Can Japan finally make special economic zones work?

Can Japan finally make special economic zones work?

Aug 10th 2013 | TOKYO |From the print edition

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THE world’s best-known and most successful special economic zone is China’s Shenzhen. After 1979, when Deng Xiaoping chose the small farming and fishing town north of Hong Kong to test free-market economics, it grew rapidly into an industrial metropolis. Japan, though long converted to capitalism, has also used special zones to test ideas too radical for the rest of the country. Shinzo Abe, the prime minister, has now put them at the heart of his plan for economic revival. After decades of not achieving much, can they finally help Japan manage a Shenzhen-like transformation? If the zones’ expected size is any guide, they could indeed have an impact. The final locations will soon be announced, with the vast cities of Tokyo, Osaka and Nagoya said to be likely candidates. A new cabinet minister may even be chosen to oversee the tokku, as such areas are known in Japanese.Mr Abe’s aim for the zones is twofold. The first is to create centres as enticing to global firms and workers as London or New York. Slightly lower taxation, somewhat easier immigration rules and looser building laws are among the draws. Another idea is to allow foreign doctors to operate there (though this modest step already faces stern opposition from local medics). Japanese industry, too, may gain extra freedoms: driverless cars could be allowed on the open road and robots permitted to mingle more freely with humans.

The zones’ second goal is to be a showcase for deregulation. Mr Abe’s “third arrow” of structural reforms for the economy, announced in June, failed to impress. It did not tackle the areas that most need an overhaul, such as medical services, agriculture and the labour market.

Big companies, for instance, want to have more freedom to fire full-time workers, which is almost impossible in Japan. But politicians fear this would lift unemployment and increase inequality—and have in effect ruled it out at a national level for now. Testing such reforms in special zones is politically easier. And once the benefits become clear, champions of the zones argue, the rest of the nation would clamour to follow.

Recent reports suggest that the reforms to be tried could indeed be far-reaching, and even include measures letting firms fire workers with severance pay. Another idea is to create a giant special agricultural zone on the island of Hokkaido, where firms would be allowed to own farmland, not just rent it. That would help modernise Japan’s agriculture, now dominated by part-time tillers with tiny plots of land (such a step has been ruled out for the country as a whole, since the farming lobby wields much political clout).

In fact, there is no consensus within the government on whether the tokku should allow such radical reforms, says a government official involved in the zones. If Tokyo and other big cities are chosen, the areas would be too big to be regarded as remote experiments. If labour laws were eased in the three big metropolises, for instance, a quarter of Japan’s workforce, or some 15m people, would be affected by the new rules, estimates Nomura, an investment bank.

The debate is vigorous, confirms Robert Feldman, an economist at Morgan Stanley, another investment bank, who recently presented ideas for the zones to an official working group. Those who want radical deregulation are pitted against others who prefer to use them in more old-fashioned ways, such as helping particular local industries and attracting foreign investment.

But if Mr Abe’s tokku are to succeed, they will need to be bold. The country is already littered with special economic zones. The first group, almost a thousand, was chosen by the government of Junichiro Koizumi, Japan’s reforming prime minister between 2001-2006. Most failed—chiefly because central-government bureaucrats rejected many ideas for deregulation for fear of offending vested interests.

A more recent batch of zones, picked by the Democratic Party of Japan before it was ejected from power last year, are only around two years old (see map). In Fukuoka, a city on Kyushu island, a “comprehensive” special zone to sell environmental technologies to neighbouring countries has only just got off the ground, says Hironobu Furukawa, a local official. Predictably, Fukuoka, like other existing special areas, is suspicious of Mr Abe’s plans, fearing that new zones will simply draw investment away from old ones. It might be more straightforward to deregulate the economic zone known as Japan.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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