Japan's Tohoku region uses FDI to rebuild and reboot

Swept away in 2011, Onagawa has risen from its ruins to become an unlikely start-up incubator in eastern Japan. A sleepy fishing town in the Miyagi prefecture, Onagawa disappeared under the 20-metre high tsunami that followed the country’s strongest ever earthquake on March 11, 2011. Once the waters retreated, they left behind a doomsday scenario. About 90% of the buildings had been washed away or reduced to rubble, and almost 1000 people, or 10% of the local population, lost their lives.

Six years on, local authorities are midway through a massive reconstruction programme. As basic infrastructure is restored, a brand-new shopping street has become a catalyst for young entrepreneurs to come and contribute to the rebirth of Onagawa.

“In this town we had to restart everything, including industries and businesses,” says Yoshiaki Suda, the mayor of Onagawa. “Instead of inviting big factories as means of revitalising the economy, we invited new businesses. My mission is to foster these new businesses and to make them as vibrant as fisheries.”

Return to life

A symbol of the tsunami’s devastation, Onagawa has become an icon of Tohoku's reconstruction that followed as its shopping high street, inaugurated only in February, bursts with life on weekends and bank holidays, offering visitors a wide range of locally produced products from electric guitars to artistic tiles, body products and craft beers.

With the number of evacuees throughout the Tohoku region falling to 140,000 in October 2016, from 470,000 in the immediate aftermath of the earthquake, local communities are slowly rebuilding. This gives local authorities breathing space to reengineer affected economies through the development of new businesses and sectors, without abandoning the traditional sectors of fishery and agriculture.

Also in Fukushima prefecture, where the problem at one of the reactors of the Daiichi nuclear plant has yet to be fixed and inevitably slowed down the whole recovery in the area, the local government has finally outlined a strategy to reignite the economy based on new sectors such as renewable energy, robotics and medical equipment, which have flourished in the aftermath of the disaster.

“We are reaching a point where the reconstruction effort is gradually shifting from housing and basic infrastructure to investment promotion,” says Masaya Hasebe, head of the Japan External Trade Organisation’s Sendai office.

Reconstruction in the making

Largely dependent on agriculture and fishery, business in Tohoku has yet to fully recover from the twin disasters, with only half of local companies estimated to have regained their pre-earthquake sales levels.

The fishing and food processing industries, which form the main economic backbone in coastal areas, were particularly badly hit. Besides the destruction of the local marine ecosystem, concerns over nuclear radiation levels in the area have crippled local sales, with countries worldwide banning imports of food products from East Japan. Diversification has thus become a necessity.  

“Since 2005, we have made efforts to reform the economic structure, but we had to put these on hold because of the earthquake and the reconstruction effort,” says Masashi Takahashi, head of the global business support division of the Miyagi prefectural government. “Now we have launched initiatives to attract investment and we hope that moving forward, the interest of local and foreign investors will grow.”

The Miyagi prefecture government has been particularly active in exploiting the pool of resources available from the reconstruction programme in the form of investment incentives. Overall, the national government set aside Y6500bn ($58.9bn) for reconstruction in affected areas between 2016 and 2020.

Three main subsidy programmes are currently available for local and foreign investors across the board, targeting the creation of new industries and research facilities in areas affected by the tsunami, as well as the development of zones for private investment promotion in specific industries including automotive, clean energy, advanced electronic equipment and medical equipment, aerospace and food processing.

It is not the first time the Miyagi prefecture government has utilised financial incentives to lure major investors to the area. The Japanese subsidiary of US-based Prudential Life Insurance chose Sendai for a second centre to share admin functions with its main headquarters in Tokyo in 2004.

“We were looking for an alternative location to our main headquarters in Tokyo to diversify the earthquake risk and we picked Sendai because the prefecture government offered us very lucrative conditions in the form of tax breaks,” says Motofusa Hamada, Prudential’s director and executive vice-president, who adds the availability of skilled workers, the proximity to Tokyo (just 90 minutes away via bullet train) and rent costs about 30% lower than the capital as key reasons that make Sendai attractive.

Renewable future

Despite its cost competiveness, and generous incentive packages, there is a lingering consensus that the reconstruction of the Tohoku region kept afloat industries and companies that were already struggling before the earthquake, and are still struggling. There are exceptions though – the standout being the renewable energy sector.

The region has become a hotspot for investment into solar and, to a more limited extent, wind energy. These two industries are capitalising on the national feed-in tariff scheme established in 2012, with foreign investors playing a major role in the development of renewable energy sources in affected areas across the Iwate, Fukushima and Miyagi prefectures.

Overall, they have announced 14 new projects worth more than $1.9bn since 2011, which every foreign investment project announced in the area since the earthquake struck in March 2011, according to figures from greenfield investment monitor fDi Markets.

Facing major electricity shortfalls due to the suspension of any activity at the Daiichi nuclear plant, Fukushima prefecture alone saw its installed capacity of non-conventional renewable energy jump to 1.2 gigawatts in 2015, up from 363 megawatts in 2011, largely thanks to small hydro power generation. Today, production from renewable source meets about 26.6% of the prefecture’s energy demand, according to government figures.

“We want to fully meet our energy demand with renewable sources by 2040,” says Seiichi Suzuki, head of Fukushima Electric Power, a local renewable energy developer with a pipeline of project under development of about 600 megawatts.

Tech help

Renewable energy is not the only investment focus of Fukushima’s authorities. The enormous challenge posed by the Daiichi reactor ­– the decommissioning of which remains in doubt because of the uncertainties surrounding damage at one of its three nuclear reactors – is driving the development of robotic technologies that can operate in highly contaminated environments.  

“In order to inspect the reactor, many robots are now being used, and this kind of technology will be developed directly in the Fukushima areas,” says Kazufumi Yoshida, deputy director of the business creation division within Fukushima’s prefectural government.

As part of a so-called Innovation Coast project, the coastal town of Minamisoma is due to become a test ground for robotics, drones and submarine technologies. The prefecture government is allocating some Y70bn a year to support research activities, and another Y15bn for the Minamisoma project alone. The production of healthcare equipment devices, which was already rooted in the local economy before the disaster, is also being boosted.  

Tourism boost?

Back in Onagawa, where the Daiichi nuclear disaster is only a distant echo, the worst seems to have passed, and a formula comprising new businesses and tourism is in the pipeline to breathe new life into the local economy, revive the local community and counter a decreasing population.

“We have 6300 people that can create a flow of tourism of 300,000 people per year,” says Onagawa’s mayor, Mr Suda. “That’s how we plan to revitalise the community and create new services. That is our vision, and it’s happening.”

Authorities in Miyagi tell of a recovery in tourism, with visitors from Taiwan, China and the US leading the way. After facing massive challenges, the reconstruction is now bringing about new opportunities, and Onagawa, as well as disaster areas throughout the Tohoku region, are working hard to ensure they do not miss out.