During the last two decades, the redevelopment of the central area has become a common policy issue in local cities. This paper discusses the mechanism of the redevelopment of the central area of local cities from three perspectives: institutional environment, urban politics, and small retailers' strategy. The case study draws on the redevelopment of the central area of Matsumoto City, Nagano Prefecture, which consists of a land readjustment project implemented with a large amount of public investment. The mechanism of the redevelopment in Matsumoto is outlined as follows.<br> In the early 1980s, the administration of the city and the association of small retailers in Matsumoto coordinated to promote the redevelopment of the central area. The redevelopment, however, made little substantial progress through the 1980s. One explanation for this is that the central government reduced specific subsidies to local governments during this period. Another explanation is that individual small retailers in the central area were oriented toward maintaining the conventional business environment.<br> The deregulation of the Large-scale Retail Store Act in the late 1980s marked the turning point in redevelopment of the central area. With the rapid penetration of large-scale retail stores in the suburbs and the advent of a new mayor who adopted developmentalism as his policy, the administration preferentially invested in redevelopment which was justified by the political slogan “;city growth, ” and enhanced the promotion of redevelopment in collaboration with several local organizations. While the promotion of redevelopment would bring great benefits to small retailers, they did not necessarily collaborate with the administration and adopted various strategies to earn their living. Their strategies generally fall into three categories: 1) withdrawing from the central area because of soaring property taxes and a diminished sense of community; 2) remaining in the central area by converting into a tenant owner; and 3) advancing into the central area with the increasing supply of commercial properties. Consequently, the diversification of small retailers' strategy encouraged the prompt implementation of land readjustment and the administration-ledredevelopment.