The Journal The Authority on Global Business in Japan

Hideo Kumano was surprised when he saw the initial proposals for special economic zones (SEZs) drafted by the government of Prime Minister Shinzo Abe in 2013, under the slogan “Japan is Back.”

The Law on National Strategic Special Zones was adopted in December of that year, and the bold reform proposals for SEZs sanctioned Japan’s regional areas to play the role of test beds for new technology and ideas considered too far ahead of the arc of the national regulatory and system-based curve.

The idea behind the SEZs—or tokku in Japanese—was to cut through the bedrock of vested interests and bureaucratic red tape, which had precluded innovation in the past; produce speedy approvals; and, within three years, to deliver concrete results, which later could be applied nationwide.

The positive cycle that the SEZs helped create was viewed as the breakthrough needed both to change Japan’s economy and society, and to help the nation exit almost a quarter century of deflation.

“I partly admired, and was partly surprised by, the proposals,” says Kumano, executive chief economist in the economic research institute at Dai-ichi Life Research Institute, affiliated with the Dai-ichi Life Insurance Company, Limited, Japan’s third-largest life insurer in terms of revenue. “I thought things might really be different this time.”

ATTRACTION OF ZONES
Six SEZs were announced in May 2014, and it was said that 68 projects would eventually be approved in the Tokyo and Kansai areas, Okinawa Prefecture, Niigata City, Fukuoka City, and Yabu City in Hyogo Prefecture.

With 27 projects, Tokyo leads the pack as it aims to attract companies that will set up their Asian headquarters in the capital’s center or along its waterfront. The government has even allowed local hospitals to employ non-Japanese physicians.

Niigata City has 14 projects, mainly centered on agriculture, that include attempts to allow companies to control farmland—which will allow supermarkets, for example, to offer advice to farmers on what to grow.

To date, this has been the prerogative of the Central Union of Agricultural Cooperatives, or JA-Zenchu, a powerful body that has dominated farm practices in Japan. The city is also looking for ways to combine scattered farming plots to allow planting and harvesting to be more mechanized.

Aiming to become a tourist hub, Okinawa Prefecture hopes to use its proximity to South Korea and China to attract the two nations’ growing middle-class populations, that are visiting the archipelago with increasing frequency.

Fukuoka City, with six projects, plans to relax visa restrictions for non-Japanese laborers. In the future, this is likely to be a vital step for Japan, as the nation’s working population continues to shrink and young people are unlikely to overcome their aversion to the 3Ks—kitanai (dirty), kitsui (hard) and kiken (dangerous)—of physical labor.

Like Niigata, Yabu City aims to revitalize its farmland. In addition to the company-based initiatives, Yabu is also attempting to revitalize abandoned farmland and bring it back into production.

Three more SEZs were added on July 8: Sendai City, Miyagi Prefecture; Aichi Prefecture; and Semboku City, Akita Prefecture.

The Kansai area including Osaka, Kyoto and Hyogo Prefecture, has built on its traditional connections to the pharmaceutical and medical devices industries. In particular, Kyoto is home to Shinya Yamanaka, joint winner of the 2012 Nobel Prize for Physiology or Medicine with Sir John B. Gurdon.

In 2006, Yamanaka discovered how intact mature cells in mice could be reprogrammed to become immature stem cells. This process became known as iPS, or induced pluripotent stem cells.

The use of iPS cells derived from human blood has so far been restricted to academic research use, but in September 2014 Kyoto Prefecture proposed the removal of these restrictions, to create an environment where iPS cells can be bought and sold as commercially-based research tools.

The use of iPS cells in regenerative medicine was discussed at a Cabinet Office working group meeting held January 9, 2015 attended by representatives of the Ministry of Health, Labour and Welfare. And on January 27, the government announced that it was considering establishing a policy to permit the sale of iPS cells derived from human blood within SEZs.

Necessary legal amendments to SEZ laws were passed in July, and will be enforced from September, opening the way for the approval of specific business plans.

It is difficult to put a dollar figure on how far the commercialization of iPS would boost economic activity, but, in the first instance, by being able to trade iPS blood between organizations, instead of produce it on site, it is expected that research activities, such as those involving drug discovery, will accelerate, possibly feeding into greater and more rapid commercial application.

A mega-city, Tokyo is leading the push for more SEZs in Japan.

A mega-city, Tokyo is leading the push for more SEZs in Japan.

THE NEW ECONOMY
It is slow going, but Kazuya Suzuki, senior director of the special economic development zone promotion office in the Department of Industry, Labor and Tourism at the Kyoto Prefectural Government, is excited about the possibilities.

“We could see commercial developments start from early 2016,” he said. “Not only are patients waiting for iPS-based regenerative medicine initiatives, but the emergence of iPS cells as a research tool is also likely to open the way to new drug discovery that in itself will serve to treat patients.”

New medical devices could also be created, and Kyoto is racing to establish itself as a center for both medical-based research, and mechanical innovation.

The area around the Yoshida campus of Kyoto University includes the university hospital, while across the Kamo River in the Kamigyo-ku area lies Creation Core Kyoto Mikuruma, an incubator facility for wellness-based ventures.

Kyoto is also home to the Keihanna Open Innovation Center at Kyoto (KICK), located in the hills between Kyoto, Osaka, and Nara, along with a network of crafts-based companies under the title of the Kyoto Shisaku Net.

“Looking ahead, I am confident that Kyoto will be able to offer investors a conducive environment for health and wellness-based businesses, from research to tool-making,” Suzuki says.

The Keihana Open Innovation Center at Kyoto is a center for innovation in the region.

The Keihana Open Innovation Center at Kyoto is a center for innovation in the region.

PIPEDREAM OR OPPORTUNITY?
The zones were originally announced as part of a regulatory reform agenda that was included in the Liberal Democratic Party pledges in December 2012. Significantly, the manifesto made reference to an “international cutting-edge test” by which systemic obstacles, where the difference with countries could not be rationally explained, would be abolished within three years.

“At that point, I thought that the ideals of Abenomics were wonderful,” Kumano says.

But, the “international cutting-edge test” was omitted from the platform on which Abe and his party won the December 2013 general election, and time began to flow by with few concrete achievements, despite the public announcement of the 67 projects.

Kumano has lost faith in the special economic zones, and it could all end up as little more than a pipedream. “I have largely forgotten what the point was, and am pretty disappointed,” Kumano says.

He is exasperated over the fact that Japan has not made more of its superior technological capabilities, and cites drones as an example. Kumano sees drones offering concrete economic benefits that could help open up Japan’s depopulated and aging villages, as well as offshore islands with restricted transport links to the mainland.

Were they to know they have both Internet and concrete links to the outside, it is possible that savvy urbanites would either more willingly join the U-turn back to the villages they left to come to the big city 30 or 40 years ago, or make a lifestyle change and move to the countryside.

Kumano points to how drones could be used to send fresh produce from areas with transport bottlenecks to stores and restaurants in city areas. It is also plausible that drones could be used to help supply public services, such as the delivery of official documents and library books from official establishments to isolated villages.

This scenario is similar to that of Shigeru Ishiba, minister in charge of Overcoming Population Decline and Vitalizing Local Economy in Japan, and minister of state for the National Strategic Special Zones.

At an event in Tokyo on July 16, the minister noted that the labor shortage was greater in rural areas than urban ones, and that promoting a shift to the countryside by males in their 50s could improve labor productivity.

Technology is clearly one way to help them make the transition. On April 17, as one of the SEZ projects, Narita City proposed using nighttime no-flying time at Narita International Airport to stage field tests involving drones.

But just five days later, a drone landed on the roof of the prime minister’s residence and, overnight, a key technological opportunity came to be viewed as a threat.

As a result, Japan has taken the low road solution to the drone issue and, instead of expanding regulatory leeway to encompass and support the business opportunities provided by drones, has decided to force a technology whose potential remains unknown at this point into the narrow shoebox of a low level regulatory remit.

What’s more, this move is now considered to be damaging the work done by the Ministry of Economy, Trade and Industry, which oversees technologies such as drones and radio-controlled helicopters, the use of which has also suffered a backlash.

“Seen from the standpoint of the ‘international cutting-edge test,’ this is mistaken,” Kumano says. “What should in principle be free, and regulated only in the exception, is being regulated in principle, and free only by exception. It goes against the spirit of freedom.”

Takuji Okubo, managing director and chief economist with Tokyo-based Japan Macro Advisers, is even more blunt in his criticism. “The idea that the special economic zones will have any impact or meaning for the Japanese economy is incorrect,” he says. In Japan, “tokku is just a word; it is just a gimmick.”

He is particularly scathing about the regulations attached to non-Japanese doctors allowed to “practice” at Japanese hospitals under the so-called reforms.

As patients wishing to be treated by these doctors will not be allowed to use Japanese health insurance, for all intents and purposes, the doctors are being prevented from treating the vast majority of the Japanese public, Okubo says.

Niigata City has been identified as an SEZ for agriculture due to its ample farmlands.

Niigata City has been identified as an SEZ for agriculture due to its ample farmlands.

THE ABE FACTOR
What Abe gives with one hand in the SEZs, he takes away with the other, Okubo states. Even while appearing to boost quotas for non-Japanese physicians in SEZs, the prime minister knows that the effective restrictions placed on their activities will make it unlikely that doctors will rush to Japan.

This, of course, is what vested interests want, and it is Okubo’s view that such interests have captured Abe. As a result, he considers the prime minister to be a shrewd politician, but has little good to say about his SEZ efforts, and is urging Abe to engage with deeper structural issues.

A case in point is the accreditation system, which should be altered to allow more non-Japanese doctors and lawyers to work in Japan, rather than just see superficial tinkering to give the impression that reform has taken place.

It seems clear that, if special economic zones are not to end up as little more than yet another pipedream of reform and recovery, now is the time for Abe to reassert control over his government, face down vested interests, and drive through the initiatives necessary to revitalize the ailing regions of a—still—ailing state.

Sub-tropical Okinawa Prefecture is to become a tourism hub under SEZ plans.

Sub-tropical Okinawa Prefecture is to become a tourism hub under SEZ plans.

Photos: Okinawa Convention & Visitors Bureau; Tokyo Convention & Visitors Bureau; Niigata Convention & Visitors Bureau.

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Martin Foster is a bilingual writer who has lived in Tokyo since 1977. Martin spent much of his career in financial journalism, and now focuses on various aspects of business and the economy.

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