The current periods of low economic growth requires that local governments in Japan adopt a new financial management system. This paper deals with such a system which has been constructed from the existing methods in the management of local finance.The function of the system is demonstrated by a computer model of local finance. The balance section of the model is organized on the basis of an institutional fund. The fund, whichis called an ‘adjustment fund’, normalizes the balance by drawing out reserves when it declines toward a deficit.THE NEW FINANCE MODEL is depicted in Figure 1.Using this model, we will be able to experiment with the financial managment of local governments. Also, we can recommend practical applications of a number of proposition in order to improve local finance.