OKINAWA'S ECONOMY: A SLOW TRANSITION

UNCLAS SECTION 01 OF 04 NAHA 000066 SIPDIS SIPDIS E.O. 12958: N/A TAGS: JA MARR PREL SUBJECT: OKINAWA'S ECONOMY: A SLOW TRANSITION ¶1. Summary: Okinawa's economy has several contradictions. Since 1972, this island economy has been growing two times faster than the rest of Japan, yet wages remain 70% of the mainland average. Jobs are being created, yet unemployment remains stubbornly high. The classic Japanese export-based economic model does not apply here, given Okinawa's high shipping costs and tiny industrial base. Instead, Okinawa has a non-diversified economy based on three pillars: tourism, construction (supported by GOJ fiscal transfers) and US military bases, which play a smaller yet still significant role in the economy. The story of Okinawa's economy is the story of these three pillars, and of the Okinawa Prefectural Government's (OPG) struggle to create new sources of jobs, especially for young people. End summary. What Makes Okinawa Different ¶2. In order to understand Okinawa's economy, one must put it into context. Okinawa is a small island located between the Japanese mainland and Taiwan. It holds 1.07% of Japan's population and contributes 0.71% of Japan's GDP. Since 2002 Japan has seen a sputtering revival of economic growth, attributed to the rebirth of domestic demand and strong US and Chinese economies. Okinawa's economy has also been improving, due to an increase in mainland Japanese tourists - at the expense of some Japanese tourism to the US, especially Hawaii - and to a "newcomer" in this island economy, information technology. ¶3. While Japan's population has started to decline, Okinawa's population is increasing by 6% per decade. Okinawa's birth rate is higher than Japan as a whole, at 1.72 births per woman, but is still below the 2.1 long term replacement level. In the short term, the population is both increasing and ageing. As a regional bank manager explained to EconOff, immigration to Okinawa from other Japanese prefectures plays a small positive role. Okinawa gained a net 275 people from immigration in 2001 and 2571 in 2004. This is a new trend; historically Okinawa's young people headed for the mainland when Japan's economy was performing well, but prefectural government statistics indicate the current young generation prefers to live on Okinawa. In the long term, Okinawa's population is expected to increase until 2025, at which point it too will begin to decline. As the mainland worries about a declining workforce and searches for ways to keep older employees productive longer, Okinawa searches for ways to employ its youth. Overall unemployment for young people up to age 24 is 17.3%; the breakdown is 14.3% for young women and 20.0% for young men. Only for workers aged 30 or higher does the trend show improvement. Thus, the OPG must not only create jobs, but also encourage companies to hire younger workers. ¶4. Jobs are being created here. During the 1990s there were 2,000 job vacancies at any given time; by 2004 that figure had climbed to 6,000 vacancies. The problem is that job growth has not kept up with population growth. In 1991, unemployment was 2.1% for Japan and 4.0% for Okinawa. As the economy stagnated throughout the 1990s, unemployment rose to 5.0% for Japan and 8.4% for Okinawa by 2001. Recently the economy has been recovering slightly; as of 2005 the numbers have improved to 4.4% for Japan and 7.9% for Okinawa. NAHA 00000066 002 OF 004 ¶5. A major, obvious difference between the Okinawan and Japanese economies is the impact of US military bases. These bases cover 10.3% of the land in Okinawa prefecture (18.5% of the main island),and US personnel represent 4% of the prefecture's population. Both the Okinawan Prefectural Government (OPG) and the US military calculate that direct base-related spending accounts for at least 6% of Okinawa's GDP. For this reason, military bases have long been considered as part of Okinawa's economic triad, along with tourism and construction. It is worth noting that even Okinawans who oppose the US military presence here recognize the economic impact of the bases, and a staunchly anti-base newspaper is running a series of articles on the economic effects of potential base reductions. What Okinawa Prefectural Government (OPG) is Doing: ¶6. The OPG has narrowly focused its efforts on three sections of the economy: tourism, information technology (IT) and manufacturing. The effort to increase tourism has been successful, with a steady increase from 3.2 million visitors in 1995 to 5.5 million in 2005. Virtually all of these tourists have been from mainland Japan. Unlike Hawaii's mild year-round climate, Okinawa's warm tourist season from April through September has traditionally been the prime season for tourism. In recent years, however, efforts to lure more tourists have focused on year-round activities, such as golf and weddings. Resort weddings now bring 2,000 couples to Okinawa annually; each couple has an average of 40 guests. The number of weddings is skyrocketing, and is expected to reach 10,000 soon. Duty-free shopping is available for domestic Japanese travelers, providing a 20-30% discount over mainland prices. Conventions have attracted high-spending visitors, and spas - especially spas that are part of hotels - are attracting more visitors as well. ¶7. The OPG has also focused on the IT sector of the economy. During recent discussions with prefectural government officials, EconOff learned IT was virtually nonexistent here in 1997, providing only 343 jobs. As of 2005 this sector employed 9631 workers at 103 companies. The vast majority of the IT jobs are in call centers, but some are in systems administration or data backup. These are average-paying jobs; the salary ranges from 150,000 to 190,000 yen/month (roughly $1300 to $1700 per month) compared to the Okinawan average salary of 167,000 yen/month for college graduates. (Most Japanese workers also receive bonuses twice per year.) Okinawa has created several programs to encourage call centers to relocate to the island and to employ younger workers. Long-distance charges to Tokyo and Osaka are paid by the OPG. Companies with large payrolls are given a subsidy for up to three years, and companies that hire young workers (below age 30) to fill newly created jobs are given a rebate of up to $900 per worker per month for two years. The OPG has established low or no-cost training programs for future call center employees and computer experts. Municipalities also often offer office space or land at preferential terms. Despite these enticements, there are still reasons why call centers might not relocate to Okinawa. Other prefectures, especially Hokkaido, are now competing for call center relocations. While Okinawa could be seen as a 'center of excellence' for call centers and eventually even IT, the island also struggles against the perception that Okinawan workers are not as NAHA 00000066 003 OF 004 work-oriented or loyal as mainland employees. Local Japanese and American business sources note some firms have chosen to import mainland workers rather than hire Okinawans. Additionally, Okinawa has the lowest percentage of eligible students entering high school and university, and the highest violent crime rate in Japan. ¶8. The third sector of the economy the OPG is focusing on is manufacturing, a sector where Okinawa has always been un successful. Okinawa has some tremendous disadvantages: the island has no manufacturing legacy, no skills base, an inadequate transportation system and high freight costs. To counter these disadvantages, for more than a decade the OPG has asked the GOJ to create a true free-trade zone on the island that would function free of taxes and unencumbered by most Japanese regulations. Okinawa's experience with the existing "free trade zone" in Nakagusuku Port has been frustrating. The only such zone in Japan, it reduces the taxes on manufacturing companies from 40.9% to 27.4%, and does not reduce complex regulations. The original OPG plan for the zone was to have 75 companies by 2005; the actual figure is 19 companies with 320 total employees. The OPG has unsuccessfully requested GOJ for a more substantial tax break. It is worth noting that in addition to this one-of-a-kind free trade zone, there are several special districts in Okinawa where certain regulations do not apply. Called "tokku", these special districts are found throughout Japan, and can apply to economic, educational or other activities. There is a financial special district in the northern city of Nago; thus far results have been disappointing because very few regulations were actually waived. Other Influences on the Economy: ¶9. More than is the case with most prefectures in Japan, Okinawa's economy is subject to forces beyond its control. Funds from the central government, which often fund public works projects, have remained fairly steady at $5 billion annually. However, these funds are expected to decline in coming years due to recent GOJ tax reforms, and public construction is already declining. The increase in hotel and shopping center construction has replaced some but not all of the lost jobs. US military base employment of Japanese nationals has also been steadily declining, from 20,000 in 1972 to a current level of ¶8703. Lastly, while jobs are being created, this job creation has not kept up with population growth. ¶10. Farther behind the scenes, Okinawa's regional banks have recovered. A Bank of Japan official stated that while not mandated by the GOJ, regional banks have decreased their percentage of non-performing loans from over 11% in 2002 to over 5% in 2005. Profit and lending capital are both up. Perhaps more important than the current snapshot are guidelines to prevent a recurrence of non-performing loans. In the past loan decisions were based on collateral such as real estate; these decisions are now based on cash flows. Banks have developed quantitative methods to determine the risk of a proposal and the suitable risk-based interest rate. Previously, interest rates might have had an inverse relationship to risk, the idea being that healthy companies could afford to pay more. Now interest rates and risk are directly related. Lastly, there are mechanisms by which banks can sell at-risk loans, though at a discount. NAHA 00000066 004 OF 004 ¶11. (Comment) It appears that GOJ fiscal transfers to Okinawa will decline over time; only the rate of decline is in question. US military base spending and employment of Japanese nationals can also be expected to decline as a result of already proposed US troop reductions and base consolidations. Therefore, tourism will remain the driving force behind Okinawa's economy. While the number of tourists will continue to increase, there is a limited supply of Japanese travelers, and few efforts have been made to lure non-Japanese. Okinawa's best hope is to diversify the economy. The call center initiative has been successful; the question is how long the increase in IT/call center jobs can continue. On balance, the short term growth in IT/call center jobs seems assured; long term prospects are uncertain. ¶12. The OPG is still championing manufacturing jobs in the free-trade zone, though prospects remain dim. The OPG is are also hoping to leverage the IT/call center success story into making Okinawa the center of excellence for web site hosting. Though the prefecture has invested in IT worker training, the reasons a mainland company would want their website hosted hundreds of miles away are unclear. In effect, the OPG has chosen to put their eggs in three baskets: tourism, IT/call centers, and manufacturing. It would seem reasonable to consider additional areas, such as health foods, which have succeeded without OPG support. The long-term question for the economy is whether three baskets are enough. (End comment). REICH