**Appended Note 2-5 Estimation method of the results of consolidation**

The theoretical value of the cost reduction rate, which is expected from the expansion in the size of population and area due to consolidation of municipalities, has been estimated. First, by using the settlement and other data of the municipalities in FY2003, a regression analysis was conducted while taking the sum of per-resident labor costs and supplies costs as explained variable and the population and area as explanatory variables. This analysis targeted 3,155 municipalities.

By using the above equation, the theoretical value of labor costs and supplies costs of municipalities-when there is no consolidation-may be derived by substituting in their population and area without a consolidation. Similarly, the theoretical value of labor costs and supplies costs of municipalities after the consolidation may be derived by substituting in its actual population and area after the consolidation. The difference between the two values is deemed to be the cost reduction amount excepted from the consolidation when studied from the perspective of the size of population and area. As such, it is considered as the theoretical rate of cost reduction brought upon by consolidation.

Furthermore, the population and area of municipalities-under the assumption that there is no consolidation-has been calculated by utilizing the ratio of population and the ratio of area of the municipality right before the consolidation.

Source: *Survey of Settlement by Local Authority and Overview of Population Based on Basic Resident Registers*, Local Public Finance Bureau, Ministry of Internal Affairs and Communications.