The purpose of this chapter is to explore how the Japanese higher education system tries to secure ample financial resources to support future higher education in an era of a decreasing population and a mature economy. First, the characteristics of the financial resources of public and private universities in Japan are described. The second section explains the size of higher education in Japan and the policy issues in an era of a decreasing population. The third section describes the trends in the revenue and expenditure of public and private universities from 2007 to 2017, and the reform of the government’s operational funding allocation system in Japan. The fourth section deals with student access to financing and equity, as well as student loans and scholarship policies in higher education. Lastly, some trends are suggested for the future challenges for government and universities regarding the funding of higher education in Japan.

Overview

Public funding vs. private funding

There are two main types of funding for supporting higher education: public and private. Public funding is the money provided by the government. The government collects taxes from taxpayers and allocates money directly or indirectly to universities to support education and research. Economically, public funding for higher education can be justified by positive externalities or spillovers from higher education and the effect of relaxing credit constraint issues. In a knowledge-based society, high-skill workers play an important role in providing innovative ideas and employment, and there is a positive relationship between the knowledge capital of countries and economic growth. Additionally, it has been pointed out that higher education may increase social benefits through increasing tax revenues, encouraging people to make better political decisions, reducing criminal activity, and improving social cohesion. However, if students cannot afford to pay for higher education and cannot borrow money at a low interest rate, higher education will be underfunded. In this context, not only public funds going directly to universities but also public funds in the form of scholarships or student loans play a principal role in the financing of higher education.

The Japanese government has allocated subsidies both to public and private universities to support their operational and specific education or research activities.