Demolition Bonds Spell End for Japan’s Ghost Buildings

After educating Japanese children since 1956, Kiyokawa Elementary School lies abandoned, its walls and roof crumbling because there are no longer enough pupils to fill it and the town can’t afford to demolish the building.

The school, in Shonai, Yamagata prefecture, 500 kilometers north of Tokyo, is one of thousands of derelict buildings in Japan known as “haikyo,” legacies of the boom years in the 1960s and 70s. As the populations of towns grow older or move to cities, indebted local governments have left the structures to rot, prompting Prime Minister Shinzo Abe’s administration to come up with a novel solution: demolition bonds.

“This symbolizes the end of an era, the turnaround from a rising population to depopulation,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management Co. “The shedding of old structures is necessary for the rebirth of regions and will test their creativity.”

Kiyokawa Elementary is a reminder of the widening divide Abe faces as his efforts to revive Japan’s economy accelerate an exodus to the capital and industrial centers like Osaka. Almost half of the nation’s municipal districts -- 1,513 -- have vanished since March 1999 as towns and villages merged with neighbors amid shrinking populations and declining revenue.

“Municipalities need to cut their losses by removing unused buildings to reduce maintenance costs,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.

A public housing project in central Japan built 45 years ago that consumes 18 million yen in annual maintenance fees for such things as basic repairs, cleaning and security, would cost 91.69 million yen to demolish, according to the Ministry of Internal Affairs and Communications.

New Bill

The government plans to submit a bill in the parliament session starting this month to revise the current law so that regional government bonds can fund the demolition of surplus and unsightly structures. Currently, local governments can only sell debt for reconstruction projects that include new facilities or buildings.

“Our inaction is due to the difficulty in procuring money given our very dire fiscal state,” said Michinori Souma, a general affairs official at Shonai town hall, who said it would cost 20 million yen to remove the school.

Shonai’s annual budget is about 10 billion yen, much of which comes from grants and subsidies from the central government. The town owes about 13.7 billion yen, according to the local government.

Long-Term Vision

“The special bonds would encourage municipalities to manage infrastructure with a long-term vision, including dealing with decaying structures,” said Takashi Murata, deputy director at the local administration bureau in the Internal Affairs Ministry. “Demand for public facilities is changing as the population declines.”

The central government estimates municipalities will need 30 billion yen in the year starting in April to tear down unused buildings. Towns across the nation reported 12,251 facilities in need of demolition as of Sept. 1, according to a ministry survey published last month. Almost one third of those need to be removed within the next two years, the survey showed.

Public housing accounted for the largest number, at 22.9 percent, followed by education facilities with 19.1 percent, according to the ministry. The total cost to clear all the sites would be 404 billion yen.

“The central government, under its severe fiscal conditions, can’t provide subsidies, so these bonds are worth considering,” said Akane Enatsu, senior analyst at Nomura Institute of Capital Markets Research in Tokyo.

Debt Burden

Japan’s total public debt is expected to be 980 trillion yen at the end of March, or 202 percent of gross domestic product. That includes municipal debt, which is expected to reach about 201 trillion yen by then, equivalent to 42 percent of GDP, according to the Finance Ministry.

Municipalities will have a 13.3 trillion yen shortfall in revenue this fiscal year, according to the Internal Affairs Ministry.

“Whether land vacated by demolition will be redeveloped depends on profitability,” said Takashi Ishizawa, chief real estate analyst at Mizuho Securities. “That means it will be limited to the region around Tokyo or densely populated areas.”

The cost of demolishing industrial-waste units would consume 29 percent of the estimated total, while educational structures would use 19 percent, the government survey showed. Scrapping an incineration plant costs about 100 million yen.

Future Cost

While many of the old buildings are dangerous or don’t meet current earthquake standards, some residents are wary of loading debt on future generations without providing any benefit.

In Kiyokawa, 69-year-old Mitsuru Saito, who lives across the road from the school, supports a plan to turn the grounds into an historical park to showcase the region’s history.

The building stands on the banks of the Mogami river, once a strategic trade route where Imperial and Tokugawa shogunate forces fought during the civil war. A nearby museum commemorates the town’s most famous son, Hachiro Kiyokawa, a Samurai warrior who was instrumental in the downfall of the shogunate and restoration of the Meiji Emperor in 1868.

Kiyokawa’s first elementary-school building was erected six years later. The current building is the third on the site. At its peak in 1961, the school had 326 students.

Now the town is in decline. Shonai’s population has fallen to 22,000, from almost 29,000 in 1970. Nationally, the population fell by 244,000 last year, the biggest drop on record, according to Health Ministry estimates.

“Kiyokawa has become desolate but it is rich in history,” said Saito, who led preparations for the school’s closing ceremony in 2009. “I had to switch off emotion, take it as the flow of time, even if I think a school disappearing from a region only accelerates depopulation.”

Empty Streets

On a snowy December weekday, the two-lane main road leading to the abandoned school is deserted, with a scattering of two-story homes and a few shops. Saito’s wife Yaeko remembers it being crowded with shops, construction firms and stone works when she got married and moved to Kiyokawa in 1969. Her three grandchildren travel 5 kilometers by bus to neighboring Karikawa each morning.

Naofumi Masaki, a Shinto priest at Kiyokawa’s 12th-century Goshonoji shrine on the forested hill above the town, is pessimistic about the future of the school grounds where he was a pupil from 1943-1949.

“The idea of a historical park probably won’t work,” Masaki said. “You can’t stop the exodus of people.”

Before it's here, it's on the Bloomberg Terminal.