Foreword 5
Acknowledgements 6
Table of contents 7
Acronyms and abbreviations 11
Executive summary 13
Key findings 13
Key messages and policy recommendations 14
Assessment and recommendations 17
Demography is reshaping Japan’s economic geography 17
Productivity growth has not been sufficient to offset labour force decline 18
Spatial concentration of economic activity is increasing but spatial disparities are not 18
Demographic change is a huge challenge but it also offers opportunities 19
Structural reforms need to address labour supply, fertility, entrepreneurship and innovation 19
Policy makers must balance two key concerns in addressing the spatial consequences of depopulation 20
Striking this balance will require both long-term vision and a multi-faceted approach 21
The government sees Japan’s future as compact, networked and diverse 22
A “compact and networked” approach is broadly correct but must be adapted to local circumstances 22
Cities outside the big three metropolitan areas need to work together 23
The national government can do much to foster such co-operation 24
The global competitiveness of the major metro areas, especially Tokyo, is a critical priority 25
Much can be done to maximise the benefits of the super-high-speed maglev rail line… 26
…and the 2020 Tokyo Olympics 26
Rural is not synonymous with decline 27
Rural policy has changed considerably in recent years 27
The keys to rural revitalisation are local initiative, local assets and a focus on local prosperity 28
Policies for shrinking places 28
Japan is pioneering a response to policy challenges that others will soon confront 29
Chapter 1 Japan’s demographic transition and the productivity challenge 31
Overview 32
The demographic context 33
Japan’s population is both shrinking and ageing very rapidly 33
Figure 1.1. Japanese population and age structure, 1950-2050 33
Figure 1.2. Longevity and fertility in Japan 34
Figure 1.3. Share of foreign-born residents in total population, 2010 35
Figure 1.4. Elderly population and total population in OECD countries, 1995 and 2012, % 35
Figure 1.5. Population estimates and projections by age group, 1950-2100 36
Japan’s population is on the whole highly concentrated… 36
…and the concentration process continues 37
…yet the rural population is unusually remote 37
Figure 1.6. Population change by prefecture, average annual growth, 1970-2010 38
Figure 1.7. Initial population density and population change, 1990-2012 39
Box 1.1. The OECD regional typology 39
Rural areas are also ageing faster 40
Figure 1.8. Ageing indicators for Japanese prefectures 40
Figure 1.9. Elderly dependency rates, 2012 41
Box 1.2. Urban data sources for this review 41
The consequences of demographic change 42
Japan’s demographic transition will create new economic, social and service-delivery challenges 42
Table 1.1. Possible consequences of demographic change 43
Demographic change may also affect entrepreneurship and innovation 44
The implications for public finances are worrying 45
The economic context 45
Growth and productivity performance has long been disappointing 45
Figure 1.10. Gross domestic product per capita 46
Figure 1.11. Growth of labour productivity, 1995-2013 46
Demographic change makes productivity growth more important than ever 47
Figure 1.12. Decomposition of real GDP growth for selected OECD countries, 1999-2011 47
Figure 1.13. The potential impact of female employment on labour supply 48
Unemployment has remained low but inequality has increased 48
Labour market institutions and practices seem to contribute to demographic decline 49
A generation of underperformance has put public finances under strain 50
Figure 1.14. Fertility and female labour supply, Japanese prefectures, 2011 51
The government has undertaken a three-pronged strategy to re-launch growth 51
Inter-regional disparities and living standards 52
Economic disparities among Japanese regions remain low… 52
Figure 1.15. Gini index of GDP per capita across TL3 regions, 1995 and 2010 53
Figure 1.16. GDP per capita in predominantly urban and rural regions relative to the national average 53
…but the picture with respect to non-monetary aspects of well-being is more complex 53
Table 1.2. Performance and dispersion on regional well-being indicators in Japan 54
Figure 1.17. CO2 and NO2 emissions, OECD TL3 regions 55
Figure 1.18. Exposure to PM2.5 in OECD TL2 regions 56
Trends in regional economic performance 56
The growth of GDP per capita has been weak but broadly consistent across space 56
Figure 1.19. Trends in relative GDP per capita by prefecture, 2001-10 57
Figure 1.20. Decomposition of GDP growth by prefecture, 2000-10 57
Aggregate growth, by contrast, has been far more concentrated 58
Figure 1.21. Contributions to growth by prefecture, 1995-2010 58
Figure 1.22. Growth contributions of the main metropolitan areas 59
Productivity performance has varied widely across prefectures 59
Figure 1.23. GDP and labour productivity by prefecture, 2001-10 59
Table 1.3. GDP growth by type of region: Japan and the OECD 60
The economic policy response to demographic change 60
Much remains to be done to address the public spending consequences of ageing 60
Structural reforms particularly need to address labour supply and fertility… 61
Figure 1.24. Female labour force participation and the fertility rate 63
…as well as innovation and entrepreneurship 63
A shrinking Japan, seeking to regain its economic dynamism, cannot afford to turn inward 65
Internationalisation is particularly important for Japan’s innovation systems 67
Figure 1.25. Regional patterns of co-patenting 68
The spatial consequences of Japan’s restructuring challenge 68
The spatial effects of demographic change are difficult to anticipate 68
Policy makers face a dilemma with respect to the degree of concentration that may be desirable 69
However, the risk of hyper-concentration may not be as great as it sometimes appears 70
Figure 1.26. City-size distribution in Japan 71
Box 1.3. Zipf’s law and the urban hierarchy 72
The policy challenges ahead are enormous and will need a multi-dimensional response 73
Notes 73
Bibliography 75
Chapter 2 Long-term vision, planning and governance in Japan 79
Box 2.1. Transcending sectoral approaches to policy 81
The National Spatial Strategy 81
The government sees Japan’s future as compact, networked and diverse 81
Box 2.2. Key policy directions of the National Spatial Strategy (National Plan) 82
Table 2.1. Instruments for compact and networked places 83
Box 2.3. France’s Maisons de service au public 85
The Strategy offers a coherent long-term vision to serve as a framework for policy 85
Policy makers will need to adapt the NSS’s core concepts to widely differing circumstances 86
The National Spatial Strategy will have an important influence on the future settlement pattern 87
The history of past plans highlights both the potential and limits of national spatial planning 88
Figure 2.1. Formulation of the National Spatial Strategy 90
A new government headquarters 90
The Headquarters has made a fast start 91
Sustaining a coherent, whole-of-government approach will be difficult 92
The emphasis on revitalisation raises questions about some policies affecting Tokyo 93
Governance, decentralisation and revitalisation 94
Japan is a unitary state with a two-tier structure of subnational government 94
Figure 2.2. The structure of territorial governance 95
Box 2.4. Types of cities in Japan 95
Metropolitan governance solutions could help Japanese cities 96
Public spending tends to be very decentralised 98
Figure 2.3. Subnational government revenue expenditure and debt: Japan and the OECD 99
Figure 2.4. Allocation of spending responsibility by function 99
Figure 2.5. Subnational government investment in OECD countries, 2013 100
Japanese SNGs depend heavily on transfers from the centre 100
Figure 2.6. Composition of subnational government revenues, FY 2012 101
Figure 2.7. Tax revenue per capita by prefecture 102
Figure 2.8. Breakdown of Japanese municipalities’ revenues, 2014 102
Inter-governmental revenue sharing and grant allocation 103
The Local Allocation Tax is the centrepiece of the inter-governmental transfer system 103
Table 2.2. Composition of the Local Allocation Tax revenues, 1999-2016 104
Box 2.5. Local debt in Japan 104
Earmarked subsidies continue to play an important role, despite efforts to use them less 105
Interactions among different fiscal instruments can have unexpected consequences 106
Box 2.6. Intergovernmental fiscal reforms since 2000 107
Policies to promote local revitalisation may reinforce pressures for fiscal decentralisation 108
Pathways for reforming inter-governmental transfers 109
The authorities might want to review the allocation criteria for the LAT 109
Table 2.3. Calculation of the Local Allocation Tax 109
Earmarked grants also have a role to play… 112
…but their use should be limited and co-ordinated across the government 113
Box 2.7. Central government leadership and inter-municipal co-operation 114
A clearer division of labour between different instruments may be needed 115
Infrastructure policy 116
Japan is exceptionally well-endowed with infrastructure 116
Figure 2.9. Public works expenditure, 1978-2014 117
Box 2.8. The national framework for infrastructure policy 118
The emphasis of infrastructure policy is now shifting to effective use and maintenance 119
Maintenance and replacement costs are a growing burden on SNG budgets 119
Table 2.4. Indicators of infrastructure ageing 120
Table 2.5. Burden of roads and public buildings by size of municipality 120
Managing infrastructure in shrinking places will be a particular challenge 121
The future of local public corporations 122
Figure 2.10. Local public corporations and LPC employment by sector of activity, 2013 123
LPCs confront numerous challenges due to demographic change 123
Rationalising LPCs can bring better services and job opportunities, not just lower costs 124
Notes 125
Bibliography 127
Chapter 3 Building competitive and liveable metropolitan areas in Japan 133
Japan’s urban system 134
Japan is overwhelmingly urbanised and has a highly concentrated urban system 134
Box 3.1. Defining functional urban areas 135
Figure 3.1. Functional urban areas in Japan with populations above 50 000 136
Figure 3.2. Distribution of population by size of FUA, selected OECD countries, 2012 137
Figure 3.3. Population densities in OECD metropolitan areas 137
Urbanisation in Japan is continuing 138
Figure 3.4. FUA size and population growth 138
Trends in economic performance 139
Like its settlement pattern, Japan’s economy is overwhelmingly urban 139
Figure 3.5. Concentration of population, GDP and employment in OECD metropolitan areas, 2010 139
Figure 3.6. Initial GDP share and contribution to growth, 2001-10 140
Disparities among major metropolitan areas and between large cities and other areas are limited 140
Figure 3.7. GDP per capita, 2012 141
The labour market seems to play a critical role in limiting disparities 141
Figure 3.8. Trends in GDP per capita: Metropolitan and non-metropolitan Japan 142
Figure 3.9. GDP growth, aggregate and per capita rates, 2001-10 142
Figure 3.10. FUA/non-FUA unemployment gaps, 2000-12 143
Figure 3.11. Countries ranked by variation in unemployment rates across metropolitan areas 143
Figure 3.12. Contributions to employment growth, 2001-12 144
Japanese cities do still generate strong agglomeration benefits 144
Figure 3.13. Evolution of the productivity gap: Japanese FUAs relative to the national average, 2001-12 145
Figure 3.14. Estimated agglomeration benefits across cities in three OECD countries 146
Box 3.2. Agglomeration economies 147
Urban governance challenges remain to be addressed 147
Figure 3.15. Governance fragmentation and performance 148
Japanese metropolitan areas are failing to fulfil their potential as drivers of innovation-led growth 148
Figure 3.16. Patent intensity, selected OECD countries and their metropolitan areas, 2008 149
Figure 3.17. Patent intensity of Japanese metropolitan areas, 2008 149
The evolution of the urban system 150
Population densities continue to decline in most metropolitan areas 150
Figure 3.18. Size and density of densely inhabited districts of prefectural capitals 150
Figure 3.19. Fastest spatial expansion observed among OECD metropolitan areas with population growth under 1% per annum (2000-06) 151
Table 3.1. Advantages and disadvantages of high urban densities 152
Figure 3.20. Fertility and concentration of population in high-density areas 153
The decline in urban densities must be managed 153
Locally tailored approaches are needed when implementing “compact city” policies 154
Box 3.3. Policy initiatives for promoting “compact and networked” urban structure 154
Environmental performance of Japanese metropolitan areas 155
CO2 emissions from most Japanese metropolitan areas are relatively low by OECD standards… 155
Figure 3.21. CO2 emissions per capita, OECD metropolitan areas 156
Figure 3.22. Major sources of per capita CO2 emissions in Japanese metropolitan areas, 2008 156
…but important environmental challenges remain 156
Figure 3.23. Exposure to particulate matter, OECD metropolitan areas 157
Figure 3.24. Availability of green space in OECD metropolitan areas 158
Efforts are under way at multiple levels to make Japanese cities greener… 158
…and more resilient 159
Table 3.2. Targets for earthquake-resistant buildings 160
The global competitiveness of Japan’s metropolitan areas 160
At an international level, the largest cities increasingly compete with one another 160
What makes “global cities” competitive and what does this mean for Tokyo? 161
The future of Tokyo 163
Tokyo’s demographic problems are unique in Japan 163
Policies for Tokyo focus on connective infrastructure and redevelopment of the urban fabric 164
Box 3.4. France’s Grand Paris project 165
Regulatory and other policies are also changing but more needs to be done 166
The maglev project and the formation of a Tokyo-Osaka-Nagoya mega-region 168
The Chuo Shinkansen is to create an urban mega-region of more than 60 million people 168
Ex-ante assessment of the impact of infrastructure mega-projects is notoriously difficult 170
Box 3.5. Ex-ante assessments of infrastructure mega-projects 171
The economic impacts of the maglev are difficult to foresee 172
Box 3.6. International evidence on the spatial impact of large transport infrastructure projects 173
The Chuo Shinkansen can stimulate innovation and entrepreneurship 175
Box 3.7. Globalisation, communication and transaction costs 176
Box 3.8. Amgen: Conceived in San Francisco, grown in Los Angeles 177
The 2020 Olympics 177
The growth and employment effects of the Olympics are difficult to anticipate… 177
Box 3.9. Assessing the impact of hosting “mega-events” 178
Box 3.10. Costing the Games: London’s experience 180
…but Japan can do much to hold down costs and maximise the benefits of the Games 180
The Games represent an important challenge for multi-level governance 181
The Games also offer opportunities to realise important non-monetary benefits 182
Social policy for large cities 183
Better urban policies could raise both fertility and female activation rates 183
Figure 3.25. Share of married women in the workforce, in 2010 (%) 184
Some initiatives could help both families with children and the elderly 184
Notes 185
Bibliography 187
Chapter 4 Policies to ensure Japan’s regional and rural revitalisation 193
The evolution of Japanese revitalisation policies 194
The challenges facing non-metropolitan areas are not primarily about demography 194
Rural policy has changed considerably in recent years 195
Regions and municipalities have also been increasingly active 196
The current push for regional revitalisation comes at a critical juncture 196
Box 4.1. The Masuda Report 197
Economic conditions and trends in performance 197
Japan’s rural regions are still relatively prosperous by OECD standards 197
Figure 4.1. GDP per capita in predominantly rural regions, 2012 198
Figure 4.2. Output per worker in predominantly rural regions 198
Growth has been weak but labour market performance has been relatively good 198
Figure 4.3. Change in real GDP per capita 2001-12, predominantly rural OECD regions 199
Figure 4.4. Labour market performance: Rural regions in Japan and the OECD 199
Policies for regional revitalisation 200
A new scheme for National Strategic Special Zones is being put into place 200
Box 4.2. National Strategic Special Zones 200
SME policies need to make the sector more dynamic and more internationally integrated 201
A range of programmes now exist to support innovation in Japanese regions 202
Box 4.3. Regional innovation policies in Japan 203
Innovation and entrepreneurship must go hand in hand 204
For innovation and entrepreneurship to flourish, the costs of failure must be reduced 205
Some rural areas are well-placed to attract entrepreneurs in knowledge-intensive services 206
Box 4.4. Green Valley, Kamiyama 207
Box 4.5. Sunshine Coast KISA firm development 208
The experience and skills of older people are an entrepreneurial resource 208
Box 4.6. Promoting senior entrepreneurship: Pointers for policy development 209
Business successions present a challenge and an opportunity 210
Agricultural policies and rural development 211
Thousands of rural hamlets face the risk of depopulation 211
Figure 4.5. Agricultural hamlets grouped by driving time to a city 212
The rationale for policy towards small hamlets needs to be crystallised 212
Figure 4.6. Hamlets managing rivers and irrigation infrastructure 213
Box 4.7. Rice farming and rural development 214
MAFF has unveiled a basic plan with a multi-faceted approach to rural revitalisation… 214
…but more can be done to address non-agricultural facets of rural development 216
Figure 4.7. Share of agri-environmental payments in total direct payments to agriculture 216
Box 4.8. Rural development policy: The EU model 217
The “sixth industry” initiative is a welcome innovation in rural policy 218
Box 4.9. The Seiwa area, Mie Prefecture 220
Box 4.10. Ama-cho 221
Tourism is complement for many strategies but not a sound basis for most 222
Box 4.11. The struggles of rural mining towns 223
Box 4.12. Japan’s “Tourism Nation” policy 224
Renewable energy can play a role in revitalising rural areas 224
Policies need to be designed well if the link between RE and rural development is to work 225
Box 4.13. Renewable energy and rural development: Lessons from OECD regions 226
Renewable energy can also support resilience 227
Policies for geographically challenged regions 229
Geography and accessibility are major challenges for many areas 229
Box 4.14. Italy’s Inner Areas Strategy 230
Policies to support geographically handicapped regions could be rationalised 231
The keys to revitalisation are local initiative, local assets and a focus on local prosperity 231
Policies for downsizing cities 232
Policy makers in most countries have been slow to focus on how to manage shrinking cities 233
Figure 4.8. The consequences of urban population decline 234
Vacant sites are costly liabilities – but shrinking cities can turn them into assets 235
Service delivery challenges are particularly acute in smaller cities and towns and rural areas 237
Box 4.15. France’s Maisons de santé 239
Japan is in the forefront of efforts to adapt public transport for rural areas 239
Box 4.16. “Big data” and public transport provision 240
Table 4.1. Indicative guidance for vehicle choice related to demand 241
Economic strategies must reflect realistic appraisals of local demographic trends 242
Policies for shrinking cities require intensive vertical and horizontal co-ordination 243
Box 4.17. Shrinking Detroit 244
Notes 245
Bibliography 247