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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