As noted above, one of the challenges facing Japan has long been the situation of geographically disadvantaged areas, chiefly hilly and mountainous areas (HMAs) and remote islands. Policies targeting regions with specific natural conditions were first developed in the high-growth years of the 1950s and 1960s to reduce or limit inter-regional disparities and offset the natural and geographical handicaps facing such areas. A Remote Islands Development Act (RIDA) was adopted in 1953 and amended every ten years or so thereafter, most recently in 2013. The Mountain Village Promotion Act was first passed in 1965. The legislative framework for islands is the more complex of the 2, as RIDA covers only 262 islands, while separate acts cover Okinawa (40 islands), Amami (8) and Ogasawara (4).20 Specific policies were also developed for areas subject to deep snow,21 peninsula areas,22 special soil areas and areas repeatedly exposed to typhoons. To these policies must be added a succession of laws each decade since 1970 providing financial support to depopulating regions.23 These laws have also had a disproportionate effect on geographically handicapped places (the populations of islands covered RIDA fell by around 58% between 1955 and 2010). The territories falling under the depopulated areas legislation are home to about 8% of Japan’s total population but occupy over half of its territory and more than 40% of its municipalities.

Policies toward such areas are based on a number of considerations, including equity in service delivery (ensuring adequate accessibility, in particular) and effective land and resource management. This is particularly important in respect of the islands, as Japan’s exclusive economic zone is among the largest in the world, raising issues concerned with the management of marine resources. Many of these islands also possess unique or extremely rare biodiversity which needs to be preserved. The remote islands have come to assume a very important role with respect to the preservation of forests, the marine and natural environments. In addition to accessibility (transport to and from the islands has long been subsidised), measures based on RIDA are concerned primarily with three things: it provides for a higher rate of subsidy for municipal service delivery; it provides resources for ensuring adequate medical care on the islands; and it provides some tax exemptions to encourage business activities on them. The budgeting process for public works projects also differs, in that there is one integrated public works budget for each island, to be administered under the oversight of MLIT. These budgets came to a total of JPY 44 trillion in FY 2014. There are, in addition, revitalisation grants for islands (JPY 1.1 billion in 2013) that can be used for a wide range of projects, including hard and soft infrastructure, industrial revitalisation, job creation, the promotion of tourism and exchanges, or disaster resilience.

The Remote Islands Development Division of MLIT estimates that islands under RIDA consumed about 1.2% of total public works spending during the last 4 decades of the 20^th century, somewhat in excess of their share of Japan’s population at the start of the period (about 1%) and far above its share at the end (under 0.4%). As a result, industries and the infrastructure of the living environment of the small islands have improved. Some islands are no longer designated as part of the Remote Island Development Region. However, population ageing and decline are still more severe in most of the islands than elsewhere, and their economies are still less productive and more dependent on tourism and the primary sector. Low incomes, in turn, fuel the outflow of young people to Honshū.

In the case of mountainous areas, the emphasis was initially on transport above all, but since 2000, there has been a system of direct payments to farmers in HMAs in an effort to prevent land abandonment and promote the “multifunctionality” of agricultural activities there. HMA farms tend to be about 30% smaller than other farms and conditions in HMAs are more difficult, so the farm productivity of HMAs is lower. This has led to increasing emphasis on farm consolidation and the promotion of community farming practices, to help organise the workforce that remains in such communities. MAFF has also been promoting sixth-industry diversification in HMAs into activities like food-processing, tourism, direct marketing of produce and catering. Ichida (2015) reports that such efforts prevented the abandonment of around 76 000 ha of farmland during 2005-09. The budget for HMAs is about JPY 50 billion per year, half provided by the national budget and a quarter each by prefectures and the 993 municipalities involved.

Policies to support geographically handicapped regions could be rationalised

Given limited fiscal resources and with population decline now a nation-wide problem, attention will be needed to ensure that these arrangements do not result in too great a dispersion of resources. A very large share of municipalities are now qualified as “disadvantaged” on one criterion or another, and many of those not so classified face challenges similar to those who are.

Even so, there is clearly a strong case for policies addressing geographically handicapped places. Japan’s islands, for example, have special needs and will continue to require special support, if only to ensure adequate public service provision and connectivity. However, there is certainly an argument for streamlining them. The challenge is ensuring that such support is provided as efficiently and effectively as possible. It would be advisable to review the provision of support at regular intervals (at least every decade, if not every five years) to assess real needs. After more than half a century of such policies, for example, further provision of physical infrastructure is unlikely to be such a priority in many places, and technological change will alter conditions regarding accessibility challenges and service provision costs (e.g. telemedicine). The move towards more development-oriented investment in recent years is welcome but it would also be prudent to assess the impact of “softer” investments, in things like entrepreneurship promotion or sixth-industry initiatives. It should be emphasised that rationalising such policies does not imply simply abandoning remote or distressed territories to their fate. It is about adopting fewer, more encompassing instruments and regularly assessing the criteria on which they are disbursed.

The keys to revitalisation are local initiative, local assets and a focus on local prosperity

In looking at the range of revitalisation and “sixth industry” initiatives undertaken to date, a number of success factors seem to stand out.

• The most successful initiatives consistently prove to be locally driven and outwardly focused. External support is not the decisive factor: indeed, one common feature of the diverse projects identified by the Headquarters is a reluctance to accept government money and a determination to put projects on a self-financing basis (Yomiuri Online, n.d.). Local actors are actively seeking external markets and ideas and welcoming outside actors, rather than soliciting subsidies.

• They also reflect a determination to build on the diversity emphasised in the Grand Design, organising community development strategies on the basis of local, often highly place-specific assets. Given Japan’s demographic and fiscal situation, this is encouraging: local communities need to abandon any expectation of revitalisation on the basis of external action and focus on asset-based community development (ABCD) strategies.24 For local policy makers, this implies a shift of focus from local deficiencies to local assets, both tangible and intangible, and local capacities (Feldhoff, 2013).

• Social capital matters. A community’s capacity for self-organisation is one of the most critical intangible assets, especially when it comes to co-production of services, an increasingly important form of collaboration between municipal authorities and citizens (e.g. community buses).

• It would appear that the most successful strategies so far are those that focus on prosperity rather than population. Ama-cho, Seiwa, Kamiyama and other such communities do not expect to return to their previous sizes; they may even shrink further. But they have established a basis for future prosperity that will allow them to attract and retain young people, ensuring that, whatever their size, they will have a healthier and more sustainable population structure. That is best achieved by economic development – and that is why, despite the attractions of the “silver economy”, an exclusive focus on attracting retirees and the elderly is self-limiting; such an approach can only be sustained if other facets of the strategy can draw in younger people.

Many of these factors are reflected in government efforts to promote revitalisation. MAFF, for its part, put forward a vision, “For Attractive Rural Areas ~ To Make Coming Back to Rural Areas Real”, to coincide with the adoption of the cabinet decision on “The Basic Policies for Food, Agriculture, and Rural Areas” in March, 2015. This vision shows the direction of rural policies with many case studies and emphasises the need to i) create jobs in rural areas, iii) strengthen ties between communities, and iii) strengthen relationships with urban residents.

While the government is understandably reluctant to see large parts of Japan become uninhabited, the prosperity, well-being and access to opportunity of its citizens are the primary concerns. How many people live in rural Japan matters far less than the prosperity and prospects of those who do live there. Of course, most settlements require a certain level of population to assure viability, but attracting people to a place is not an end in itself but a means to an end – the end of enabling them to offer good livelihoods and a good quality of life. This is sometimes forgotten, but it must be kept in mind, because many places may well have prosperous sustainable futures but with fewer people – as, for example, when structural change leads to a reduction in the labour intensity of the dominant local industry or when it leads to a shift in specialisation from more to less labour-intensive activities. The experiences of rural communities in places like Canada and Australia demonstrate that communities sometimes can and do shrink their way back to prosperity (Tompson, 2009; OECD, 2010a). The process, though, is often painful, which is why the last part of this chapter focuses on policies for downsizing places.

Policy makers in most countries have been slow to focus on how to manage shrinking cities

Given how widespread the phenomenon is, there is remarkably little understanding of what might constitute “best practice” when it comes to managing the shrinkage of cities. Until recently, the problem was not so common, but a large number of medium-sized cities in OECD countries have experienced substantial population decline in recent decades,25 as have a small number of much larger ones, such as Detroit. The experience of cities in eastern Germany after unification has attracted particular attention, since many of them shrank very rapidly as large parts of the population moved to western Länder (Martinez-Fernandez et al., 2012).

Part of the reason for this lack of understanding has been a reluctance to accept shrinkage as permanent. Political leaders in such cities have often been reluctant to acknowledge that they might not grow back to their previous sizes, not least because the idea is electorally unpopular: citizens do not wish to think of themselves as part of a “declining community” (Schlappa and Neill, 2013). At the same time, the professionals involved in urban policy making, particularly planners and infrastructure engineers, have been trained to manage growth rather than decline (Hollander, et al., 2009; Hoornbeek and Schwarz, 2009). Planners in many places have, of course, been managing urban decline for some time, but the dominant paradigm of the field is still growth-oriented (Martinez Fernandez et al., 2012). Politically, it is far easier to sell (even unrealistic) plans for regeneration, and technically it is often more straightforward to preserve public facilities and infrastructures that may someday be needed again than to decommission or dismantle them. Where shrinkage occurs in the context of a positive demographic dynamic in the larger society, the hope that the city will “bounce back” may indeed have some basis. In a Japanese context, though, it is clear that many – indeed most – cities face an extended future of population decline. To this must be added the lobbying of construction companies and others with a vested interest in public works projects. Infrastructure spending and the allocation of public works contracts in many countries are central to the “iron triangle” linking bureaucracy, politics and business (Adams, 1981; Kondoh, 2008; Yoshino and Mizoguchi, 2009).

City shrinkage can also bring about also tremendous loss of wealth, as the loss of population reduces the value of real property and other assets held by those who remain. Once the process begins, it can become self-reinforcing. The most productive workers tend to leave first, as they have the best prospects elsewhere. The resulting erosion of the city’s human capital may then prompt other promising individuals to leave, as they see that the earlier departures have reduced the opportunities available locally. This, in turn, can have a knock-on effect on asset prices, which encourages more departures (no one wishes to find himself the last homeowner in an area where house prices have collapsed owing to depopulation). This redistribution mechanism has evident effects on the generation of fiscal revenues and thus on the investment capacities of local authorities, which further augment the risk of a sustained downward spiral. Figure 4.8 presents a stylised view of this process.

Figure 4.8. The consequences of urban population decline

Source: Author’s elaboration.

Of course, the strength of the various effects shown in the schema above depends enormously on the size and form of the city in question. In smaller cities and towns, loss of density will matter less, because they tend to be less dense anyway and because distances tend, other things being equal, to be shorter. However, they are likely to suffer far more acute problems with the attraction and retention of firms – it is lack of job opportunities that will contribute most to outbound migration – and the financing of public services. In larger cities, where density and distances are both greater, the pattern of de-densification will matter more, since depopulation, if not well-managed in spatial terms, could fragment the urban area, leading to fragmented, “perforated” cities, where shrinkage occurs in different areas throughout the city (e.g. Detroit). Indeed, precisely because distances tend to be greater and populations both larger and denser in such cities, the potential environmental consequences of de-densification will be greater. As will be seen, policy responses to shrinkage will likewise need to vary to reflect these differences in cities’ circumstances.

From a purely spatial perspective, too, the process tends to vary. Hollander et al. (2009) find that the usual pattern in western countries has – until recently, at least – been a hollowing-out of inner cities, but this pattern is far from universal and there are growing signs of a reversal. Some suburbs of Paris have gone into decline while the city centre continued to grow and even some US metropolitan areas are starting to see movement back into city centres. A pattern of “perforation” has been observed in some places in Eastern Germany. Whatever the pattern, however, shrinking cities need to deal with a range of common challenges.

Vacant sites are costly liabilities – but shrinking cities can turn them into assets

Vacant land is often the most visible by-product of urban depopulation and the management of vacant sites can be critical to a shrinking community’s prosperity and sense of identity. Hollander et al. (2009: 227) observe that “vacant land saps vitality from cities and coverts a productive resource (real estate) into a community liability.” Vacant residences and abandoned factories and other structures also create visual and environmental dis-amenities and public safety hazards. In many cities, failure to face the problem of shrinkage has led to numerous problems, including abandoned/under-occupied buildings, empty overgrown lots, crime, rapid ageing of the local population and in many cases large concentrations of other marginalised groups in the areas experiencing the fastest depopulation.

The first question to address concerns the potential for redevelopment. Ferber and Preuss (2006) distinguish three categories of vacant urban land:

• Sites with relatively low reclamation costs and high post-reclamation value (“self-developing sites”) are likely to be very attractive to private agents and can be redeveloped with minimal public support. There is usually no need for public intervention, provided the existing planning and administrative framework is sound.

• Sites with potentially high post-reclamation value but relatively high reclamation costs (“potential development sites”) may require some sort of public-private partnership to develop, with the commitment of public resources justified where the negative (positive) spillover effects of vacancy (redevelopment) on surrounding areas are significant. Private actors will likely require advice and assistance in planning and funding any redevelopment, so the authorities will need to consider public-private partnerships (PPPs) and other risk-sharing and co-ordination mechanisms.

• “Reserve sites” with high reclamation costs and low potential value may nevertheless require public investment to address environmental and other dis-amenities, lest they drive down nearby property values and thus contribute to further decline. These are likely to be very common in places where demographic trends mean that population decline will not be reversed in the foreseeable future; this category will thus be especially relevant for Japanese urban planners in the coming decades.

Where redevelopment is not feasible, holding strategies are needed to help maintain adjacent property values – particularly in respect of reserve sites. The evidence from shrinking US cities suggests that relatively simple, commonsensical first steps can make a big difference. For example, the removal of derelict structures and basic landscaping of vacant lots can raise adjacent property values by 30% (Wachter, 2005). Just planting a tree within 50 feet of a house can add as much as 9% to its value. Other simple but important steps include the prevention of illegal dumping (which can be harder when the informal oversight provided by local residents is gone). More ambitious measures, which might apply to the potential development sites or reserve sites, would include community use for grassroots economic development – letting neighbourhood communities turn vacant lots into parks or allowing entrepreneurs to put them to new uses, such as temporary marketplaces or as venues for sports and cultural events or art installations. Entrepreneurs will always look to extract value from vacancy if they can – Overmeyer (2006, 2007) points to the need for light but effective regulation of temporary use to enable such activities.

Shrinking cities in Japan may need to create land banks to help identify, prepare and redevelop vacant sites. These have become increasingly prominent in the United States since the early 1980s. They typically have special powers to acquire and assemble multiple derelict or abandoned properties and to transfer them to responsible public, non-profit or private entities for redevelopment. Where real estate markets are subject to considerable uncertainty, they assume much of the initial risk of preparing sites for redevelopment. They can also participate with city or neighbourhood leaders in the elaboration of community plans or visions for redevelopment (Alexander, 2005).

The experience of urban shrinkage in the eastern German Länder after unification has thrown up some promising examples of innovative policy responses (Schlappa and Neill, 2013) that Japanese cities might in some circumstances adapt:

• Leipzig in 2004 initiated the Wächterhaus concept to address high levels of housing vacancy in its attractive inner-city districts. A coalition of architects, planners and residents created a voluntary organisation to facilitate flexible rental agreements. For example, tenants in some cases may live rent-free in return for an obligation to protect the building from vandalism and look after simple maintenance and repairs to prevent deterioration of the housing stock or the urban environment. Such a model cannot be applied in all circumstances, but Japanese cities with attractive old centres could find it an important part of a policy package for attracting entrepreneurs and start-up firms.

• A number of cities have turned surplus car parks, offices and industrial sites into gardens for growing food and ornamental plants. The income generated is generally modest but is often sufficient to cover maintenance costs, and such redevelopment also serves to turn the sites from liabilities into assets in terms of the urban environment and local property values.

• Schönebeck has identified and planned the network of vacant sites to be redeveloped as open spaces using a “plot” approach. Instead of identifying large tracts of land for one use or form of redevelopment, the authorities have integrated into the urban fabric a network of open spaces that range from urban farmland and small allotments to restored woodland. One of the key elements here is to pursue the transition of old urban sites into new open spaces on the basis of a larger vision of the district or city – rather than lot by lot – and to allow mixed use even in areas designated for new green space.

Other examples include the conversion of old industrial sites into landscape parks and cultural attractions (e.g. Emscher Park [Ruhr] and Fürst Pückler Land [Eastern Germany]). Environmentally, this can be quite straightforward, if not always cheap. In the right locations, vacant land can help greatly with stormwater management, air quality and biodiversity, as well as reducing urban heat-island effects (Hollander et al., 2009).

The use of vacant land for urban green infrastructure – defined here as strategically planned and locally managed networks of protected green space26 – is receiving increasing attention in the United States (Schilling, 2009). Community-driven green infrastructure plans can offer an opportunity for city leaders, residents and property owners to identify and select sites for such greening. In the first instance, they might target tax-delinquent, abandoned and poorly maintained commercial or residential properties and then follow up with incentives for voluntary acquisitions in the case of other properties that might need to be included in the plans. The design of such green infrastructure could draw on the findings of researchers like Stott et al. (2015), which point to the need to balance the benefits for eco-system services of large, contiguous green spaces in relatively densely developed urban areas and the health and well-being benefits of smaller parks and nearby green spaces.

Reforestation strategies are also increasingly seen as part of the response to city shrinkage in the United States (Sacramento Tree Foundation, 2005), as are initiatives focused on the planting of community gardens and market gardens, though these depend greatly on soil conditions and the presence/absence of environmental pollutants (Hollander et al., 2009). The impact of such initiatives can go well beyond property values: in a block by block study of Toronto, Kardan et al. (2015) find that an additional ten trees on a given block correspond to a one percentage point increase in how healthy nearby residents felt, a result consistent with the findings of Donovan et al. (2013) in a much larger, but less urban-focused, study in the United States.

Other promising options may be more location-specific, such as identifying sites that may have considerable amenity value to the community and/or the potential to attract visitors – what Schlappa and Neill (2013), in a discussion of Altena (Germany), call “polishing diamonds”. In this instance, the real obstacle was governance: a medieval castle overlooked the town but was not owned by it and was not easily accessible from it. Successful redevelopment occurred only once the town, the public entity that owned the castle and a private investor devised a way to link it better to the town, so that both could benefit from the visitors the castle attracted.

There is clearly room for considerable diversity across cities in responding to the challenges of shrinkage. Indeed, the largest cities will need diverse strategies to address conditions in different districts and neighbourhoods. As Okata and Murayama (2011) show, Tokyo is a patchwork of different types of urban spaces facing very diverse redevelopment issues. Incremental approaches, allowing for diverse and creative responses to these challenges will help different parts of the capital region to adapt to demographic, environmental and economic change while preserving their distinctive characters. Whatever the chosen strategy, it is important that municipalities and other local actors not overlook the importance of simply creating a sustainable and aesthetically appealing urban landscape as the city shrinks. This is far more promising for many than gambling on resurrection with expensive new development projects.

Service delivery challenges are particularly acute in smaller cities and towns and rural areas

As cities shrink in size, pressure on the financing of public services naturally mounts, as local tax revenues decline and the unit (per person) cost of providing services rises. In many cases, this results in the closure or downsizing of schools, hospitals or other public facilities. The result is longer journeys for citizens who need access to such facilities, at least to the extent that online or other remote connections cannot replace them. Such choices are difficult in any community, but they are particularly hard in smaller places. Large cities may close and consolidate schools, for example, without children having to travel very long distances, though the decisions they take will have impacts on local property values. By contrast, the closure of a school in a small town may result in very long bus trips to attend school in another town or city. The loss of the school may relieve the town of a public finance burden but it also means losing an asset that could otherwise help attract new residents. The same is true of the relocation of healthcare facilities and other social infrastructure: newcomers to an area are more likely to settle, and incumbent residents to stay, in places where those facilities are close at hand.

A second, more radical step for a shrinking city is to begin curtailing services to some areas altogether – not merely consolidating schools or clinics but putting an end to, e.g. public rubbish collection, bus services or water supply. In 2010, the city of Detroit began considering such possibilities for the least dense areas of that city. People might continue to live in such places but they would need private solutions for such service-provision challenges, as many rural dwellers do. In a sense, Detroit would simply be treating such areas as though they were no longer incorporated in the city (presumably, this would include cutting their local tax bills). The third, and most radical, option is to bulldoze urban areas and redevelop them as parks or farmland. As Glaeser (2010) observes, this is hardly controversial in respect of abandoned and run-down structures, which may even pose dangers to the public, but it is far more difficult to apply in respect of very large areas. The key question is whether and at what point the authorities may need to compel the remaining inhabitants to sell their properties and relocate, and on what terms – the mirror image of the more common historical problem in which the power of eminent domain and compulsory purchase/relocation has been used primarily to make room for growth.

As noted above, the problems of service provision in depopulating places tend to be most acute in smaller towns and rural areas. In major cities, the challenge usually involves rationalising and streamlining key services; local provision is rarely threatened. The number of schools, hospitals or clinics may be cut, but a major city – unlike a small town – is unlikely to be left without a secondary school or tertiary medical care, for example. However, there are two key points that are highly relevant for major cities as well:

• Quality can improve even when scale is declining. When savings are made from a reduction in the scale of services, there is often scope to soften public opposition and mitigate the effect of the cuts by using some of the savings to enhance their quality. For example, when streamlining school systems, as many cities have done, it may be possible to invest some of the savings in improving the equipment and buildings of those that remain – something that may, in turn, make it easier to attract both teachers and pupils. A similar logic can be applied to early childhood care facilities or to healthcare.

• “Smart” technologies offer promising opportunities to optimise service delivery, particularly in areas like public transport, where loss of population and density will make it increasingly difficult to sustain the levels of service that previously prevailed.

In some spheres, like telemedicine, information technology already has much to offer when it comes to sustaining service provision in remote places, though many countries have recognised that IT alone is not enough. Some have experimented increasingly with strategies for making services more mobile. Sweden, for example, long ago introduced mobile post offices in some rural areas, with rural postal vans not merely delivering letters but providing a range of other postal and related services in the communities they covered. In Germany, the AGnES Community Medicine Nurses Programme supports general practitioner physicians in rural areas, reducing the amount of time doctors spend on home visits for routine procedures. The community medicine nurses make home visits and use electronic devices (tablets or PCs) to send patients’ health information in real time to the doctor, with video-conferences convened as necessary. In Canada, mobile labs have been used in some areas to provide on-the-spot training to rural residents; the service works with local employers to identify and address skills gaps (OECD, 2010b). In France, the Maisons de santé form part of a multi-dimensional strategy for supporting rural healthcare that also includes telemedicine and other measures (Box 4.15).

Japan is in the forefront of efforts to adapt public transport for rural areas

An increasing number of Japanese regions outside metropolitan areas are struggling to sustain their rural public transport networks as financially independent private businesses due to population ageing and decline. Efficient provision of public transport is often a challenge in areas with relatively low population density: long distances and low ridership make it difficult to offer public transport options that are quick, reliable, affordable and efficient enough to attract rural consumers without requiring huge public subsidies. However, open data and mobile information platforms are rapidly changing the options available when it comes to public transport provision in rural areas; this is particularly true of the rise of “big data” (Box 4.16). OECD/ITF (2015) draws on the experiences of a number of OECD countries, including Japan, to understand these shifts. It looks, in particular, at the potential for “demand-responsive transport” (DRT) to meet public transport needs in rural areas. There essentially two models of DRT: door-to-door or predefined pick-up and drop-off points with service provided only if there is demand. For example, in the Czech Republic, “Radiobus” operates like a conventional bus in that it has a regular timetable, but it runs only when users confirm demand (by phone or Internet) and only on the part of the route required.

Information and communications technologies are used to adapt collective transport routes, stops and timing to the actual needs of customers. In addition to working well in areas of low population or at periods of low demand, such schemes can operate effectively in denser areas to meet the needs of specific groups that are dispersed among the general population, like the elderly or the handicapped. DRT schemes may be fully or partially funded by local transit authorities, as they are often providers of socially necessary transport and may be selected by public tender. However, they can also operate independently as private concerns or community operated non-profit enterprises.

Japanese municipalities are extremely active in this sphere; indeed, demand buses have operated in Japan since the 1970s (Takeuchi et al., 2003). What has changed in recent years is technology and uptake. Computer-assisted scheduling, routing and dispatching have made operation much more efficient, while mobile applications have made such services far easier for users. In response to these changes, and in an effort to deal with pressure on public transport services, Japanese municipalities have been ramping up their DRT provision. MLIT (2014) reports that, between FY 2006 and FY 2013, the number of DRT schemes nearly doubled. More than 200 municipalities now have “on demand” bus services. These are of three basic types. The first are essentially bus services with fixed routes that operate only on the basis of customer demand. The second type involves some flexibility along a fixed route in response to customer demand. The third involves a much freer route, based on customers’ demands for pick-up and set-down: since the area of operation is defined and the number of customers small, the operator selects the route that minimises inconvenience to passengers. In addition, what are effectively shared taxis allow door-to-door service with no fixed routes or stops in certain areas. For example, the Migon shared taxi service around the Tohkadai Newtown in Komaki (Aichi Prefecture) is based on flat-rate fares, shared ride, limited area of operation and door-to-door service.

The evidence suggests that DRT users are prepared to pay a higher fare than existing bus tariffs. However, the unit cost per trip may be high, which means that vehicle choice needs to be linked to density of demand (Table 4.1). Yet if higher cost is a drawback, other aspects of system design offer benefits to offset this. The evidence suggests that successful DRT systems are designed and adapted in close consultation with users as regards routing, location of stops, frequency, etc. Indeed, even relatively simple changes, like relocation of key stops (e.g. around major transport termini) can enhance convenience and increase ridership substantially (ITPS, 2011). Moreover, these systems are continually improving, not least in Japan, where IT researchers at the University of Tokyo have helped to design systems that allow for faster, simpler dispatch, eliminating the need to call an operator, and to optimise dispatch and route planning so that new passenger reservations do not disrupt or delay services to already-booked passengers (On Demand Bus, n.d.).

Where “conventional” public transport still has a role to play, OECD/ITF (2015) points to the success of some relatively simple innovations in increasing efficiency: reducing seat density, for greater comfort; using smaller vehicles; better marketing; and a focus on service reliability by, e.g. making real-time travel information available with mobile applications. A number of Japanese locales have shown how identifying service levels based on customer need can help to plan the supply so as to meet actual demand. Such customer-based planning has resulted in the revitalisation of several public transport services in Japan, resulting in increased numbers of users. In some places, the local private sector has also been involved in designing routes and financing initiatives in co-operation with local authorities. For example, Hidakagawa-cho (Wakayama Prefecture) has integrated its bus routes with shared taxis, allowing variation in vehicle size depending on demand at different times, as well as enhanced feeder services and greater frequency. Niseko-cho, in Hokkaidō, integrated the routes of private buses, municipal welfare buses and school buses. The buses stop on demand and there is some variation of routes at times of peak demand (e.g. early morning school runs). The resulting increase in frequency and reliability then led to an upward trend in use by the general public. In a number of places, community bus services now operate on a not-for-profit basis, sustained partly by fares, but with support from municipal budgets and, most importantly, local businesses along the routes. In many cases, local volunteers play a central role. (ITPS, 2011).

Car- and ride-sharing programmes are also growing fast. In Japan, shared taxis are increasingly widespread. Car-sharing services, virtually unknown a few years ago, are spreading rapidly in many countries. One of the best-known is Paris’s AutoLib, an electric car-sharing service that now has 130 000 registered users with about 10 000 individual journeys on any given day. Similar systems are springing up elsewhere: Car2go, a Daimler AG subsidiary, operates car-sharing schemes in more than 30 cities in Europe and North America, and in June 2015, Avis’s Zipcar had more than 900 000 members and nearly 10 000 vehicles in seven countries. Ride-sharing schemes are also growing fast (Liftshare, Blablacar). By the beginning of 2014, it was estimated that almost 500 000 Japanese had registered for car-sharing services, and the numbers were rising fast, with private companies entering the market alongside municipalities, which in some cases have launched services on their own or in collaboration with private firms, in an effort to make better use of their official vehicle fleets (Nagata, 2014).

Virtually all of these car-sharing services rely on mobile apps for efficient matching of supply and demand. While this is often seen chiefly as an urban phenomenon (and matching is certainly easier where passenger and vehicle densities are higher), it can also work very well in rural areas, particularly for key routes to and from centres of employment or essential services. Public initiatives to support car-pooling schemes have been undertaken in many countries, e.g. France (OECD/ITF, 2015).

In some countries (e.g. Switzerland), the postal service operator is a major bus operator. In others (e.g. United Kingdom), this is an incidental role but some postal bus services are operated. Simply put, such services rely on existing postal vehicle runs to collect mail from local post offices, public mail boxes, etc., and take them to regional sorting offices, most often in a nearby town. In many cases, this can provide 2-3 runs per day on weekdays, depending on the frequency of postal collections. Replacing a small postal van with a minibus allows public transport services to “piggyback” on postal operations. Financing depends on fares and passenger numbers, and some local authority support may be required. In the United Kingdom, a demand-responsive service is now provided in some locations. However, this option can work most readily where settlement patterns in a low-density area effectively place most of the population on a linear corridor – e.g. along a peninsula, coastal road or valley (White, 2015).

There is still plenty of scope for experimentation and innovation in this sphere; the government should therefore seek to promote a trial-and-error approach, undergirded by mechanisms for sharing information and experiences. Previously, subsidies from the centre were provided to operators to combat low ridership problems. This made it harder for municipalities to co-ordinate the activities of the various operators, who were often in competition with each other and who looked mainly to the central government for guidance and support. Under the 2007 Act on Revitalisation and Rehabilitation of Local Public Transport Systems, municipalities in Japan are in the forefront of tackling rural transport needs, but the central government certifies rural public transport reorganisation plans and provides subsidies under certain conditions for maintaining regional transport in accordance with regional characteristics and reconstructing rural public transport networks. Amendments to the act in 2014 further reinforced the ability of municipal governments to co-ordinate public transport activities. Public transport reorganisation plans still require central government approval, but they are no longer defined by sector, and municipalities have greater freedom to adjust fees and tariffs, to combine some cargo and passenger transport (like Switzerland’s postal buses) and the like.

This reform process has unleashed a great deal of local experimentation in public transport. The experience of Norway is instructive here. The national government provided extraordinary funding to encourage experimentation as part of its Public Transport in Rural Areas Programme. A number of schemes were created in response to this opportunity, but some of them struggled when the programme ended. That should be seen as good news: temporary funding triggered innovation. As would be expected, some of the new ideas tried proved to be more resilient than others; some needed to be reworked to make them more efficient, and others were not viable. The key is to avoid locking in support for the less efficient approaches that emerge.

Economic strategies must reflect realistic appraisals of local demographic trends

As noted above, loss of human capital is a critical part of the shrinking process. While vacant land is more visible and the reduction in services is more immediately felt, the loss of skills and knowledge may ultimately pose the greatest threat to a city’s economic future. The loss of human capital can weaken local innovation systems, making it harder for local firms to participate in highly productive value chains, and it is likely to hit small and medium enterprises (SMEs) particularly hard, as they depend primarily on the availability of skilled workers in local labour markets (Martinez-Fernandez and Wu, 2007). Shrinking cities thus need skills and employment strategies that differ from those that are suited to growing cities. In the latter, skills shortages often reflect strong demand from employers, whereas declining cities have enormous problems on the supply side, a fact that makes it all the harder to attract and retain firms.

Policies for shrinking cities require intensive vertical and horizontal co-ordination

“Rightsizing” cities undergoing rapid population decline and ageing will require important efforts to co-ordinate policy interventions across different policy domains, across levels of government and across jurisdictional boundaries. City leaders in Japan will want to bear in mind some common issues that should be aligned across levels of government and, in some cases, across municipal boundaries:

• the alignment of service provision and land-use policies

• the co-ordination of local and regional planning processes and development policies and

• the co-ordination of policies to deal with urban shrinkage at a regional scale.

One lesson that can be drawn from the experiences of many shrinking cities is that central governments may have a role to play in ensuring that local actors adopt a realistic appraisal of the situation. This is a common problem across the OECD; far too many regions and local authorities subject to demographic decline have continued to plan for growth. In many cases, they are abetted in this by fiscal transfer systems that do not penalise them for so doing or that even reward them with investments in infrastructure for which there is little or no need. It was to counter this problem that the German state of Saxony in 2010 imposed the requirement that every ministry demonstrate that local and regional planning processes have taken due account of demographic trends (Schlappa and Neill, 2013). The authorities in Japan, who have been working to make subnational governments adopt more realistic projections (see Chapter 2 above), might do likewise, requiring that municipal plans be assessed against some of the questions included in the “demographic checklist” adopted by Saxony:

• Does the proposal take into account the statistical evidence concerning population trends and the future composition of the population?

• Are intergenerational models of living and working considered?

• Does the proposal provide for the continued adaptation of physical infrastructure and services?

A second key point, which is particularly important in view of the incentives that local politicians have to be “bullish” in their demographic projections, is that too much external support for a declining city may contribute to the problem, as it can increase incentives to gamble unwisely on regeneration projects rather than adapting to the new reality. The experience of Detroit is instructive here: the city gambled repeatedly on big, visible “flagship” regeneration projects, often financed with state and federal support (Box 4.17).27 In the end, they profited the city little. In Japan, too, revival plans for shrinking cities have often assumed either national- or prefectural-level infusions of investment, particularly in infrastructure, and inward net migration flows and important infrastructure (Onishi, 2004; Uemura, 2012). Yet such expectations are increasingly unrealistic in a Japan where most cities are losing population and public budgets are severely constrained. Central resources will in future have to be allocated much more sparingly and much more selectively, so it is important that cities and towns facing population decline be prepared to adapt rather to expect large exogenous transfers intended to keep them growing. The alternative is to reframe shrinkage as opportunity, offering – in some cases, at least – the chance to make the city greener and more sustainable, along some of the lines suggested above.

The central and prefectural authorities may also play an essential role in ensuring a regional approach to shrinkage, as the experience of many struggling towns and cities demonstrates the degree to which the pressure of decline can prompt “beggar-thy-neighbour” competition rather than co-operation among adjacent municipalities. This was a particularly important problem in Detroit, but it also arises in a Japanese context. Intensifying competition for budgetary resources, people and investment is a natural outcome of shrinkage, but there is growing awareness in Japan of the need to adopt more co-operative governance approaches. The MIC programmes to promote co-operation among municipalities can make an important contribution here.

Effective governance of the shrinking process involves more than links among levels of public administration: the engagement of citizens in the process is critical. Indeed, the process by which the city downsizing is managed can be almost as important as the specific decisions reached. The choices made in “right-sizing” a city can have huge implications for its character, identity and liveability. If they are to be legitimate and accepted, they must be the result of transparent, open and honest debate involving not only policy makers but also civic and business leaders, community groups and other stakeholders about the way the city’s form will change. Certainly, no strategy involving demolition, redevelopment and relocation can be adopted without such a process; the catastrophic mistakes made under slum clearance policies in some OECD countries in the last century should not be repeated (Schilling, Schamess and Logan, 2006).