March 14, 2017 4:15 am JST

Corporate Japan to power Saudi economic overhaul

Special economic zones planned to bolster industry

Saudi King Salman, left, sitting directly across from Japanese Prime Minister Shinzo Abe.

TOKYO -- A new cooperation plan between Japan and Saudi Arabia will help reshape the Middle Eastern kingdom's oil-dependent economy, enticing Japanese businesses to expand its industry in exchange for looser regulation and favorable tax treatment.

Japanese Prime Minister Shinzo Abe and King Salman agreed to the far-reaching Saudi-Japan Vision 2030 plan Monday at Abe's office here. The two sides will look into creating special economic zones in Saudi Arabia to lower regulatory and tax barriers to foreign businesses. Leading Japanese companies in such sectors as manufacturing, energy and infrastructure are expected to join the effort.

The leaders also hatched measures to deepen cooperation on security, including resuming vice-ministerial-level talks between foreign ministries. Japan aims "to further strengthen ties to Saudi Arabia, a key contributor to stability in the Middle East," Abe said at the top of the meeting. King Salman affirmed that Vision 2030 will strengthen the bilateral strategic partnership.

The two men agreed to cooperate to ensure Middle Eastern stability. They also criticized North Korea, with Abe calling Pyongyang's recent ballistic missile launch a "next-level threat" and King Salman saying Saudi Arabia stands against the North's nuclear and missile development efforts. Abe also called for resuming negotiations on a free trade agreement with the Gulf Cooperation Council, whose six members include Saudi Arabia, as well as for talks on a Japan-Saudi nuclear energy pact.

Public plus private

Vision 2030 was heavily shaped by government and business forces on both sides. These include the Ministry of Economy, Trade and Industry here and the Japan International Cooperation Agency, as well as the Saudi Ministry of Commerce and Investment and state oil and gas giant Saudi Aramco.

The countries will prioritize 31 projects in nine fields, such as competitive industry, energy, agriculture and infrastructure. The Japanese economy ministry and a Saudi state research center will team up to investigate investment opportunities that could speed the introduction of advanced industrial technology. Japan Exchange Group will work with the Saudi Stock Exchange, or Tadawul, on human resources development.

JICA looks to send staff to teach Saudi companies Japanese techniques for maximizing productivity, while Japan Post could work with its Saudi counterpart to improve cross-border e-commerce.

Zones where foreign businesses would face looser regulation and receive tax benefits will help make these projects a reality. Japanese companies setting up shop in these areas would avoid such strict rules as a requirement to hire a certain number of Saudi workers.

New options needed

Opening the door to greater foreign investment aims to bring much-needed diversity to the Saudi economy. The kingdom relies heavily on the petroleum sector for revenue -- an arrangement that has brought deep budget deficits over the past three years as oil prices have tumbled. Even if prices rise again, the world's top oil exporter will face longer-term challenges. New drilling technologies have unearthed shale gas in the U.S., while the introduction of energy-saving technology in the auto industry and elsewhere is chipping away at petroleum demand. Such thorny structural problems as unemployment stuck above 10% also leave the country vulnerable to a deeper downturn.

King Salman has overseen an effort to rapidly transform the economy since taking the throne in 2015. Saudi Arabia looks to such major Asian oil markets as Japan, China and South Korea for technology and cash, playing them off against one another to secure the best terms on various projects. Hong Kong and Tokyo are both being eyed alongside New York and London as possible sites for an initial public offering by Aramco, for example. Market selection is expected to be dragged out to the last moment.

Japan stands to benefit from cooperation as well. Saudi Arabia accounts for 30% of the country's oil consumption, making it a critical economic partner. The kingdom is also a promising consumer market at a time when population decline is weighing on spending in Japan. Nearly half of the Saudi population is under the age of 25. Cooperating with Saudi economic reform early on could also help Tokyo outmaneuver Beijing, which has its eyes on the kingdom as well.

Private-sector companies including top Japanese banks are set to reach 20 or so cooperation and investment agreements Tuesday.

Nikkei staff writer Hidemitsu Kibe in Riyadh contributed to this report.

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