Zoning in on Opportunity

With new special economic zones, ongoing deregulation, a major IPO due this fall and the promise of the 2020 Tokyo Olympics—investors have every reason to feel bullish about Japanese real estate.

The Six Special Economic Zones (SEZs)

On March 28 this year, the Council on National Strategic Zones finally unveiled the six special economic zones (SEZs). The SEZs constitute a key component of Prime Minister Shinzo Abe’s economic revitalization strategy, or “third arrow.”

Each SEZ will see regulations governing one specific area of business where it is a strong performer being loosened. Greater Tokyo will focus on attracting international companies and Greater Kansai on developing advanced medical technologies. In Yabu and Niigata, two smaller country cities, the emphasis will be on agricultural reform and large-scale agriculture. The island of Okinawa will seek to establish itself as a destination for international tourists. Fukuoka, meanwhile, has been designated a special labor zone where rules governing hiring, firing and the setting up of new businesses will be relaxed.

Passed in 2002, the Special Measure for the Revitalization of Cities spurred
a wave of urban redevelopment around Japan. Many new office districts were built and the competition between different areas ratcheted up a notch. The announcement of the SEZs should now give a further impetus to developers.

The market, however, failed to respond with as much enthusiasm as expected. For example, Swiss investment bank UBS noted that while it liked the fact that the idea of setting the effective rate of corporation tax at 20.2 percent remained in place, the fact that none of the other major policies discussed last September even got a look in was a big minus. Mizuho Securities, meanwhile, lamented the “lack of detail” in the zones’ geographic designation and in the economic sectors slated for deregulation, and was “disappointed” that Aiichi prefecture was not selected as an SEZ for roads. In the case of real estate it was a similar story: no information was provided on the all-important loosening of the rules controlling the ratio of a building’s floor area to the overall lot area.

Tokyo Olympics Main Stadium
Tokyo Olympics Main Stadium

In fact, the year-to-date stock market performance of Japanese real estate developers has been another disappointment. As a group, real estate-related stocks have fallen 23 percent. Despite staging a couple of abortive run-ups on either side of the SEZ announcement, their rise tailed off and in late April they were bumping along their lows for the year.

One should nonetheless bear in mind that the March SEZ announcement was only a first salvo. The sort of news the market was hoping for then may well be forthcoming at a later stage. This time, few if any of the more complex and controversial issues—reducing the rate of income tax for international business people, extending the operating hours of the Tokyo Metro, loosening the regulations on who can manage railway stations and airports, the privatization of ports, and the development of large resorts including casinos—were touched upon in the government’s statement.

It is expected that the deregulation policies which did not make it into the Japan Revitalization Strategy announced in June 2013 will be announced, along with supportive measures designed
to encourage the rejuvenation of businesses, in late June this year as part of the new Growth Strategy package. This is when providing a proper level of detail will be genuinely crucial. An LDP Dietmember close to Abe’s inner circle assured me that Akira Amari, Minister for National Strategy and Economic Policy, is very likely to propose additional policies and that enthusiasm for bringing clarity to the reduction of the effective corporation tax rate is rising.

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