Okinawa gung-ho on wooing companies

Saturday, March 30, 2002
By MAYUMI NEGISHI and TOSHI MAEDA
Staff writers


THE OKINAWA FACTOR

Tax havens for financial firms in Nago fuel hopes as skeptics grumble

The city of Nago, Okinawa Prefecture, wants to be home to more than a breathtaking coastline and a future U.S. Marine Corps airfield.

The city's leaders are pushing to create a financial tax haven in the eastern outskirts of the city, hoping to attract big money players and their investing finesse.

A law enacted by the Diet on Friday allows Okinawa to cut taxes for financial institutions, and brings the vision a step closer to reality.

The legislation will replace an Okinawa promotion and development law enacted when the prefecture was returned to Japan from U.S. rule in 1972. The previous legislation expires Sunday. The new law, which is effective until March 2012, also promises a similar arrangement for information technology firms relocating to envisioned IT zones.

"A financial sector will bring more than one-time benefits," said Tateo Kishimoto, mayor of Nago, located at least a two-hour plane trip and two-hour drive from financial regulators in Tokyo. "It will act as an engine for the community's self-sustained growth and make Nago a positive force in our nation's troubled financial industry."

It's a visionary idea, a departure from conventional public works projects, and Tokyo's Otemachi financial district is interested. But executives are saying they want to wait and see how well the system works before they invest.

Since Okinawa's return to Japanese rule 30 years ago, they say they have seen too many government-led economic projects in the prefecture peter out.

Tax breaks and then some

Under the new law, financial institutions can receive either a 35 percent corporate tax deduction for 10 years or up to 15 percent tax deductions on initial capital expenditures. Under an existing law to promote development in northern Okinawa, Nago also covers 80 percent of communications costs at new companies in designated industries.

It also plans to offer financial institutions office space at 1,100 yen to 1,600 yen per sq. meter -- 5 percent to 10 percent that of Tokyo rent -- at an incubator facility in the town of Toyohara on the east coast. Plus, it offers new companies grants of up to 100,000 yen a month for two years per local hire aged 30 or under.

Such tax havens are not new overseas. Dublin created the International Finance Service Center in 1987, where corporate taxes are down to 10 percent from 24 percent; JP Morgan & Chase Bank has an office in a tax haven in Tampa, Fla.; and some 2,776 companies are registered at Malaysia's Labuan Offshore Financial Service Authority, where corporate taxes are at 3 percent.

Dublin was able to create around 14,000 jobs at over 1,000 companies and slash its unemployment rate from 19 percent to 4 percent in 14 years.

Cynics call Okinawa's new tax breaks more "guilt money," to compensate for the relocation of the U.S. Marine Corps Futenma base in central Okinawa to off Nago, adding it will do little more than the 6.7 trillion yen the national government has sifted into Okinawa development projects since 1972.

Kishimoto, at least, believes the tax breaks could help transform Nago's future and that a financial hub could give birth to 7,000 much-needed jobs over the next 10 years.

Online securities firm United World Investments (Japan) K.K. is ready to prove that companies don't need to be in Tokyo to do finance. President Kazuto Hayashi announced in February he would transfer the firm's support and maintenance operations to the incubator facility. The company will start operations in June with a staff of 15.

"We can keep operating costs at a minimum in Nago, while maintaining productivity and access to both Tokyo and our headquarters in Hong Kong," Hayashi said. But more incentive is needed to draw companies from Tokyo and other parts of Asia, he said.

"Our decision was based on a set of very special conditions," Hayashi said. "Okinawa's advantages start to fade when you begin comparing operating costs with those in Singapore, Taiwan and China."

Nago officials are forced to agree.

Companies must employ at least 20 people to qualify for the corporate tax reductions under the new law, while the tax deduction will not exceed 20 percent of personnel costs.

The conditional clause precludes the creation of companies on paper only, but it also means that the law offers no incentive for firms with less than 20 employees, like United World Investments and venture firms. Because of the tax deduction cap, incentives for larger companies also diminish as profits rise.

Meanwhile, critics say the timing couldn't be worse to woo big domestic players. Survival is the big issue of the moment and the trend is to cut staff, as domestic banks, life insurers and brokerages continue to struggle with bad loans, portfolio losses and weak customer demand.

Critics see 'no prospects'

"I see no prospects of firms coming here. I even think this project might be scrapped before it can be realized," said Seigen Miyazato, a local political scholar and former professor at Ryukyu University.

Like Tokyo's other "Okinawa promotion" items, Miyazato said Tokyo overestimates potential demand for its projects. Building a financial district is as bad as a working plan to build a graduate school specializing in IT, nanotechnology and other high-tech industries in Okinawa, which he said is unlikely to attract students and less likely to offer reasons for students and teachers to stay.

Kazutoshi Oshiro, who heads the Nago municipal industrial development task force, countered that the city still has a trump card to play.

Mayor Kishimoto is requesting Nago be designated as the sole place in Japan to allow major companies to establish their own insurance firms and design policies especially to cover the parent company's operating risks. So far, over 100 Japanese firms have such captive insurance companies overseas, and Nago estimates the potential demand is at least twice that.

However, the national government has left the matter pending, as details about how to regulate these companies and their insurance policies has not been debated. The campaign has sparked vocal support from executives of the Japanese branches of U.S. financial giant AIG KK and French-based AXA Life Insurance Co., both with experience in captive insurance consultation.

But until Nago officials begin courting companies in May, when the city unveils a detailed plan for the tax haven, it is hard to tell which firms will come, and whether Okinawa's campaign to transform itself into islands teeming with Internet service providers, corporate data centers and Net securities companies will succeed.

Hiroshi Iizuka, a Cabinet Office official in charge of Okinawa policymaking, credits the government for its efforts in creating more than 4,000 jobs since 1997.

In the same period, Okinawa has increased subsidies to the firms that moved their operations to the prefecture.

"The people of Okinawa are in charge of leading the prefecture to a self-sustaining economy, but the government will do its utmost to create a new Okinawa," said Koji Omi, minister for Okinawa and Northern Territories Affairs.

An example of successful government campaigning was the establishment by Nippon Telegraph and Telephone Corp. of two call centers in Okinawa to take 104 number information calls placed from Tokyo. On a daily basis, 500 part-time employees handle an average of 100,000 calls.

Financial services company Orix Corp. is another example, with a full-time staff of 250 at its call center, established in Ginoza, just south of Nago, in 1998.

Less successful is a tax haven for manufacturers launched in 1998 in the Nakagusuku free-trade area in central Okinawa. Eight firms have committed to come, filling less than 10 percent of the company slots allotted.

"It took Dublin seven years before things began to really move," said Tsunemi Tamaki, deputy director of Nago's five-member International IT and Financial Center Establishment Team. "Don't jump to conclusions before we even start."

Economic disparities, bases frustrate Okinawa

Friday, March 29, 2002

THE OKINAWA FACTOR

As U.S. security alliance strengthens, locals turn from military issues to boosting business

2002 marks the 30th anniversary of Okinawa's reversion to Japan from the U.S. As the two nations boost their security alliance, Okinawa's strategic importance appears to be increasing, but it continues to suffer political, social and economic problems. This is the first article in an occasional series on Okinawa issues. By TOSHI MAEDA Staff writer Three decades after its reversion to Japan, Okinawa is still dominated by U.S. bases, suffering economic disparities and seeking ways to vent its frustration.

Okinawa has trailed the other prefectures economically.

Unemployment, which stood at 8.4 percent in 2001, is the highest among all 47 prefectures, while its wage level is the nation's lowest.

Although the key U.S. military installations are one of the island's major employers and revenue sources, residents near them often complain of noise and air pollution from aircraft, while forest fires and the drift of red clay caused by live-fire drills also draw complaints.

Okinawa, a bloody battle ground in the final months of World War II, was returned to Japan on May 15, 1972. The island prefecture, which accounts for only 0.7 percent of Japan's total area, still provides some 75 percent of the land being used exclusively by the U.S. military stationed in Japan.

A deterrence to China

During the Cold War, the U.S. dubbed Okinawa the "keystone of the Pacific" in deterring possible Soviet or North Korean aggression in Northeast Asia.

Since the collapse of the Soviet Union, however, bases in Okinawa are serving as a deterrent to China and possible conflicts in the Taiwan Strait, and to North Korea.

"Okinawa's advantage is that it is located 'not too close' and 'not too far' from potential war zones. In other words, you can project power while keeping an appropriate distance," said Toshiyuki Shikata, professor of Teikyo University and former commanding general of the Ground Self-Defense Force's Northern Area Army.

Okinawa lies about 800 km from the Taiwan Strait, 1,400 km from Pyongyang and 2,000 km from the Russian Far East.

"Some people argue Okinawa's role has ended now that the Cold War is over," Shikata said.

"But with the U.S. having shifted its focus from the north (the former Soviet Union) to the west (China and terrorist networks), the significance of Okinawa in a strategic sense is increasing even more."

In the post-Cold War world, the U.S. and Japan have sought to beef up their security alliance by pursuing an "equal partnership."

The Japan-U.S. defense cooperation guidelines, enacted in 1999, opened the way for the Self-Defense Forces to provide logistic and other noncombatant support for the U.S. military should hostilities erupt near Japan -- most likely in the Taiwan Strait or on the Korean Peninsula.

Richard Armitage, U.S. deputy secretary of state and an influential policymaker on Japan, noted in an October 2000 report that he "sees the special relationship between the U.S. and Great Britain as a model for the (U.S.-Japan) alliance."

The U.S. Quadrennial Defense Review released in September by the Pentagon highlighted the uncertainty of Asia's security environment.

"Maintaining a stable balance in Asia will be a complex task. The possibility exists that a military competitor with a formidable resource base will emerge in the region," the report said, obviously referring to China.

Another report compiled by the QDR 2001 Working Group set up at the U.S. National Defense University provides a clear explanation about Okinawa's strategic role.

"The air base at Kadena (in central Okinawa) is vital to U.S. security because it is the only U.S. air base within tactical fighter range of Taiwan," it said. "Without access to Kadena, the United States would be forced to rely primarily on carrier-based aviation to support defense of Taiwan in the event of a Chinese attack."

Okinawa, Shikata notes, is the "adhesive of the Japan-U.S. relationship."

Relocation efforts

Following the 1995 rape of a 12-year-old Okinawan girl by three U.S. servicemen, local resentment against the U.S. bases reached a peak.

In 1996, Tokyo and Washington agreed to relocate the U.S. Marine Corps Futenma Air Station from its central residential location in Ginowan on condition that Tokyo provide the marines with an alternative airport on the island.

Although Tokyo is pushing to build the alternative airport on a reef off the town of Nago, in the north of Okinawa island, the outlook remains uncertain as local governments insist that the U.S. military's use of the new airport be limited to 15 years -- a condition Washington is reluctant to accept.

Local media and scholars say the U.S. should reduce the number of marines in Okinawa, which accounts for more than 60 percent of the roughly 25,000 U.S service members stationed in the prefecture.

"The marines are here mostly for exercises only. I don't see the reason why they must be here if they can do the same exercises in the U.S.," said Seigen Miyazato, a political analyst in Okinawa.

Indeed, reduction in the number of Okinawa-deployed marines seems to be among the Pentagon's future options.

"The inherent mobility of the marines means there is no absolute requirement for them to be in Japan, particularly if they were no longer needed for a Korean contingency," said the QDR 2001 Working Group report.

"If a reduction in the U.S. military presence in Japan were necessary, the Marine Corps facilities in Okinawa and the Air Force base at Yokota (west of Tokyo) probably are the least vital of major American installations in the country and therefore the most likely candidates for reduction."

Fishing rods, not fish

Amid the island's bleak economic outlook and speculation that an immediate withdrawal or cutback in U.S. forces is unlikely, Okinawan voters in recent years have chosen leaders more conscious of the economy than anti-U.S. base sentiment.

In a 1998 election, then Okinawa Gov. Masahide Ota, a hardline opponent to the U.S. presence, lost his seat to local tycoon Keiichi Inamine. In Nago, Tateo Kishimoto, who declared his intention to accept an alternative to Futenma, won the mayoral race twice running in 1998 and 2002.

Under Inamine's "We need fishing rods, not fish" slogan, Okinawa has sought ways to stop relying on subsidies from the central government and stand on its own feet.

"When Okinawa reverted to Japan, it was in a miserable plight. Under (U.S.) rule, infrastructure had not been built," said Munetaka Takeda, chief of Okinawa Development Bureau at the Cabinet Office.

"Over the last three decades, our focus has been on bridging the infrastructure gap with the rest of Japan," he said.

"And now, the focus has shifted to improving its economic performance. Okinawa needs to invite firms with advanced technologies so they can attract more firms and industries in a ripple effect."

The subtropical prefecture, where tourism has served as the leading industry, came up with a new concept in 1998 to turn itself into a "multimedia island," hoping to serve as an Asia-Pacific information and technology hub.

To help realize the project, the Diet is expected to enact a new law today to allow Okinawa to launch tax havens for IT-related and financial firms -- the first such attempt in country.

The law also calls for setting up a technology graduate school in Okinawa and continuing a reduction to the fuel tax on flights between Okinawa and the main islands.

"We are satisfied as we have got what we wanted. This is pretty much like the 'one nation, two systems' policy that we were asking for," said Kazutoshi Oshiro, head of the industrial development task force at the municipal office of Nago, where the tax havens will be most likely introduced.

Some observers point out that the tax havens are the major component of the carrot-and-stick deal between Tokyo and Nago in an attempt to promote the construction of the joint civilian-military airport off Nago.

Events related to Okinawa bases

February 1995 -- Joseph Nye, a former U.S. assistant secretary of defense, declares the U.S. will keep 100,000 troops in Northeast Asia indefinitely, subject to review in 2015. This angers Gov. Masahide Ota.

September 1995 -- A 12-year-old local girl is raped by three U.S. servicemen. The incident spurs widespread public anger toward the U.S. presence.

April 1996 -- Japan and the U.S. agree to relocate Futenma Air Station on condition that Tokyo provide an alternate facility for the marines in the prefecture.

September 1996 -- In a prefectural plebiscite, 89 percent of those who voted -- 53 percent of eligible voters -- call for a reduction of U.S. bases in Okinawa.

December 1997 -- In a local plebiscite, 53 percent of the residents of Nago object to the town's plan to accept a Futenma alternate airport.

February 1998 -- Futenma relocation proponent Tateo Kishimoto elected mayor of Nago.

November 1998 -- Local business leader Keiichi Inamine elected governor of Okinawa.

July 2000 -- Group of Eight summit held in Nago.

February 2001 -- Private e-mail from Lt. Gen. Earl Hailston, then top commander of U.S. forces in Okinawa, to other U.S. officers is leaked. He referred to prefectural officials, including Inamine, as "all nuts and a bunch of wimps," venting frustration over the local response to an indecent act committed by a marine that month.

June 2001 -- A local woman in her 20s is raped by a U.S. Air Force staff sergeant.

December 2001 -- Tokyo and Nago agree to build an airport on a reef off Nago for marine helicopter operations.

February 2002 -- Nago Mayor Kishimoto re-elected.

How Okinawa fits in
	Okinawa	Entire nation
Annual income per capita	2.17 million yen (1999) (71.9% of natinal average)	3.02 million yen (1999)
Unemployment rate	8.4% (2001)	4.85% (2001)
Real ecconomic growth	1.2% (1999)	1.4% (1999)
Area used exclusively by U.S. military (As of March 2001)	23,445 hectares (74.8% of national total)	31,349 hectares
Population (As of Jan. 2002)	1.33 million (1.05% of national total)	127.28 million
Total area	2,272 sq.km ( 0.67% of national total)	337,880 sq.km

The only certainty is change

Sunday, March 17, 2002
ASIA'S SECURITY ENVIRONMENT
By BRAD GLOSSERMAN

THE UNITED STATES AND ASIA: Toward a New U.S. Strategy and Force Posture, by Zalmay Khalilzad, et al. RAND, 2001, 260 pp. (paper).

Since the collapse of the Soviet Union, Asia has enjoyed considerably more stability than has Europe, the other critical theater of the Cold War. It's fair to say that there has been far more continuity in the region than change. That, however, no longer appears to be the case. The historic June 2000 summit between South Korean President Kim Dae Jung and North Korean leader Kim Jong Il raised hopes for a normalization in relations between the two countries. Nuclear tests by India and Pakistan signaled a shift in the strategic situation in South Asia. China's economic modernization could transform the regional balance of power. Southeast Asia is still grappling with the effects of the 1997 economic crisis and increasing economic integration.

In other words, report the authors of this new study, "This is a dynamic security environment. The only certainty is that it could and likely will evolve rapidly over the next decade."

The stakes are especially high for the United States. In many ways, the U.S. is the security guarantor for East Asia. Its military presence provides reassurance to friends and deters forces that might try to cause trouble or hope to profit from instability. For Washington, an understanding of the forces at work in the region is critical. Even business professionals would do well to understand the "big picture" as they too benefit from the stability that the U.S. presence provides.

While this study does not reflect official U.S. policy, several of its authors have taken positions within the Bush administration. Zalmay Khalilzad, for example, is the point man for Afghanistan; Ashley Tellis is a key player in South Asia policy. Since they have input into the policy process, the insight the study provides into U.S. thinking about the region is valuable.

On the most basic level, U.S. thinking is shaped by its goals. According to the authors, "the overall long-term U.S. objective for the region should be to preclude in Asia the growth of rivalries, suspicions and insecurities that could lead to war. This overall objective necessitates, in turn, three subordinate goals: prevent the rise of a regional hegemon, maintain stability, and manage Asia's transformation."

The chief tools in this endeavor are the bilateral alliances the U.S. has with Japan, South Korea and Australia, along with the security relationships it enjoys with Singapore, the Philippines and Thailand. The authors believe the time has come to extend these ties and create a more interlinked network of relationships. "The United States should deepen as well as widen its bilateral security alliances in the form of a larger partnership. This multilateralization -- which would be a complement to and not a substitute for the existing bilateral alliances -- should include the United States, Japan, South Korea, Australia and perhaps Singapore, the Philippines and Thailand." Curiously, a similar proposal was the subject of much speculation late last year during U.S. defense consultations with Australia; the idea was dismissed, but it clearly has a constituency in Washington. Some would even extend it to include India.

The U.S. doesn't have to make those relationships formal to achieve its objectives. At a minimum, it should encourage communication with and among its partners in Asia, foster increased political and military transparency, and cast its net broadly in search for security partners. If security is as much psychological as physical, confidence building can go a long way toward enhancing peace and stability in the region.

The study itself -- and its recommendations -- makes up one-third of the volume. For most readers, the real value is in the rest of the book: background papers on the political-military environment in Northeast Asia, Southeast Asia, China and South Asia.

For Japan Times readers, the chapters on Northeast Asia and China are probably the most interesting. The starting point for analysis is simple: Asia is in the midst of a transformation. "Major uncertainties persist concerning the region's dominant political and strategic characteristics and America's place in it. . . . Policymakers need to assess the likelihood and consequences of alternative futures that are not simply marginal adjustments to the status quo."

Japan is trying to adapt to this new environment. A decade of economic stagnation, the rise of China and renewed appreciation of the utility of military force -- a product of the 1996 Taiwan Strait crisis and North Korea's 1998 missile test -- have had a profound effect on Japanese thinking. The political debate lags behind, but developments since the Sept. 11 terrorist attacks show that there is a new approach to security in Tokyo.

Although this study was completed before those tragic events, the Japanese reaction seems to confirm its thinking. Jonathan Pollack, a distinguished scholar of Northeast Asia and the author of the paper on the region, concludes that "security debate in Japan has advanced well beyond its prior conceptual and policy restraints. While the potential fragility of the ruling political coalition remains a limiting factor, it has not inhibited the development of more innovative Japanese policies."

For the most part, those changes are continuations of the existing defense framework: They pose no threat to the bilateral alliance. Still, Pollack notes that "evidence of shifting directions is palpable."

Accommodating those changes and encouraging responsible behavior on Tokyo's part is Washington's main task. That may sound condescending, but historically the U.S. has played big brother in the relationship and been prepared to shoulder Japan's defense burden.

Establishing a new balance for those duties and responsibilities will not be easy. Finding a new equilibrium is complicated by concerns that any restructuring of U.S. forces will raise questions about the U.S. commitment to the region. Pollack believes that prudent changes will allow the U.S. to "be better prepared to protect and advance its goals in East Asia as a whole even if it is moved to reduce the absolute size of its military forces permanently stationed in the region."

This is a key issue. Pollack continues, "Reducing and/or relocating (the large U.S. Marine Corps force in Okinawa) -- to Guam, perhaps, or to Hawaii -- would remove a perennially contentious issue from the agenda of U.S.-Japanese relations and will not significantly diminish U.S. capabilities for rapidly responding to events in East Asia. . . . the maintenance of a large U.S. Marine Corps presence on Okinawa may not be an effective use of limited U.S. political capital in the region." I am not sure the alliance managers in either Tokyo or Washington want to hear that argument.

The study makes a number of other critical points:

* A unified Korea is more likely to view Japan "as its main regional rival or as a security threat." Much depends on the circumstances of Korean unification: A united Korea with weapons of mass destruction (inherited from the North), missile programs and South Korea's economic strength would redraw (literally and figuratively) the map of the region. The authors note that the failure to resolve historical antagonisms between Japan and Korea could drive Seoul closer to China.

* Within two decades, China could emerge as a "multidimensional peer regional competitor" for the U.S. That does not mean that China would be equal to the U.S. globally, but it would be capable of asserting itself -- and frustrating U.S. intentions -- in the region.

* Southeast Asia's instability presents "unprecedented opportunities for internal and external actors -- whether political dissidents, religious extremists, separatists, or perspective hegemons -- seeking to overturn the status quo. In particular, it could present a rising China with opportunities to extend its presence and influence in the region."

* Finally, the authors note India's rise and its desire to project influence in South Asia and beyond, but caution against trying to harness that power; in other words, the hope of enlisting India in an anti-China strategy is probably unrealistic. "Indian security managers believe that the best insurance against asserted Chinese power lies not in participating in any evolving anti-China coalition, but rather in emerging as a strong and independent power center on China's periphery. . . . Indian policymakers are convinced that the challenges of guaranteeing Indian security, status, and autonomy require that the country play an active and responsible role abroad . . ."

That could have implications for Tokyo. The authors also note that "India and Japan could see a common interest in balancing Chinese influence in the region and in protecting sea lanes of communication from the Middle East."

When "The United States and Asia" was released, it was viewed as a key document for the (then) new Bush administration. That gives the document too much importance: It is not a blueprint for U.S. policy. As a "tour d'horizon," however, it is invaluable.
Brad Glosserman, a contributing editor to The Japan Times, is director of research at Pacific Forum CSIS, a Honolulu-based think tank.