Written by Miseon Lee, Dongin Kim, Minsun Cho
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
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