The relationships among related categories was discussed here
Below is a rough plan of the system the English Wikipedia uses (using Aichi as the representative for all prefectures). The basic idea is a dual indexing system, so articles are able to be found by prefecture and by type (city, town, village). Under this system, an article need only be placed in one category (e.g., "Towns in Aichi Prefecture").
We probably don't have the numbers to need the red categories, but the dual index will still be there because you'll have two higher-level categories on every page instead of the one lower-level category—(instead of "Towns in Aichi Prefecture", you'll have "Municipalities in Aichi Prefecture" and "Towns in Japan").
Is this a good foundation for future discussions? --Horeki (talk) 13:53, 23 March 2012 (UTC)