Japanese city's financial collapse offers a number of interesting lessons

Copious column inches have been devoted to Detroit's bankruptcy, with inevitable and irresistible tendencies towards drawing comparisons with our own cash-strapped councils in the UK.

Meanwhile, the scale of Chinese concealed local government debt, potentially £1.1 trillion, is growing and possible defaults are emerging.

As noted on the Local Leaders Network last week, a Detroit scenario would be unlikely here, given the contrasts between US and UK municipal finances and their sources of revenue, not to mention the law. Where we can find a more illustrative case is the Japanese municipality of Yubari, on the northern island of Hokkaido, which is closer in scale and scope to the likes of West Somerset in the UK.

Yubari has become the face of municipal bankruptcy in Japan (whose national public debt ranks highest in the world at an eye-watering 220% of GDP), though it wasn't the first, as the coal-mining town of Akaike in the southern prefecture of Fukuoka went under in 1992.

Yubari saw a substantial drop in population in the 1980s from a peak of almost 120,000 to just 10,000 (in an area almost the size of New York city) following the collapse of its economic base of coal mining in the 1980s.

White elephant amusement parks and ski resorts followed as city leaders sought to save face, with an internationally-renowned film festival in the city, favoured by Quentin Tarantino, faring much better.

But even Tarantino couldn't save Yubari and at the time of its financial collapse the film festival went into a hiatus for a couple of years.

The city went to the wall in 2007, owing more than Y35.3bn (£150m) and having papered over the cracks for a decade to hide its debts following the double-whammy of cuts in central grants and the expiry of a national statute to fund former mining communities.

When the crunch came, Yubari was forced to effectively halve the city's 300-strong payroll (even under Japan's stringent protection for public servants) in a manner familiar from more recent Californian municipal bankruptcies, cutting all but the most vital of services to its ageing population.

School, library and pool closures followed. This is when the Japanese ministry of internal affairs and communications (which supervises Japanese municipalities and champions local autonomy in Tokyo) took charge of the situation and placed the municipality under centrally-directed special measures aimed at consolidating its debts – in exchange for the suspension of its constitutional autonomy it gained some breathing space, at least.

In 2007 a "No More Yubaris" law was passed (the Local Finance Soundness Law) aimed at ensuring early warnings and recovery plans would be set in motion for any municipality where even the mildest signs of financial stress become evident. The law followed an earlier ministry report which identified that more municipalities faced going to the wall amid a perfect storm of excessive dependence on central finances, accumulated debt, declining populations, failure to market the municipalities' unique characteristics, inadequate local civic participation and a lack of local financial transparency.

Like Detroit, around the time of Yubari's financial collapse rumours persisted of this being the tip of the iceberg, but under the new law there is greater transparency of the municipalities' finances, with an array of annual health checks around deficit ratios and future debt servicing.

Earlier checks and enhanced media scrutiny helped the most stricken municipalities pull back from the brink. Yubari aims to be out of financial reconstruction by March 2030, having already repaid Y3.8bn of its Y35.3bn debt as of the end of July .

The Yubari case offers a number of interesting lessons for the UK, not least in the area of turnaround leadership. In 2011, following a stint on loan to the city from the Tokyo metropolitan government, Naomichi Suzuki became Japan's youngest mayor at 30. He was implored by locals to return from Tokyo and finish the job.

Suzuki is credited with reviving the local film festival and personally brokering more favourable terms for debt repayment. Other measures such as eliminating senior management posts and selling off land and buildings will probably be more familiar here in the UK. But as Suzuki himself cautions, if Yubari can't be saved then what hope is there for the rest of Japan?

Andrew Stevens is chief researcher at the Japan Local Government Centre, the London office for Japan's cities and regions.

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