The ancient capital of Kyoto has long been a tourist mecca, attracting domestic and international travelers to its World Heritage-designated temples, shrines and rock gardens. From the city’s traditional geiko (geisha) quarter of Gion to Kinkakuji, the Golden Pavilion, Kyoto’s has few rival few cities anywhere in the world when it comes to cultural treasures.

For centuries, Kyoto, home of the emperor, was a forbidden city, inaccessible to the outside world. Foreign travelers passing through Japan in the 17th through the 19th centuries were not allowed to step foot in it. As late as the early 1870s, Westerners in Japan’s treaty ports such as Yokohama and Kobe were prohibited from visiting the city unless they had special permission — which was rarely granted. One report, published in a 1918 history of the opening of Kobe Port, suggested that, until an 1872 international exhibition in Kyoto, no more than a dozen Westerners had ever seen it.

In the 19th century, the idea that Kyoto would someday become one of the world’s most popular tourist destinations with a highly developed infrastructure catering to international visitors would most likely have been dismissed as a fantasy. But by 2014, international media such as Travel +Leisure magazine were calling Kyoto the world’s best city to visit (an honor the city won again a year later).

The accolades led to tourists from around the world pouring into Kyoto, putting a strain on the city’s infrastructure. New hotel chains sprang up like mushrooms, and new businesses catering to the suddenly booming tourist trade appeared almost overnight. Kimono-clad Mayor Daisaku Kadokawa played the role of cultural ambassador, popping up at international conferences to extoll Kyoto’s heritage and traditions and encouraging people to visit.

However, the good times hid a dark secret. Despite the fact Kyoto’s tourism industry was recording record profits, the city itself was going bankrupt.

An estimated 3.8 million tourists visited Kyoto in 2019, according to the city's municipal tourism office. | GETTY IMAGES
An estimated 3.8 million tourists visited Kyoto in 2019, according to the city’s municipal tourism office. | GETTY IMAGES

In June, the municipal tourism office announced only about 450,000 foreign tourists visited in 2020 — an 88% drop compared to the 3.8 million who came in 2019. Hotel reservations for 2020 were down nearly 60% in 2020 compared to the previous year.

Then, in August, a grim-faced Kadokawa warned that Kyoto faced possible bankruptcy and drastic cuts in the city budget were needed over the next four years in order to prevent that. The restructuring plan for 2021-25 calls for trimming the bureaucracy by at least 550 people, raising the minimum age of those eligible for discount transportation services from 70 to 75, and cutting subsidies to day care workers. Kyoto has total debts of ¥860 billion and faces a ¥280 billion deficit by 2025.

“We’re facing a crisis situation and face the prospect of bankruptcy within a decade,” Kadokawa said in mid-August, when he rolled out the proposal.

The city explained its reasons for focusing on these areas in particular. First, underperforming municipal subway lines that are ¥5.4 billion in debt. Second, the free or heavily discounted bus and rail passes granted to those over 70 could easily be covered years ago. But as the number of eligible older residents continues to rise, the financial burden has become too great.

Finally, the effort to turn Kyoto into Japan’s top choice for parents seeking good childhood services by subsidizing day care centers well beyond the national standard has left it short of funds, the city says. But even these explanations avoid the reality the city faces when trying to levy municipal taxes on its residents.

The suggested cuts under the four year plan are expected to save ¥160 billion — enough to prevent the central government from taking over Kyoto’s finances. But Kadokawa did not address questions of whether more cuts would eventually be required.

It would be easy to blame the coronavirus pandemic and collapse in tourism last year on Kyoto’s current financial woes and sudden need to cut costs. However, the crisis goes much deeper.

Hotel reservations in Kyoto for 2020 were down nearly 60% in the first six months compared to the previous year, according to the city's municipal tourism office. | KYODO
Hotel reservations in Kyoto for 2020 were down nearly 60% in the first six months compared to the previous year, according to the city’s municipal tourism office. | KYODO

‘The white socks brigade’

Despite being a modern city with a population of around 1.5 million, Kyoto faces some unique challenges that greatly limit its ability to make up for financial losses by simply raising local taxes.

Some of these hurdles are due to legal reasons. In order to preserve the city’s traditional atmosphere, local ordinances limit the height of buildings. Compared to other major Japanese cities, Kyoto has few modern highrise apartment or office buildings that would be subject to higher property taxes than traditional wooden buildings and machiya or newer, smaller structures that have to be constructed under the ordinances.

A second reason is demographics. About 10% of Kyoto’s residents are college students and about 28% are over 65. They usually pay no tax, or less tax, than working residents in their 20s through 50s.

But one of the biggest reasons is because none of Kyoto city’s temples and shrines, which are legally registered religious corporations, are subject to property taxes. As Shoei Murayama, a visiting professor at Taisho University and former Kyoto city councilman, says, any attempt now by the mayor or city council to get around the property tax exemption with other forms of levies on temples and shrines to help raise revenue opens a can of historical worms.

Shoei Murayama, a visiting professor at Taisho University and former councilman, says Kyoto's leaders need to face fiscal reality and accept new ways of generating revenue for the city to recover. | KYODO
Shoei Murayama, a visiting professor at Taisho University and former councilman, says Kyoto’s leaders need to face fiscal reality and accept new ways of generating revenue for the city to recover. | KYODO

“In 1983, with no prior discussion by any committee, the city council approved an ordinance establishing the Kyoto Old Capital Tax. The 71 temples belonging to the Kyoto Buddhist Association, claiming that the tax was a violation of religious freedom, sued the city in Kyoto District Court, which ruled in favor of the city,” Murayama says.

The tourist tax of ¥50 for adults and ¥30 for children targeted 37 temples and shrines.

What followed was two years of anger, standoffs and protests by the members of the association, which refused to pay. Some 24 major temples, including Kinkakuji and Kiyomizu, announced they were closing their doors to tourists.

Attempts by outsiders, including local business leaders, lawmakers and even reputed members of the yakuza to mediate between the mayor, who was determined to keep the tax, and the temples, who remained strongly opposed to it, failed.

The result was a two-year war of attrition between the city, which couldn’t collect the taxes, and the temples, which, by closing, forfeited revenue. As the conflict wore on, however, a few temples, tired of the confrontation and in need of revenue, left the association and reopened, agreeing to pay the city. But the standoff finally ended when, in a deal that involved the mediation efforts of Kyocera founder Kazuo Inamori, the city agreed to abolish the tax in 1987.

“In the end, the tax brought in a total of ¥35 billion, only a quarter of what the city originally predicted,” Murayama says.

The result, however, was at least two decades of further distrust and bad blood between the temples and the city. It’s a period nobody in Kyoto wants to remember, Murayama added. In a 2019 book on Kyoto tourism, he wrote that the battle created an image among Kyotoites of “Don’t mess with the white socks brigade” — referring to the socks worn by Buddhist monks and their allies who wield political influence behind the scenes.

Few tourists have visited iconic World Heritage sites such as the Kiyomizu temple in Kyoto over the past 18 months due to the ongoing global pandemic. | KYODO
Few tourists have visited iconic World Heritage sites such as the Kiyomizu temple in Kyoto over the past 18 months due to the ongoing global pandemic. | KYODO

Avoiding bankruptcy

Now, as Kyoto looks in the financial abyss, an idea proposed by Murayama, one he believes some temple priests would not oppose, is being discussed by members in the small, Kyoto-based political party Kyoto-to, Murayama’s party when he served in the assembly.

“Because of what happened with the Kyoto Old Capital Tax back in the 1980s, there would be great resistance to placing a similar obligatory tax today on temples today,” says Risa Emura, a Kyoto city council member who leads the party. “Rather than a legalized tax, a voluntary donation system could be introduced in the temples to help raise money.”

Additional cuts and a political gesture from the top are also necessary, says former Osaka Gov., Mayor, and Nippon Ishin co-founder Toru Hashimoto. When he took over as Osaka governor in 2008, the prefecture had many of the same financial problems Kyoto has, spending money it didn’t have on large salaries for civil servants and investing in projects that bled red ink.

Hashimoto’s solution was a combination of widespread cuts to the bureaucracy, the privatization of some municipal services and revoking the tax-exempt status of some prefectural-funded buildings, such as the Osaka Lawyers’ Association building. But Hashimoto also took drastic cuts in his own pay and bonuses. The prefectural budget cuts were hard and caused great anger and strong opposition within the prefectural bureaucracy, but he said they had to be done.

“Kyoto should look at Osaka’s example of how the prefecture cut costs. Kadokawa can help rally public support for any cuts to Kyoto municipal services by first announcing he will make drastic cuts to his own salary and benefits package, followed by severe cuts to the bureaucracy, including salary cuts. Then he can say to the people, ‘I’m sacrificing and we’re cutting bureaucratic salaries across the board. But, very sorry, we may have to cut city services,’” Hashimoto said during a late August discussion about Kyoto’s problems on Yomiuri TV, a local Osaka television station.

Another time-tested way of generating municipal revenue — raising local corporate taxes — is not, Emura says, currently under discussion by city council members either.

But while Kyoto has a few world-renowned corporations such as Kyocera, Omron and, of course, Nintendo, it’s not a center of large tax-paying corporations such as Tokyo, Nagoya and Osaka.

Much of the current discussion in Kyoto and Kansai is how to revive Kyoto’s economy after the coronavirus pandemic subsides is on the promotion of sustainable tourism, rather than the mass, industrialized tourism that characterized the period from about 2013 to 2020. But given Kyoto’s need for massive amounts of new revenue in order to prevent financial collapse, that, too, has its risks.

A sudden return of the virus could once again keep tourists, especially abroad, from returning, while geopolitical tensions in East Asia could mean sudden drops in tourists from this region, who provided much tourism income to Kyoto a few years ago.

Prior to the pandemic, Kyoto Mayor Daisaku Kadokawa had been actively involved in extolling the city's heritage and encouraging people to visit. | KYODO
Prior to the pandemic, Kyoto Mayor Daisaku Kadokawa had been actively involved in extolling the city’s heritage and encouraging people to visit. | KYODO

Sustainable tourism is fine, Emura and Murayama say. But it’s not enough and Kyoto, and the Kyoto mayor, need to consider how to attract other new businesses and create jobs.

“A big problem is that many young people want to work in Kyoto, but they can’t find a good job or career here. So they’re forced to move somewhere else to look for work,” Emura says. “There are a lot of restrictions on constructing high office buildings in many parts of Kyoto. But the area around Kyoto Station might be one place to be developed and attract new commercial investment.”

But which businesses should the city spend its ever-declining resources on pursuing? Murayama says that, given the large number of universities in Kyoto, especially Kyoto University, businesses in IT, biotech research and other fields are the areas where the city should be focusing its efforts.

“Kyoto is well known and has a good reputation abroad,” Murayama says. “If the mayor were to reach out to IT companies in places such as Boston, Seattle or northern California, there might be interest at companies such as Google in establishing a presence in Kyoto.”

When asked in 2019 about the negative effects of overtourism, Kadokawa replied, somewhat testily, that Kyoto wasn’t a tourist town, meaning that it was much more, a historical cultural center but also a modern city.

Now, facing financial ruin unless drastic and likely politically controversial cuts are made, the mayor and the city’s residents must come to grips with financial problems and questions about Kyoto’s future that they avoided for many years.

Yet nobody expects Kyoto to actually end up bankrupt, forced to seek central government permission for everything it does and follow its financial restructuring orders.

Emura and Murayama are optimistic the needed cuts can be made, and the needed revenue can be found. However, it will require a city leadership willing to face fiscal reality and willing to accept new ways of thinking about and generating revenue to recover.

Thus Kyoto, the 1,200-year-old capital where old traditions and precedent are venerated and polite but seemingly indirect speech is considered a virtue, now faces the need for an urgent, frank exchange and rapid agreement on how to return to financial health.

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