FOREIGN INVESTMENT IN JAPAN: DIFFERENT REGIONAL APPROACHES

UNCLAS SECTION 01 OF 05 TOKYO 001199

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E.O. 12985: N/A
TAGS: EINV PREL ECON OECD JA
SUBJECT: FOREIGN INVESTMENT IN JAPAN: DIFFERENT REGIONAL APPROACHES

Refs: A) Tokyo 408
B) Tokyo 119
C) 07 Nagoya 59

Sensitive but Unclassified - Not for the Internet


1. (SBU) Summary: Japanese regional authorities' attitudes toward
foreign direct investment are largely positive, but when it comes to
attracting foreign investors, while some are aggressive, others are
ineffective or downright clueless. Limited authority to offer tax
or other incentives to potential investors is a further important
constraint on prefectures' and cities' abilities to attract
investment. The central government continues to play a major role
and some regions look to the local branch of a ministry, e.g., METI,
to lead in directing/
implementing investment promotion strategies. Creative local
approaches can work, as successes in the Nagoya region demonstrate.
A lack of sufficient data to show which policies work, however,
undercuts local, regional, and national abilities to evaluate
programs and to adjust efforts accordingly.


2. (SBU) Without more energetic and focused efforts by regional
governments, and the ability to make more far-reaching concessions
on tax and other issues of concern to potential investors, the
national-level institutions will keep their hold on FDI promotion.
Such a situation reinforces the trend for growth in Tokyo and a few
other regions, even though the result is one that contributes to
public unease with growing economic disparities within Japan. As in
any country, some part of Japan will do better than others when it
comes to attracting foreign investment. Right now, though, it seems
the GOJ relies on old patterns rather than making needed changes.
This cable is the first of two reports on regional investment trends
produced jointly by Embassy Tokyo and Consulates Fukuoka, Nagoya,
Naha, Osaka Kobe, and Sapporo. The second will look at policy
implications and how the U.S. might encourage regional efforts to
attract and to use FDI. End Summary.


3. (U) Foreign direct investment continues to flow into Japan.
According to preliminary Ministry of Finance (MOF) statistics, the
net inflow of FDI in the first two months of 2008 was $3.85 billion,
despite a concurrent outflow of portfolio investment, a sharp
decline in the Tokyo Stock Exchange indices, and a number of
high-profile government actions suggesting the GOJ might be taking
steps to limit FDI. Government policy since 2001 has been to
increase Japan's stock of FDI to stimulate economic growth and
productivity. Between 2001 and 2007, Japan's FDI stock tripled as a
share of GDP, from less than one percent to approximately three
percent or 15.4 trillion yen ($146 billion.) The GOJ hopes to raise
that figure to the equivalent of five percent of GDP by the end of
JFY-2010 (March 2011),a share still well below the average levels
in other OECD countries.

Investment Flows: Few Regional Data
--------------


4. (U) The Bank of Japan and MOF maintain good data on nationwide
investment stock and flow, based on balance of payments figures.
However, it is difficult to get an accurate statistical picture of
regional patterns. Local government contacts state the lack of
statistics makes it difficult for them to track success and is an
obstacle to promoting FDI.


5. (SBU) Some prefectural governments collect information on FDI
success stories, but data are often incomplete or out of date.

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Fukuoka officials maintain an internal list of foreign companies
operating in the prefecture that includes the location, nationality
and business sector of the invested firm, but not the value of
individual investments. Neighboring Kumamoto collects information
only on greenfield FDI investment. Kumamoto's list thus shows only
11 foreign investments in the prefecture and none since 2005. Mie,
southwest of Nagoya, reports, as of April 2008, 21 manufacturing
enterprises in the prefecture and 16 non-manufacturing enterprises
with at least 50 percent foreign ownership, but, again, with no
estimate of investment value. Hokkaido does not collect information
on FDI leaving the task to the regional branch of the Japan External
Trade Organization (JETRO) -- which has not updated its list in five
years. Miyagi prefecture in northern Honshu maintains a list of
foreign companies in the prefecture on its website, which is updated
annually.


6. (SBU) The private sector M&A consultancy Recof collects data on
M&A deals by prefecture, but defines "inward" M&A as any investment
originating outside the prefecture. Recof does not distinguish
between cross-border and domestic deals. Nevertheless, Recof's data
do indicate which regions are net recipients of outside investment.
The vast majority of inward M&A deals in 2007 (181 out of 308)
target the greater Kanto region (Tokyo and its three surrounding
prefectures of Kanagawa, Chiba, and Saitama.) The next largest
number of deals (46) was in the three central Kansai prefectures of
Osaka, Hyogo, and Kyoto. These seven prefectures account for 45
percent of Japan's GDP and 73 percent of Japan's inward M&A.

Nagoya: Enthusiastically Promoting FDI
--------------


7. (SBU) Not surprisingly, there is a wide variety in the type of
investment regions seek and receive, taking advantage of different
geographic factors and different economic and industrial bases. The
most impressive, and arguably most successful, is the Greater Nagoya
Initiative (GNI). The GNI's stated mission is to bring world class
companies, technologies, human resources and information to Central
Japan's Chubu region. The GNI offers "one-stop" service for
potential foreign investors, including research, public relations,
and business matching services -- and also holds investment
promotion conferences and seminars throughout the year, often
focusing on specific sectors (e.g., robotics or health care). The
GNI also provides advice on legal and regulatory requirements and
free temporary office space to prospective investors, services JETRO
alone provides in other regions.


8. (SBU) Most Chubu regional governments also have individual
economic development offices that court foreign investment. Local
governments welcome all types of investment, but target firms that
complement the region's existing high-tech industrial base in DRAM
flash memory and auto parts. Mie's incentive programs have
attracted FDI in producing large screen LCDs and integrated circuits
by touting the prefecture's central location and concentration of
manufacturing industries.


9. (SBU) Other recent investment successes in the Chubu region are
in logistics/distribution. Nagoya port hosts the Nippon Juice
Terminal, essentially a tanker terminal for orange juice
concentrate, owned by Brazil's Iosco Corporation, through which
almost 50 percent of Japan's imported orange juice passes. The
terminal, used jointly by both Coca-Cola and Pepsico, was built in
1992 after liberalization of the Japanese citrus market and is a
good example of how trade liberalization can lead directly to FDI.


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10. (SBU) Auto parts maker Dana Corporation's $10 million Toyohashi
technical center is an example of local creativity playing a key
role in attracting FDI. Toyohashi's proximity to the heart of the
Japanese auto industry was the main factor for choosing the
location. But the reduced land price offered by Toyohashi City was
also important. Moreover, Toyohashi "warranteed" the site by
offering to repay Dana's purchase price after ten years, if Dana
decides to close the project and returns the land in its original
condition.

Kyushu looks to Asia
--------------


11. (SBU) Kyushu, in southwestern Japan, seeks to use proximity to
China and Korea to attract FDI. Greenfield investment in the region
is limited and mostly a niche market, but real estate investment is
increasingly important. According to the Kyushu branch of the
Development Bank of Japan, northern Kyushu, and in particular
Fukuoka, is attracting money from abroad, especially real estate
investment funds, and the average land price, although still only
half that of comparable property in Tokyo, has increased rapidly in
the past two years. United States and European investment funds are
particularly active as are sovereign wealth funds. In March 2007,
Singapore's Government Investment Corporation purchased "Hawks
Town", a multi-use commercial development along Fukuoka's
waterfront.


12. (SBU) Local leadership is also an important contributor to
success. Fukuoka Governor Wataru Aso, head of the Japan Governor's
Association and an articulate advocate for pro-investment policies,
looks to Asia for FDI and believes companies must have a global
outlook. The governor thinks young Asians' interest in "J-Pop"
culture and animation can help Kyushu-based businesses and attract
investment.


13. (SBU) Fukuoka also seeks to attract companies requiring high
quality inputs -- such as stable energy supplies or clean water --
that may be reluctant to build facilities in developing countries,
according to the Business Development section of the Fukuoka
prefectural government. Some foreign auto parts companies have
moved to Kyushu to take advantage of rising auto production there.
Fukuoka is now an important parts manufacturing center and local
businesses are benefiting from the spillover effect. Auto parts
manufacturers that set up to supply Toyota now do business with
other manufacturers like Nissan. In addition, Fukuoka's government
has hired private sector experts to work in promoting IT,
semiconductors, biotech, environmental technology and hydrogen
energy.

Hokkaido and Tohoku Have a Domestic Focus
--------------


14. (SBU) Northern Japan is the opposite of Kyushu. There are few
regional strategies for attracting foreign investment. Hokkaido's
Prefectural Government maintains a web-based "Business Investment
Guide" in Japanese, English, Chinese and Korean that lists
Hokkaido's two overseas offices, in Singapore and Seoul, even though
the former closed in March 2008. However, nothing on the site
specifically targets foreign investors. Instead, prefectural
officials here woo domestic investment. For example, most regional
governors make pilgrimages to Nagoya seeking investment from Toyota
or its suppliers, and Hokkaido, Aomori, Akita and Iwate prefectures
have set up investment promotion offices in Nagoya.


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15. (SBU) Miyagi Prefecture, centered on the city of Sendai, is
unique in the region for its outward orientation. As in Kyushu,
personalities are important. Both Miyagi Governor Murai and Sendai
Mayor Umehara -- the latter a former METI official -- take a
personal interest in promoting investment. Sendai was the site of
the U.S.-Japan Investment seminar in October 2006. Although several
recent investment successes are associated with domestic companies,
many local officials speak positively about FDI and credited the
sharp land price increases around Sendai's train station to an
influx in FDI. This welcoming attitude towards foreign investors is
clearly a factor in Sendai's success.


16. (SBU) Meanwhile, investment in the rest of Tohoku has stalled.
Officials from Aomori, Honshu's northernmost prefecture, admit it
has received no FDI in recent years and neither the local government
nor the regional JETRO office collects data on foreign investment.
Aomori's Industrial Promotion Guide describes incentives for firms
that create new employment opportunities, but targets Japanese
multinationals. Likewise, Akita prefectural officials could only
identify a single foreign-owned company in the prefecture, and that
was the result of the foreign acquisition of the firm's Tokyo-based
parent. Neighboring Iwate has only a Japanese language "Corporate
Location Guide" for prospective investors and does not appear to
make any special effort to attract foreign investment.

Kansai: Building on Regional Expertise
--------------


17. (SBU) Local governments in the Kansai are aggressive in
courting specific types of FDI. Osaka and its neighbors look more
to mainland Asia than to other potential sources, with more than
half of Osaka's FDI coming from Japan's neighbors. Asian investment
also tends to be smaller scale compared to U.S. or European
investment, according to METI Kansai Bureau. As with other regions,
local governments have done a poor job in tracking the value of
inward FDI, which hampers efforts to improve the situation.


18. (SBU) A brake on international penetration is Kansai's
conservative corporate culture that prides itself on the region's
history and ability to provide for itself without outside
interference. For companies with high tech patents and global
market share, this pride has sometimes been an obstacle to new ideas
from abroad. Local businesses tend to see foreign investors as
corporate rivals rather than partners.


19. (SBU) Osaka does encourage FDI in distribution, wholesale, and
device manufacturing sectors but, due to higher operating costs,
does not actively seek greenfield investment in manufacturing.
Still, Corning Glass has partnered with Sharp to provide high
quality glass for a new flat panel display plant under construction
south of Osaka. Kansai is a second priority market for service
investment, such as the finance and insurance sectors, while Nara
seeks to boost tourism by promoting international hotel
construction.

Okinawa Follows its Own Path
--------------


20. (SBU) Okinawa, Japan's southernmost prefecture, is unique, both
for its distance from Japan's main islands and the economic impact
of U.S. military bases. Foreign investment centers largely on the
tourism sector. American investment funds own 18 hotels and four
golf courses. Local officials estimate, over the next five years,
there will be as many as 24 new hotel projects, totaling some 4000

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rooms, at a cost of $1.6 billion. Taiwan investment is an important
factor, given its geographic proximity.


21. (SBU) Another growing sector for FDI in Okinawa is telephone
call centers, and there is discussion of developing the prefecture
as an IT hub. Since 1990, government efforts spurred creation of 51
call centers and another 111 IT-related companies. Together, these
companies employ 14,700, the majority in call centers. Last year,
Citigroup purchased land close to Naha International Airport and
announced plans to invest $43 million in a new management center,
which will serve as a back up to its Tokyo Center and also function
as a call center.


22. (SBU) Petroleo Brasileiro S.A., Brazil's national petroleum
company, agreed in November 2007 to buy the local oil refinery
facility of Tonen General Oil (a subsidiary of Exxon Mobil).
Petroleo Brasileiro plans to invest up to $1 billion into this
facility to build a base for introducing Brazilian biofuel and
petroleum products into Japan and Asian regional markets.

Chugoku: National Institutions Take the Lead
--------------


23. (SBU) In the Chugoku region of Western Japan, the Industrial
Promotion Division of METI's regional office runs an active Invest
Japan program and publishes an impressive English language guide
with extensive economic, demographic and social data on the region.
The agency's promotional material describes the business advantages
of the six individual prefectures as well as of the region as a
whole. The bureau has identified auto manufacturing, information
technology and communications, and biotechnology as priority areas
for investment. It also encourages investment in emerging
industrial sectors that build on existing regional specialization
including "key industries for the next generation" such as
"mechatoronics" (the intersection of mechanics and electronics),and
flat-panel displays. Officials also promote environmentally
friendly energy production, such as woody biomass.

Comment
--------------


24. (SBU) Local governments do not have the tools available to
their counterparts in the U.S. or other countries to attract foreign
investment and the resulting economic activity. The result is
further growth in Tokyo and its environs along with a few other
centers. As a result, the trends leading to economic disparities
decried by the Japan's public and politicians continue.

SCHIEFFER