Service Efficiency and Productivity with Digital Transformation in Japanese Local Governments

As the population becomes increasingly concentrated in Tokyo, local regions are experiencing a decline in birth rates, an aging population, and an accelerating labor shortage. These demographic shifts are placing significant financial pressure on these regions. In response, recent technological innovations are transforming the way public services are produced, with the aim of enhancing operational efficiency and collaboration with prefectures. The research question is to ascertain how these transformations in local governments affect the production and efficiency of public services. This chapter examined the production activities of local government in Japanese municipalities regarding service efficiency and productivity. The findings show that most municipalities improved efficiency but slightly decreased productivity across the country. The factor analysis verifies the effects of population agglomeration, the introduction of municipal cloud computing, and vertical cooperation. The results present following three key findings. First, population agglomeration has an inverse U-shaped relationship with municipal efficiency. Second, we could not confirm the effect of introducing the government cloud on improving efficiency, indicating that the productivity of municipalities that introduced the cloud early was relatively low. Finally, enhanced vertical cooperation accompanied by municipalities’ efforts to improve their finances could help increase productivity and improve the efficiency of local government services.