The publicly-owned municipal bus sector that provides local transport in Japan is in a difficult situation
because of operating deficits, inefficient operations and management, and budgetary constraints of
expanding subsidies, and thus, it needs to be restructured to improve efficiency. This paper investigates
the impact of subsidies and contractual settings on the cost structure of the publicly-owned bus sector in
Japan. A trans-log cost function has been estimated by pooling cross-sectional data of 527 observations
over the time period of 1990e2006 for a cross-section of 31 publicly-owned transport companies in
Japan. Our analytical results confirm that governmental subsidies to this sector negatively affect the cost
structure, while the contractual model may have a positive impact. We also discuss the implications of
these results for Japan’s public transport policy.