KEY POINTS:
Yubari, a former coal-mining town in northern Japan, once attracted movie director Quentin Tarantino to its annual film festival. Now it's more famous for going bust.
The community of 13,000 people accumulated debts of 63 billion yen, partly to build hotels, a ski slope and a coal-mining theme
park after the last pit closed in 1990.
In March, the Government rescheduled Yubari's debts after the city agreed to cut spending and sell assets.
Yubari's plight offers a test case for overhauling the finances of municipalities that are being forced to balance their budgets after the Government cut subsidies to rein in its own debt. Across Japan, cities have about Y200 trillion ($2.1 trillion) of debt, out of a total Y775 trillion owed by public bodies.
"It's considered an embarrassment and lots of local governments will try to avoid it but there may be more cases" like Yubari, says Akane Enatsu, a credit analyst at Nikko Citigroup in Tokyo.
The coal mines around Yubari on Hokkaido island were opened more than 100 years ago to fuel Japan's industrialisation. After peaking at 117,000 in 1960, the city's population started to fall as power companies switched to burning oil.
As the mines closed, Yubari followed other municipalities struggling to deal with economic decline by expanding public works projects: it spent US$74 million to build museums and parks and launch the film festival.
Tarantino attended the event in 1993, winning an award for his film Reservoir Dogs. He returned the compliment a decade later, giving the name Yubari to the sword-wielding character in his movie Kill Bill. Since last year, local residents have banded together to keep the festival going.
City buildings are adorned with almost 100 movie billboards.
Audrey Hepburn pouts from a giant Roman Holiday poster splayed across a hotel and Die Hard hangs above the florist.
"The town concentrated on tourism after the mines closed but it wasn't enough," says Toshi Koami, head of Yubari's Chamber of Commerce. "The population could go down to 7000."
As young people desert Yubari for big cities, elderly farmers are left to grow the town's eponymous melons that thrive in the steep-sided valley, served by a single-carriage train.
"Everyday citizens can quickly leave the city but farmers have land and can't move as easily," says Seiichi Naganuma, 57, chairman of Yubari City Agricultural Co-operative.
Yubari masked the size of its debt by borrowing at the start of each fiscal year to pay previous obligations, Enatsu said.
The city was forced to negotiate its debt work-out programme after the Government slashed direct subsidies to Y4.6 billion last year from Y8.1 billion in 1991. The city agreed to increase taxes, halve the number of civil servants and cut their salaries by as much as 40 per cent.
Yubari has faced up to its problems. "We are taking a strict path under the supervision of the Government," Mayor Hajime Fujikura said. "This allows us to sweep away past ills."
While no Yubari officials have been prosecuted, revelations about its finances spurred investigations of other municipalities. Last year, eight authorities were found to have falsified accounts to hide their indebtedness.
Yubari's failure has spurred legislation that will require cities to adopt corporate-style accounting by 2009 and subject them to outside auditing.
Not everyone in Yubari is ready to desert the city. Atsuko Muraoka, 84, runs the florist opposite city hall and is determined to find an apprentice to whom she can pass on her flower-arranging skills.
"We have such a rich diversity of culture here," Muraoka says. "We can't just let it disappear."
And Naganuma says Yubari's melon farmers are also here to stay.
The industry employs 350 people and accounts for more than a tenth of the city's economy. Melons sell for as much as Y10,000 each in Tokyo department stores and local farmers remain proud that the fruit became the first to be awarded a patent from the Japanese Government.
"All that's left is for us to work hard and keep growing melons," he says.
- BLOOMBERG
