Japan's Special Economic Zones Offer Opportunity for Overseas Companies

New Initiative Provides Regulatory Relief, Tax Breaks, Financial Support
January 2012 -- To say that 2011 was not an easy year for Japan would be a gross understatement. The Great East Japan Earthquake and tsunami, coupled with the continuing uncertainties in global financial markets, exacerbated the ongoing economic challenges Japan faces. In the face of these strong headwinds, the Japanese government recently adopted various measures to boost growth, and it is considering further measures to improve the health and competitiveness of Japanese industries.

One such step is the Special Economic Zones (known in Japanese as Sogo Tokku, or "Comprehensive Special Zones") initiative released in late December 2011, a core component of Japan's strategy for economic growth. Special advantages given to the Zones include relaxation of certain regulations, tax breaks, and financial support.

The Zones are of two classes. The International Strategic Zones (ISZ), of which there are seven, are aimed at nurturing industries that have strong international competitiveness. The Local Revitalization Special Zones, totaling 26, are designed to augment the business vitality of local communities. Among the main tax incentives for businesses in the ISZ is a lower corporate income tax provided through special depreciation allowances and certain income exemptions.

The Zones, however, are not only targeted at domestic Japanese companies. Overseas businesses can take advantage of various benefits, including regulatory, tax, and financial support. Some Zones even offer business development support in finding and establishing alliances with Japanese companies. They can help open doors not only to markets in Japan, but also establish hubs to expand growth to the rest of Asia.

Working to Attract Regional Headquarters to Japan
One ISZ is the Asian Headquarters Zone (AHZ) located in Ota City, Tokyo. Its mission is to encourage more overseas companies to locate their Asian headquarters in Japan, including those firms that were in Japan but have relocated to growing cities in other Asian nations. Currently, about 3,000 foreign companies have offices in Japan, down from the peak 3,500 in 2005. The AHZ aims to create an environment for overseas companies and their employees -- including required infrastructure for guaranteeing security -- that will entice more foreign firms to locate their headquarters in Japan.

Tsukuba Specializes in Scientific Innovation
Other Special Economic Zones specialize in specific themes, such as environment, life science, and innovation. The Tsukuba ISZ, located in the college town of Tsukuba, Ibaragi Prefecture, is an excellent example. Taking advantage of the vast scientific assets of Tsukuba University as well as surrounding research organizations and think tanks, the Tsukuba ISZ aims to boost new industry sectors, such as life science, robotics, and clean technologies. Initial projects include cancer research, algae-based biomass energy, and nanotechnology.

Meanwhile, the Kansai Innovation ISZ, based in the cities of Kyoto, Osaka, and Kobe, emphasizes collaboration among cities and prefectures in Western Japan, helping to raise the region's profile vis-a-vis the dominant Tokyo-area economy. Its initial industrial targets include six areas: pharmaceuticals, medical equipment, advanced medical procedures, preventive healthcare, batteries, and smart communities.

Green Based Zone near Continental Asia
Turning south, in Fukuoka the Green-Asia ISZ looks to exploit its location as the major Japanese city closest to continental Asia (indeed, Fukuoka is closer to Shanghai than to Tokyo). It intends to achieve economic growth by providing environmental solutions -- including water and wastewater technologies, and smart community know-how -- to rapidly expanding areas of Asia.

Boosting Japan's Economic Prospects
Throughout Japan, therefore, the Special Economic Zones offer overseas companies excellent opportunities for gaining a foothold in the Japanese market or expanding exisiting operations. The incentives offered should both help individual firms in local markets and buoy Japan as it seeks to recover from the devastating blows it has faced.

Note: This article was written by Cando Advisors -- a consulting firm supporting clients on international business development, strategic alliance, and investment, focusing on the Japanese market -- and co-author Bob Schneider.