Water utilities are affected by economies of scale. However, in Japan most water utilities are small-scale water services. Therefore, they face enormous difficulties in terms of financial and personnel resources. To take advantage of economies of scale, the consolidation of water utilities has been promoted since 1965 by Japanese water authorities. The measure has been successful to some extent; nevertheless, consolidation has not progressed in recent years as was expected. This paper identifies the main barriers that hinder the consolidation of water utilities in Japan and describes the new promotion plan for the consolidation of water utilities developed by the Japan Water Works Association. To assess the economic effects of consolidation, an empirical application is carried out involving four real Japanese cities. The results will be useful to water authorities considering consolidation in the long-term planning of urban water management.