Has the Issuance of Public Bonds Induced Market Discipline in Local Government Finance in Japan?

Abstract

Through the use of the panel data method, this paper seeks to verify whether the issuance of public bonds has induced market discipline in local government finance. The result of the analysis indicates that increases in the share of public bonds among the total amount of outstanding local government bonds have caused improvements in the future fiscal situation of local governments as the fiscal situation has been exposed to market discipline. Market discipline was effective even during 1990's when the issuance of local bonds increased rapidly. This suggests that issue of more public bonds would contribute to the reduction in and streamlining of unnecessary expenditures and increase in their revenues, which is desirable for the fiscal discipline of local governments in Japan.