Written by Miseon Lee, Dongin Kim, Minsun Cho

Executive Summary

Japanese local governments revitalizing local economies with Web3 technology

NFT and DAO initiatives are being progressively implemented to revitalize Japan's provincial cities and rural areas. Reports from local media indicate that over 160 varied projects leveraging Web3 technologies are underway in 46 prefectures of Japan. Web3 adoption by local governments coincides with a strategic shift by the Japanese government, moving from a focus on boosting resident populations to enlarging relational populations. This shift has catalyzed the integration of NFTs and DAOs in regional development plans.

Efforts to enhance practicality and utility such as digital resident ID NFTs

Japanese local governments are steadfastly working to promote tourism and reinforce community bonds. They are achieving this by offering incentives such as complimentary admission tickets to visitors who hold specific NFTs, upgrading the NFTs when the holders visit the district, or granting digital residency. Through the efforts of local governments to provide more practical and useful benefits, NFTs are evolving to meet the demands of a broader audience.

Approach to grow the pie with blockchain technology

As the digital economy grows, the operational scope for individuals and companies is increasingly transcending physical boundaries, extending to all corners of the internet. This expansion presents an opportunity for local governments and even the nation to broaden their influence beyond traditional geographical limits. Utilizing the scalability of NFTs to expand relational populations internationally, local governments can significantly enhance their economic footprint, thereby 'increasing the size of the pie' for everyone involved.

Japan Revitalizes Local Economies with Spread of Web3 Web3 Technology

The adoption of Web3 by local governments is spreading throughout Japan

Efforts to rejuvenate Japan's local cities and rural areas through NFT and DAO projects are gaining momentum nationwide. As of last October, more than 160 diverse Web3 and NFT initiatives were reported to be in operation across 46 regions of Japan. Japan is grappling with a demographic challenge, marked by 12 consecutive years of population decline and an aging population, where 29% are over 65 years old. In response, the Japanese government initiated the Regional Revitalization Act in 2014, aimed at stimulating local economies and addressing the population concentration in metropolitan areas like Tokyo. Significantly, the Japanese government has recently pivoted from focusing solely on increasing the physical 'resident population' to boosting the 'relational population.' This shift, occurring in 2018, emphasizes cultivating diverse interactions with local areas and residents, rather than just augmenting the settled population. This strategic redirection has resonated with local governments, which had hitherto only focused on the expansion of the settled population at that time.

Figure 1. Policies Applying Web3, NFT in 46 Regions of Japan in Progress

Source : web3-chihou-sousei.net

Japan targets increase in ‘relational population' with the application of Web3 technology

In pursuit of expanding the 'relational population,' there has been a strategic evolution in Japan's approach. This involves the digital encapsulation of each region's unique intangible assets and their nationwide dissemination. Such a strategy underscores the significance of community-driven platforms, enabling individuals with varied interests in these regions to engage and foster a sense of shared mental connection. South Korea is also following Japan’s again phase with a gap of approximately 20 years, hence this shift in policy direction in Japan has significant implications domestically. As of 2022, South Korea's elderly population (aged 65 and over) constitutes 17.5%, paralleling Japan's demographics in 2000 (17.4%). Forecasts from the Korean Statistical Office suggest that South Korea's aging trajectory might be steeper than Japan's. It is projected to become a super-aged society by 2025, with 20.6%ofits population over 65, and is expected to reach 26%by 2030. Japan targets increase in ‘relational population' with the application of Web3 technology

Relational Population (関係人口): Encompasses individuals who engage with a region through various means, forming connections without being tied to permanent residence, consumption, or taxation. This concept offers a novel approach in addressing population decline, bridging the gap between permanent residents and transient visitors.

Resident Population (定住人口):Population surveyed based on the place of permanent residence. Defined as individuals who reside in a particular area for a significant duration (more than six months per year according to the UN standard, and more than three months as per Korean standards).

Figure 2. Japan Shifts Focus to Relational Population for Regional Revitalization Since 2018

Source : Ministry of Internal Affairs and Communications, Relational Population
(https://www.soumu.go.jp/kankeijinkou/about/index.html) 

South Korea’s rapid aging and population outflow threaten the existence of small provincial cities

In 2021, the Ministry of Public Administration and Security in South Korea identified 89 'population-decreasing regions' at risk of disappearing due to declining populations. To counter this, the government has earmarked a Local Extinction Response Fund, allocating 1 trillion won annually over the next decade. This fund is dedicated to providing administrative and financial support to these vulnerable areas. Local governments are employing various strategies to attract migrants and tourists, including financial incentives for childbirth, living subsidies, and the organization of local festivals. Despite these efforts, the reality often poses challenges to physical relocation. Moreover, the proliferation of over 15,000 annual festivals has led to a decrease in their distinctiveness and competitiveness. The economic impact of these events is generally limited to short-term consumption spikes, rarely translating into regular visits. Furthermore, the influx of tourists or migrants in one area frequently results in a corresponding decline in another, creating a zero-sum situation that is challenging to surmount.

Figure 3. Comparison of the Population Percentage aged 65 and above between Japan (1960-2020) and Korea (1985-2025)

1. Leveraging NFTs and DAOs to expand the relational population

South Korea could benefit from adopting a strategy that engages individuals as part of the 'relational population' through mental connections or a sense of belonging, regardless of their physical residence. This approach targets both national and global populations and leverages the digital world's capacity for multiple affiliations, effectively increasing the size of the pie itself. Since 2018, Japan has increasingly emphasized a policy centered on the 'relational population.' The key themes in its regional revitalization policy since 2020 include embracing future technologies, enlarging the relational population, and establishing robust regional economic and social systems. Efforts to realize this vision involve promoting remote work, engaging diverse relational populations via online platforms, and encouraging hometown tax donations. NFTs and DAOs play a pivotal role in these initiatives, serving as essential tools for digital transformation and relational population expansion. A notable example of blockchain technology's application in expanding the relational population includes the Hometown Tax (Furusato Nouzei) NFT and various local government NFT issuances, such as digital resident IDs. The Hometown Tax NFT service, operational since 2008, offers NFTs as additional incentives or alongside return gifts for the Japanese Hometown Tax program contributions. The Yamakoshi NFT/DAO project stands out as an exemplary model that has increased digital residents and revitalized the community. This article explores how Japan’s Hometown Tax program has effectively contributed to balanced regional development and how integrating NFTs has globally popularized the region’s unique cultural heritage, attracting worldwide support.

Hometown Tax System in Japan

The Hometown Tax System in Japan is a mechanism designed to bolster regional revitalization through tax contributions. Taxpayers can donate to regions of their choice, not limited to their hometowns. In appreciation, they receive local specialty products and, more recently, NFTs.

The average annual contribution per person to the Japanese Hometown Tax system exceeds 100,000 yen

In Japan, donations exceeding 2,000 yen (approximately 18,000 KRW) qualify for deductions from income tax for the same year and resident tax for the subsequent year, within specified limits. In return, donors receive local specialty or tourism products. The Hometown Tax system in Japan is renowned for its high-quality, unique offerings. Participation is widespread, with over 8.9 million people engaged and more than 50 million instances of contributions annually. From an initial amount of 8.14 billion yen (73.3 billion KRW) in 2008, the total donations had surged by 2022 to more than 100-fold, reaching 965.4 billion yen (approximately 9 trillion KRW). The average annual donation per person is 102,666 yen.

Japan's Hometown Tax generates economic impact of 37trillion Korean won annually

The Furusato Tax Research Institute reported that in 2022, Japan's Hometown Tax program had an economic impact of 4.1259 trillion yen (approximately $27.6 billion), which constitutes 0.65% of the nation's total GDP. Considering Japan's projected GDP growth rate of a low to mid-1%for this year,this impactis notably significant. The magnitude of this impact is evaluated as being more than quadruple the total donations of 965.4 billion yen collected through the program. This amplification is attributed to the involvement of diverse economic actors who benefit from the system. These stakeholders encompass donors, local governments, businesses providing reciprocal gifts, web portal operators processing donations, intermediaries managing tasks for local governments, delivery services for the gifts, and advertisers. Even in cases where donations are motivated primarily by the desire for return gift, the funds flow through various business sectors. This circulation creates a virtuous economic cycle, generating both primary and secondary economic benefits for the Japanese economy.

2. Integrating NFTs into the 9 trillion won Hometown Tax market

In 2022, Japan began to integrate NFTs into its Hometown Tax system in earnest. As of October 2023, local media reports indicate at least 42 instances across Japan where NFTs offering tourism benefits and digital resident IDs have been included as gifts from municipalities. Despite this, NFTs still represent a relatively small proportion of all Hometown Tax return gifts. In 2021, among over 150,000 gifts, the most popular categories were meat (21.2%) and seafood (13.6%). Travel vouchers/gift certificates, which likely include NFTs, accounted for less than 4%. Prior to the COVID-19 pandemic in 2019, travel vouchers/gift certificates held a higher share at 7.4%. This figure, however, dipped to 2-3% during 2020-2021. With the easing travel restrictions from 2023, there is an anticipation that utility NFTs, which encourage regional visits, will see increased integration with local products as gifts. Furthermore, as local governments align their NFT issuances with the Japanese government's digital transformation and relational population expansion objectives, more regions are likely to adopt NFTs within theHometown Tax program

Moreover, the traditional Hometown Tax system often results in tax revenue disparities based on the availability of their local specialty resources. NFTs, on the other hand, offer the advantage of commodifying intangible regional assets such as landmarks or narratives, regardless of whether the area has natural resources, at minimal costs. The potential for local governments to employ innovative approaches like issuing Soulbound Tokens (SBTs) as proof of one's hometown, or dynamic NFTs that evolve over time in relation to hometown Tax contributions, is substantial.

Case Analysis of Japanese Local Authorities Adopting Web3

1. More than 160 cases utilizing Web3 into local governments

As of October 2023, Japan has witnessed the implementation of Web3 technologies in 163 distinct cases across all 46 prefectures for the purpose of regional economic revitalization. Leading the way is Hokkaido, which boasts the highest number of initiatives, totaling 10. These include Hometown Tax NFTs, digital ambassador programs, digital residency grants, DAOs, and utility NFTs. Notably, over 40% of all prefectures have employed Web3 technology in more than four different formats to support their economic recovery. When categorizing these 163 Web3 applications into various types — NFTs, Metaverse, DAOs, Local Tokens, and Others — and accounting for overlaps, there are a total of 181 instances. NFTs represent the majority with 131 cases, or 72.4%. Among these, 42 cases specifically involve the integration of NFTs with Hometown Tax gifts. The remaining categories, including the Metaverse, DAOs, and local tokens, account for 17.7%, 4.4%, and 1.7% of the instances, respectively.

Local specialties and utility NFTs together as the gifts for Hometown Tax program

Japanese local governments predominantly exploit utility-focused NFTs. Common applications include offering privileges like priority purchase of local specialties such as wine, beer, and agricultural products. Services to provide or enhance NFTs upon visiting the region are also prevalent, alongside using NFTs as admission tickets for local events or attractions. Notably, there have been nine instances where digital resident status has been granted, such as in Yubari City in Hokkaido, Shiwa Town in Iwate Prefecture, and Nishikawa Town in Yamagata Prefecture. Localities offering NFTs as digital residentID were more likely to operate DAOs together. The recent trend includes initiatives aimed at encouraging visits through incentives like free access to local tourist attractions for holders of Hometown Tax NFTs or by upgrading the status of these NFTs. Additionally, there is a growing effort to establish connections by offering digital residency. As these endeavors to enhance practicality and utility through NFTs intensify, the scope and application of NFTs continue to evolve, catering to a broader audience and more diverse needs.

A detailed analysis of the 131 NFTs offered by Japanese local governments reveals a diverse range of applications. Utility-focused NFTs, which offer benefits like free transportation and admission to regional attractions, constitute the largest category at 27.7%. This is followed by Art/PFP (Profile Picture) NFTs at 25.2%, and NFTs providing priority purchase rights for local specialties or game items at 20.2%. NFTs used as digital resident IDs represent 7.6% of the total. Other notable categories include animation-themed NFTs at 5.9%, NFTs focused on environmental and climate issues also at 5.9%, sports-related NFTs at 5%, and NFTs dedicated to funding disaster recovery efforts from events such as earthquakes and floods at 2.5%.

Issuance of digital resident ID by NFTs

On April 17, 2023, Nishikawa Town in Yamagata Prefecture launched an initiative offering digital resident IDs as NFTs. Each NFT was priced at 1,000 yen, with a total of 1,000 NFTs made available for purchase. These NFTs, which were also tradeable on various NFT marketplaces, offered holders the status of digital residents in Nishikawa. This status included benefits such as participation in online communities and free access to local hot springs. The NFTs were met with overwhelming demand, selling out within just a minute of release. Initially, the demand was anticipated to be around 1,000 pieces, but it rapidly escalated, with the final demand confirmed at 13,440 pieces. This was a remarkable figure, especially considering that as of April 2023, the actual population of Nishikawa was only 4,732. The interest in the digital resident ID NFTs represented a potential relational population of over 13,000, which is more than 2.8 times the actual population.

2. Hometown Tax system X NFT cases 

Hokkaido Yoichi Town X Crypto Ninja Partners: Yoichi Town in Hokkaido launched the groundbreaking Furusato CNP (CryptoNinja Partners) project, starting sales on October 28, 2022, through the Hometown Tax system. Priced at 30,000 yen each, the NFTs were swiftly sold out within minutes of their release. The Yoichi Town CNP2022 NFTs are distinguished by their 222 unique designs, which incorporate elements reflecting the region's famous places and its renowned wine, the local specialty. These NFTs confer exclusive benefits to the holders, including priority purchasing rights for popular wines from Yoichi's wineries and a one-month trial access to a Discord channel exclusively for Ninja DAO’s CNP holders. Moreover, visitors to Yoichi Town who possess these NFTs are offered the opportunity to upgrade their NFTs’ level and design. This unique feature further enhances the value and appeal of the NFTs. Additionally, holders of these Hometown Tax NFTs are given the chance to participate in seminars designed to educate about the basics of NFTs, thereby promoting broader understanding and engagement with this emerging technology.

wate Prefecture Tono City X Game of the Lotus: Tono City, nestled in the central southern inland of Iwate Prefecture and renowned for its guardian deity Zashikiwarashi, depicted as a young girl who brings fortune to homes, has embraced digital storytelling through the Game of Lotus (GOTL) NFT project. This project transforms the rich mythology of the Tono region into digital assets, encapsulating local folklore and characteristics into NFTs. Purchasers have the option to acquire one of three characters from the ‘Furusato Choice’ Hometown Tax portal site or on OpenSea, an NFT marketplace. These NFTs are designed to be interactive and customizable, with future options for purchasing additional items to modify the character's facial expressions, attire, and backgrounds. The NFTs are structured with an initial character token (L1) and additional items (L2) that can be equipped. Holders of these NFTs are granted membership in the ‘Tono Dao’ community, where they can visit specific locations in Tono City, check in, and receive unique items. This innovative project, a collaboration between Smanu Lab Co. (スマニューラボ: Smanu-rabo) and NextComons, is under the leadership of Daisuke Sasaki, a director at Sumanu-rabo and an advisor at NextComons, who hails from Tono City. The GOTL project is being conducted with a focus on creating new customer experiences, encapsulated in the motto “Enjoy by Using, and Delight in Visiting”.

Nishikigoi NFT and Yamakoshi DAO

Nishikigoi NFT, a leading example of local x Web3

The Nishikigoi NFT initiative, employed by Yamakoshi Village, is a standout success story among various NFT and DAO applications by Japanese local governments. This project has significantly surpassed expectations, with over 1,600 individuals holding the Nishikigoi NFT, which serves as a digital resident ID for the village. This number is notably more than double the village's actual population of 800. Impressively, among these digital residents, 140 have made the profound decision to physically relocate to Yamakoshi Village, underscoring the initiative's influential and transformative impact in the realm of Local x Web3 implementations worldwide. Yamakoshi Village (山古志村, やまこしむら), a picturesque rural village nestled in Nagaoka City, Niigata Prefecture, has a population of approximately 800.

The Yamakoshi village facing extinction due to population decline

Yamakoshi Village's decision to adopt NFTs for securing digital residents is deeply rooted in its struggle against severe population decline. Data from Japan's Ministry of Internal Affairs and Communications Statistics Bureau reveals a stark demographic shift in the Yamakoshi area. From around 6,000 residents in 1960, the population dwindled to about 2,000 by 2000, decreasing to a third of its size. The situation worsened following a magnitude 7 earthquake in 2004, which led to a mass exodus of the village’s inhabitants. The village began to see a slow reversal of this trend only after evacuation orders were lifted in April 2019, allowing approximately 1,200 villagers to return. However, as of October 2023, the village still grapples with demographic challenges, housing only 372 households with a total of 759 residents. The aging population issue is particularly acute, with 55% of the residents being over 65 years old, and this percentage continues to rise annually.

1. A major shift to a digital village based on the Estonian model

After the devastating earthquake, Yamakoshi residents united to form the 'Yamakoshi Villagers' Council,' rallying around the motto 'Let's Return to Yamakoshi (帰ろう山古志へ).' In 2021, Haruka Takeuchi, a representative of the council, initiated discussions on village revitalization through Facebook with Toshiaki Takase, a Web3 developer. Toshiaki, who had previously worked with a company under Estonia's eResidency program, found inspiration in applying a similar digital residency system to Yamakoshi Village.

Issuing digital resident IDs using NFT

Toshiaki recognized the potential in Estonia's e-Residency program, a digital ID system that, despite not granting physical residency rights in Estonia, attracted global interest. The e-Residency offered the rights to establish and manage a business in Estonia, fostering a sense of belonging to the nation among global users. Drawing from this model, Toshiaki envisioned that issuing digital resident IDs for Yamakoshi as NFTs would enable people worldwide to become digital residents, fostering affection and a sense of belonging to the village. This led to the establishment of Crypto Village, marking the commencement of Yamakoshi Village’s digital transformation journey. Encouragingly, the residents of Yamakoshi embraced this vision, supporting the idea of augmenting the village’s population digitally through Crypto Village, rather than increasing the physical populace.

The Yamakoshi Villagers' Council articulated their decision to adopt a digital strategy in the face of Widespread population decline: ‘'With the nationwide population decrease, solely focusing on growing the local population is akin to redistributing a diminishing pie. What's essential is to transcend the constraints of physical residency and adopt a global perspective, akin to Estonia's success in attracting global talent.’ The residents of Yamakoshi believe that by leveraging the collective intelligence and networks of digital residents from varied backgrounds, they can do more than just preserve their village. They aim to also protect and celebrate its unique cultural elements, such as the koi fish.

Nishikigoi NFT inspired by koi

Inspired by the village’s iconic Koi fishes, the Yamakoshi Villagers' Council and Crypto Village launched the 'Nishikigoi NFT' project. The objective was to achieve '10,000 Global Digital Residents.' Priced at 0.03 ETH each, with a 10% artist royalty, the NFTs were made available in three varieties as of October 2023. By November 4, 2023, on OpenSea, the project had 2,845 NFTs traded by 1,658 unique holders. While the 30-day trading volume of 0.78 ETH may seem modest compared to other NFT projects, it is significant given the project's nature. Remarkably, the Nishikigoi NFT project gained attention without a dedicated marketing campaign. It became known through blog posts, online NFT exhibitions, and subsequent features in various media outlets, including NHK, Forbes, and Coinbase. The project's impact was further recognized when it won the Good Design Award in 2022, the Japanese Minister of State Award for sustainable development in underserved regions in 2023 and was showcased at Tokyo Solid in Japan and the Superchief NFT Gallery in New York.

2. Expansion from NFT project to Yamakoshi DAO

The triumph of the Nishikigoi NFT project is largely attributed to the community fostered by the Yamakoshi Villagers' Council. Nishikigoi NFT community members actively contribute to village revitalization, participating in decisions on the utilization of NFT proceeds and creating content to promote Yamakoshi Village. An estimated one-third of the 3,213 participants (both current and former holders) in the Discord community are non-Japanese, as inferred from the languages used in the Discord. Crypto Village initially envisioned that revenue would primarily come from distribution royalties following the first issuance, anticipating that transaction fees from new community members buying NFTs from existing holders would be the main income source. However, with only a 2% resale rate on OpenSea, it became evident that holders valued their digital resident ID NFTs and were reluctant to sell. Recognizing this, the Yamakoshi Villagers' Council and Crypto Village pivoted the project's direction. While the initial aim of the Nishikigoi NFT was to secure funding for village reconstruction and draw external attention, the focus shifted towards actively managing the community, enabling digital residents to take a lead role in the village's revitalization

The vote to transform the Nishikigoi NFT initiative into the Yamakoshi DAO received overwhelming support, with a 97.32% approval rate. Since then, the Yamakoshi DAO has been more active than ever in promoting not only Yamakoshi Village but also the broader concept of Local DAOs. This transformation marks a significant shift: the founders now aim to extend this model into a global platform for local DAOs, targeting regions at risk of disappearance worldwide, beyond just Yamakoshi or Japan. “It is common until now that only physical residents are key stakeholders in a village’s revitalization, with outsiders merely playing a supporting role. Previously, outsiders expressing interest in a region were often asked about their willingness to permanently settle there.” “However, Japan’s ongoing demographic challenges, characterized by young people leaving rural areas, low birthrates, aging population, and population decline, necessitated a novel approach. The Nishikigoi NFT/Yamakoshi DAO represents a significant breakthrough in this context.” “Interestingly, Nishikigoi NFTs holders quickly embraced their new identities as 'digital residents' of Yamakoshi, irrespective of their actual connections, heritage, or even physical visits to the village. They began to have an identity that is represented by the name of the region solely through digital means.”

Implications for Local Governments in Korea From Resident 

The current challenges of population decline in small and medium-sized cities in South Korea mirror those faced by Japan two decades ago. As Japan shifted its policy focus from boosting the resident population to enlarging the relational population, local governments began to voluntarily adopt NFT and DAO technologies. This approach has seen modest successes in attracting digital residents, fostering voluntary participation, and boosting tourism revenue. Key lessons from Japan’s experience include: Focusing on expanding the relational population over the resident population: Japan’s strategy highlights that even without an increase in the resident population, expanding the relational population — those with interest and affection for the area — can still catalyze tangible economic revitalization. Financially weaker small towns in Japan have reaped significant economic benefits from the Hometown Tax, which they could not have accessed previously. Issuing NFTs that capture the unique intangible assets of a region or digital resident IDs has proven effective in fostering a sense of belonging among holders. These digital residents often actively participate in the local DAO and, in some cases, even join the settled population, contributing to the region's vitality in diverse ways.

The scalability of NFTs and their role in growing the pie itself: NFTs, with their global distribution capabilities via blockchain, present a scalable solution unlike physical goods. They open up the potential to target digital residents worldwide, enabling a new phase of growth that focuses on increasing the overall 'pie size' rather than competing for a share of the existing pie. Strong community centered on village residents: While decentralization is a hallmark of typical Web3 DAOs, in local DAOs, the leadership and involvement of village residents are vital. They act as bridges, enabling both the region and digital residents to engage deeply with local issues and contexts in the digital space. Thus, the success of local projects hinges on villagers who are digitally literate. For instance, in Yamakoshi Village, local news and updates were communicated to digital residents 3-4 times daily across various channels (Twitter, Discord, YouTube, etc.). The active involvement and determination of local residents fostered serious participation and a sense of belonging among NFT holders. Efforts to increase understanding of blockchain technology: Contrasting with other regions, the Yamakoshi Villagers' Council possessed a sophisticated understanding of digital technology, enabling them to propose a Web3 project to businesses. Recognizing the potential of expanding the relational population through Nishikigoi NFT, they successfully convinced other village residents and relevant departments to support the project. In community-based projects, the grasp of blockchain technology by residents and department officials is pivotal, as their leadership and endorsement are crucial for successful implementation and adoption.

The limitless expanding sphere of activity for individuals and businesses in the digital world.

With technological advancements and the burgeoning digital economy, many activities once confined to physical spaces are now feasible through the internet. This shift has liberated individuals from geographical constraints, enabling them to affiliate with any region or community globally connected via the internet. In the digital realm, it is possible to belong to multiple communities across borders, nationalities, races, and ages. These diverse digital communities can create significant impacts through their interactions and integrations. As the sphere of individual and business activities transcends physical boundaries, there is potential for the scope of communities, local governments, and even nations to expand beyond current perceptions. Key influencing factors in this expansion are the mental realms, encompassing values and interests. These evolving dynamics offer critical insights for nations and local governments grappling with aging populations and small towns losing their vitality. While efforts to bolster birth rates and promote migration should also be accompanied, the global trend of declining birth rates necessitates exploring alternative solutions. Leveraging digital technologies, including blockchain, to grow the relational population presents a compelling strategy. This approach can help regions adapt to and thrive in the changing demographic landscape.