Japan’s Furusato Nozei System Creates ¥863B Deficit for Municipalities, June 13

Japan’s Board of Audit found that the furusato nozei (hometown tax donation) system created a ¥863 billion deficit for municipalities in fiscal 2024. Donations totaled ¥1.27 trillion, but tax deductions and intermediary fees cost ¥1.13 trillion. The deficit has grown from ¥157 billion in 2017, and the Board of Audit is urging the Ministry of Internal Affairs to review the system’s impact on local government finances.

How the Deficit Grew

The furusato nozei system received ¥1.27 trillion in donations during fiscal 2024, the highest amount ever. However, municipalities paid ¥7.69 trillion in residential tax deductions and ¥5.90 trillion in operating costs. Operating costs include ¥3.21 trillion for return gifts, ¥733 billion for shipping, and ¥1.38 billion in intermediary fees to donation portal operators. After subtracting these amounts, municipalities faced a net loss of ¥863 billion.

Rising Costs Drive Worsening Losses

The deficit has expanded significantly since 2017, when it was only ¥157 billion. Operating costs have grown 2.5 times over the past five years. Between 2017 and 2024, municipalities accumulated ¥3.2 trillion in total losses. The Board of Audit found that only fiscal years 2020 and 2021 showed surpluses during this period.

Impact on National Budget Planning

The Board of Audit warned that furusato nozei losses reduce the total revenue available to local governments, affecting national budget planning. The Ministry of Internal Affairs receives 75% of lost residential tax revenue through local allocation tax transfers, but the full deficit still impacts overall government finances. The Board requested that the ministry verify how the system affects local financial planning and national budget forecasts.

Government Response and Fee Reduction Efforts

The Ministry of Internal Affairs acknowledged the findings and stated it would “continue to respond appropriately.” In May 2026, the ministry requested that intermediary operators reduce fees. The ministry set a target to increase the percentage of donations reaching municipalities from the current level to 60% by fiscal 2029.

Final Thoughts

Japan’s furusato nozei system cost municipalities ¥863 billion in fiscal 2024 as intermediary fees and tax deductions exceeded donations. The Board of Audit is pushing the Ministry of Internal Affairs to review the system’s impact on local government finances and national budget planning.

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