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This is likely to be a watershed year in the government’s drive toward decentralization. The challenges are many, including “second-phase” reform of central and local government finances, debate on streamlining the prefectural system (designed to create larger administrative zones), and development of “new towns” following a recent wave of municipal mergers. Prompt action is needed to address more specific problems, such as budget deficits, bloated payrolls and wasteful spending.

Also needed is an overhaul of public services provided exclusively by the central government, prefectural governments and other local administrations (city, town and village halls). This monopoly system should be changed to a community-wide system of public and private collaboration that involves the participation of nonprofit organizations (NPO) and business corporations as well.

These challenges are intertwined, making it essential that the central and local governments take an integrated approach. That may be easier said than done, but without a coordinated strategy, the goal of decentralization — creating a more efficient system of government — will likely remain as distant as ever.

Under the government’s current plans for local fiscal and tax reform, subsidies to local governments will be cut by 4 trillion yen by the beginning of fiscal 2006. In order to cover the subsidy cut, the central government will transfer 3 trillion yen in tax revenues by giving up part of its tax-collecting authority.

One remaining question for this year is how to revamp the system of central government grants to local governments. Another is how to carry out second-phase reforms — particularly, additional subsidy cuts and revenue-source transfers being sought by six local administrative groups, including the national association of prefectural governors.

Notable in this connection is the plan of Mr. Heizo Takenaka, the minister of internal affairs and communications, to create a private forum that would discuss “21st-century visions for decentralization.” In particular, the panel is expected to conduct a wholesale review of the local fiscal system, including role-sharing arrangements between central and local governments, and the provision of grants.

The government, meanwhile, is expected to announce a set of reform guidelines in June. Mr. Takenaka reportedly wants to reflect the results of the review in the new guidelines, which will affect the economic policies of post-Koizumi Cabinets. With the prime minister expected to step aside this autumn, the question for now is what the government will do, or will not do, in the area of local fiscal reform in the first six months of this year.

Debate in the Takenaka forum will be closely watched by local administrations, in part because the panel will include private members of the Council on Economic and Fiscal Policy who have argued for subsidy cuts. The six local administrative groups, now stepping up their efforts toward second-stage reform, are set to launch their own forum to discuss “new initiatives for decentralization.”

As of Jan. 4, 2006, the total number of cities, towns and villages stood at 2,047, a sharp decline from approximately 3,200 in 1999. That number is expected to drop by about 40 percent to 1,821 by March 31, 2006.

The merger wave has provided a “carrot” for the cities, towns and villages involved — a privilege to issue “merger bonds.” Many of them plan to build new facilities using these borrowed funds. Given their tight fiscal conditions, however, they should reconsider whether the planned facilities are really needed. In addition, town-building projects need to be carried out in cooperation with private partners, such as NPOs and community residents.

As for the proposal for a consolidation of the prefectural system, the Local Government System Research Council, an advisory panel to the prime minister, is expected to compile a report in February. Already the council has published seven different rezoning plans to reorganize the existing 47 prefectures into about 10 larger “provinces.” The report will certainly give an impetus to the decentralization debate, although the public does not appear to be much interested in the proposal.

Japan’s population is aging so fast that it will start shrinking earlier than expected, according to statistics released in December. Programs to reverse the falling birthrate are under way in parts of the country but more drastic measures seem in order.

Akita Prefecture, which is seeking legislation to support children as well as child-rearing, has established a study committee that includes high-school students. The idea is to create a system that provides society-wide support for child-rearing. The message is that community-level ingenuity and resourcefulness are essential in the era of decentralization.

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