A government panel released an interim report Monday recommending steps to improve monitoring of local government finances to keep them solvent.
The panel set up by the Internal Affairs and Communications Ministry said local authorities should draw up balance sheets like private companies and open their books to public scrutiny.
Under legislation enacted in 1955, prefectures with debts equivalent to at least 5 percent of revenue and municipalities with debts equal to at least 20 percent are subject to financial oversight by the central government.
The panel made the recommendations in response to criticism the current criteria are insufficient to determine the financial soundness of local governments.
The balance sheets recommended by the panel would detail the debts owed by local authorities, public corporations and so-called third-sector concerns run jointly with private companies.
Depending on the seriousness of its financial plight, a local government could be instructed by the ministry to take steps to turn its finances around under the supervision of the central government, the panel's report says.
Local governments deemed in need of assistance by the central government would be required to determine the cause of the financial difficulties and to present specific spending cuts and revenue-enhancements to local residents.
The report does not go into detail on defaults by local governments, or what role the courts might play in rehabilitating those that are heavily indebted. The report merely says these issues should be studied.
The ministry aims to propose amendments based on the panel recommendations during the regular Diet session starting in January.
The panel's recommendations come amid growing public concern about red ink at many local governments.
Yubari, Hokkaido, for example, is expected next year to be the first municipality in 15 years to be fingered as requiring central government assistance.