The Law Relating to the Financial Soundness of Local Governments

• The Law Relating to the Financial Soundness of LGs became effective from this fiscal year.

Purpose

1. Full disclosure of comprehensive fiscal condition including contingent liabilities
   ・Five fiscal indicators (see below) disclose LGs fiscal condition thoroughly and strengthen public check on fiscal condition. This makes LGs much more accountable to the public and investors.
2. Early Warning System
   ・Each fiscal indicator must meet set limit and if one of them fails, the LG needs to make a fiscal restoration plan to meet the limit in years. This plan must be checked by outside auditors, authorized by the local assembly and reported to the NG. Also, the LG needs to make a progress report annually to the assembly, the public and NG and if there is problem, NG is supported to make a recommendation to change the fiscal policy to the LG.
3. Reconstruction System
   If fiscal indicators fail to meet highest set limit, it needs to make a fiscal reconstruction plan with heavy oversight by NG. In this state, the LG needs to take severe measures to cut expenditure and increase tax and other revenue. Importantly, even in this state,both bankruptcy and discharge of debt is not allowed under legal scheme and LG needs to repay full amount of debt.

• LGs must report the following ratios every year after receiving assessment by outside auditor, to the assembly, and disclose those to the public.

Note: Three-year transitional limit(40%、40%、35% for cities, towns and villages) will be set up for reconstruction limit for the consolidated effective fiscal deficit ratio.