The regional Japan growth paradox

Speaking to the Australia and New Zealand Chamber of Commerce in Japan last week, ANZ chief executive Shayne Elliott quipped it was rare to speak at a multinational event where all the audience understood a rugby reference.

He may have glossed over the point many Australians – like me – have little understanding of rugger but for Japan the 'beastly' game played by gentlemen is indeed good news. It’s just 1000 days until Japan hosts the 2019 Rugby World Cup and the event is potentially more economically interesting than the more-hyped Tokyo Olympics of 2020.

"While Japan as a whole is making positive steps towards growth, the biggest are benefitting more than regional centres."
Andrew Cornell, BlueNotes managing editor

For one, the RWC runs for a month, not just two weeks. Even more significantly, while several Olympic events will be held outside Tokyo, 12 cities across as many prefectures, from Sapporo in the far north to Fukuoka in the far west will host the rugby.

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In Japan, cities are benefitting more than regional centres. PHOTO: Andrew Cornell

That’s significant because while Japan as a whole is making positive, albeit tentative, steps towards more robust economic growth the biggest cities – and especially Tokyo – are benefitting more than regional centres. And it is the regions where Japan’s potentially debilitating population shrinkage will be most profound.

Even in the depths of Japan’s frequent recessions since the ‘bubble economy’ burst in 1989, you wouldn’t know it by the lights in Ginza, the crowds in Shibuya or seemingly endless array of look-at-me architecture being built to showcase luxury brands.

The regions – and indeed even the less glamorous suburbs of the cities – are different. Shops in once thriving shopping strips are shuttered, young people leave for Tokyo, Osaka or Fukuoka.

Paradoxically, those lesser-known regions are also an underappreciated destination for foreign investment and business. Greater Osaka has a bigger GDP than Australia. Several prefectures by themselves would rank in the G20.


The challenge – and opportunity – in Japan is twofold: grow the economy and reduce the population shrinkage. The two are interlinked.

As the minister responsible for regional development Shinjiro Koizumi (the son of Junichiro, Japan’s most reformist prime minister in recent history) says “fostering economic activity outside Japan’s megalopolises, meanwhile, will also encourage procreation”.

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PHOTO: Andrew Cornell

According to the government, many of Japan’s big-city dwellers would prefer to live in a less-urban setting if work were available.

The demographic challenge is huge. Japan is older and ageing faster than any other economy. The median age is around 46 and 25 per cent of the population is over 65. According to the government, population shrinkage and greying are causes and also results of demographic differentials between regions.​

Urban centres draw people—especially young people—away from nonurban areas. “Childbearing rates for women of the same age brackets tend to be lower in big cities than in the countryside or in provincial towns and cities,” the government notes in its regional growth initiative. “So urbanisation can undermine the nations’ fertility. The migration of young people, meanwhile, raises the average age in nonurban regions and lowers it in metropolitan regions.”

(A significant part of the challenge is also the historical under-representation of women in the permanent workforce and particularly in senior ranks. PM Shinzo Abe’s “womenomics” is designed to address this but the infrastructure to entice and enable to both work and have families is still under-developed in Japan.)​

Japan though is still the world’s third largest economy, Australia’s second largest trading partner and one of the richest nations in the world per capita. It is a land of sophisticated companies and consumers, an ideal destination for not only the bulk commodities of Australia and New Zealand like iron ore, coal and milk but the quality products carrying high margins.​

The Japanese government’s initiatives for the regions include increasing the competitiveness of Japanese agriculture, incentives and deregulation in support of regional entrepreneurship, the establishment of a nationwide network of village hubs to serve localities with medical care and with other crucial services, and investment in transport infrastructure for supporting stepped-up interchange among regional centres.​

The attractions for foreign business and investment are significant.

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PHOTO: Andrew Cornell

Speak though to people like Andrew Gauci, a two-decade resident of Japan, the head of Lendlease in the country and also the president of the Australian and New Zealand Chamber of Commerce and he concedes Japan struggles with its profile for business.

“People look at China, obviously, it’s the big market, but they forget Japan is also big. And Japan, with its long established relationships, is lower risk,” he says.

Meanwhile, Japan is improving its welcome for foreign investment while the perception of business is China is the situation is becoming more difficult. The latest American Chamber of Commerce in China survey of business conditions – the biggest annual barometer of foreign (not just American) sentiment – found 80 per cent of respondents (which include Chinese managers of foreign firms) feel less welcome.

“It’s clear from these findings that many foreign companies are being forced to rethink their strategies to respond to the challenges in the business environment,” Stephen Shih, a Beijing-based Bain & Co partner, noted about the survey.

The survey highlighted policy opacity, unpredictable regulation and a perceived stalling of economic reforms. Japan however – which in the past had been accused of similar issues – is actively streamlining regulation and processes for foreign investment. Geopolitically too the relationship between Japan and Australia is becoming firmer with shared anxieties around China and a Trump-led America.

The 2015 Japan-Australia Economic Partnership Agreement has been particularly positive. According to the Australian government “to date, JAEPA is by far the most liberalising trade agreement Japan has ever concluded”.

The regional opportunities Japan is focussing on – and encouraging foreign involvement in – are things like satellite centres. In the Tokushima Prefecture village of Kamiyamacho the offices create web content and conduct other digital work for Tokyo-based companies.


“The project leader's stroke of genius,” said Koizumi of the Kamiyamacho project, “was the notion of ‘creative depopulation.’ He realises overall population decline is unavoidable over the long term. But he set out to shape a demographic profile to engender lasting vitality for the village: young professionals, for example, and people to serve them, such as two who have opened a bakery and a French restaurant.”

In agriculture, another sector in which previously unwelcome foreign and corporate involvement is now welcomed, the rapidly ageing farming population has led a rethink. New laws allow corporates to lease more farmland.

While foreign investment in farming has long been a bridge too far for the agricultural sector, imported intellectual capital such as agricultural technology is less of an issue.

According to McKinsey & Co in a report “Strengthening Japanese Agriculture”, agtech “is advancing rapidly, and harnessing these innovations could help Japan to achieve its goals for the sector.

In one indication of the pace of technological development, venture capital funds are streaming into agtech companies, technology companies focused on addressing challenges in the agricultural sector. Between 2013 and 2014, the amount of venture capital funding invested into the industry grew fivefold, from $US900 million to $US4.6 billion.”


Regional centres – and especially those which will welcome rugby fans – are also focussing on foreign tourism which is currently concentrated in Tokyo, Kyoto and the ski fields of Hokkaido and Nagano prefecture.

In 2016 the number of foreign visitors to Japan reached 24.03 million, up 22 per cent from the previous year. This is a record high for the fourth consecutive year and nearly four times the level five years earlier. The government’s target for 2020 is 40 million.

The bulk of growth is from neighbouring Asian countries, particularly China, Taiwan and Thailand. The Japan Tourism Agency plans to have 100 regions specially designated and their brands promoted to foreign tourists.

However again more opportunity exists.

For companies outside Japan, particularly Australia and New Zealand, Japan is something of a forgotten giant. The regional opportunity was never really even understood, let alone forgotten.

Andrew Cornell is managing editor at BlueNotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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