VZCZCXRO3511
RR RUEHFK RUEHGH RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #1199/01 1230109
ZNR UUUUU ZZH
R 020109Z MAY 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 3914
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAWJA/JUSTICE DEPT WASHDC
RUEATRS/TREASURY DEPT WASHDC
RHEHAAA/NSC WASHDC
RUEHFR/AMEMBASSY PARIS 6070
RUEHUL/AMEMBASSY SEOUL 9126
RUEHBJ/AMEMBASSY BEIJING 3109
RUEHRL/AMEMBASSY BERLIN 1385
RUEHFT/AMCONSUL FRANKFURT 0480
RUEHOK/AMCONSUL OSAKA KOBE 1250
RUEHFK/AMCONSUL FUKUOKA 7571
RUEHKSO/AMCONSUL SAPPORO 8166
RUEHNAG/AMCONSUL NAGOYA 5936
RUEHNH/AMCONSUL NAHA 9958
RUEHGH/AMCONSUL SHANGHAI 0399
RUEHHK/AMCONSUL HONG KONG 6495
RUEHGV/USMISSION GENEVA 3301
RUEHIN/AIT TAIPEI 7003
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 05 TOKYO 001199 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP - AMBASSADOR HASLACH 
DEPT ALSO FOR EAP/J AND EEB/OIA 
DEPT PASS USTR FOR CUTLER, BEEMAN, KALLMER 
NSC FOR TONG 
TREASURY FOR AND IA/CARNES AND POGGI 
USDOC FOR 4410/ITA/MAC/OJ 
GENEVA FOR USTR 
 
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. 
 
TOKYO 00001199  002 OF 005 
 
 
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. 
 
 
TOKYO 00001199  003 OF 005 
 
 
¶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. 
 
 
TOKYO 00001199  004 OF 005 
 
 
¶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 
 
TOKYO 00001199  005 OF 005 
 
 
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