OKINAWA'S ECONOMY: A SLOW TRANSITION

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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.


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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

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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.

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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