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Japan's regions must bypass Tokyo and go global

The tech revolution offers a chance to revive declining local economies

| Japan

Type "Abenomics" in Google search and the autofill prompts "Abenomics failure" followed by "Abenomics success." The five-year-old economic policy program of Japanese Prime Minister Shinzo Abe has had such mixed results that there are radically different views on its performance.

But there is little dispute that one of the least successful policy baskets is regional revitalization.

In 2014 the Japan Policy Council, a private think tank, published a shocking report predicting that, by 2040, 896 Japanese municipalities, half the total, face the risk of literally disappearing from the map with the general Japanese population decline exacerbated by an exodus to Tokyo.

Taking the matter to heart, the government devised five-year regional revitalization strategy to boost local economies (dubbed "local Abenomics") and bring people back from Tokyo and into the regions.

So far, the needle has hardly moved. For example, the original goal in 2014 was to achieve zero population growth in Tokyo by 2020 by balancing inflow with outflow. But last year, the Tokyo metropolitan area recorded a net inflow for the 22nd year in succession, with an increase of 120,000, mostly people under the age of 30.

In a desperate attempt to reverse this trend, in June 2018, a government advisory committee made an emergency recommendation with another set of targets such as creating employment for 240,000 women and older people over the next six years outside Tokyo.

Such efforts may appear futile. Tokyo, with all its wealth, glitter and business opportunities, appears set to carry on attracting people in a "winner takes all" fashion.

But there is still hope beyond the glamor of Tokyo. Anyone who has traveled the countryside of Japan sees a diverse land filled with unique regional features, not least in economic life. The late Stefan Lippert, a professor in International Business at Temple University Japan Campus, studied the "hidden champions" of Japan, a category of leading companies which tend to stay out of the public eye, typically having under $5 billion in annual revenue.

Of 220 such hidden champions that Lippert identified, 129 or 60% are headquartered outside the Tokyo metropolitan area. Examples of these groups, which together generate around 8% of gross domestic product, include Hamamatsu Photonics, a leader in advanced light sources in Hamamatsu, Shizuoka Prefecture, and Hosokawa Micron, a particle processing equipment manufacturer in Hirakata, Osaka Prefecture.

While the study was summarized in 2016, its conclusions still hold. Many of these hidden champions are family-owned companies deeply ingrained in their local economy over multiple generations from a time when the nation's wealth was less concentrated in Tokyo than today.

These hidden champions offer a powerful hint to the future of regional revitalization -- despite their under-the-radar discreetness, many of them are global, earning half or more revenue from overseas.

The caveat is that they typically belong to the old manufacturing economy. As stability and resilience to downturn is the hallmark of traditional hidden champions, we cannot expect a bursting growth. The key to revitalizing Japan's regional cities today, therefore, would be take the hidden champions' global approach and apply it the new, tech-leveraged economy.

The time is ripe. Information technology has made communications costs so low that it does not matter whether the Japanese participant in a global video conference is calling in from Tokyo or Nagasaki. Transportation costs have also dropped dramatically. New infrastructure such as Shinkansen (Bullet train) lines to the northwestern city of Kanazawa and the far northern island of Hokkaido has made Japan's previously more remote regions "closer" to the global market.

Finally, helped by such reductions in the time and cost of communication, there are growing numbers of workers follow more fluid careers, choosing different domiciles for different phases in their life and work. Japan's regional cities could well be made attractive for such fluid (and talented) people.

How can the cities get started on the journey? One relatively low-cost and quick approach is to promote the region as global destinations for MICE (Meeting, Incentive Travel, Convention, Exhibition). Japanese cities such as Hiroshima, Fukuoka and Yokohama are already boosting their presence through MICE working with Japan Tourism Agency.

An even bolder yet budget-friendly approach may be trying to become a breeding ground for innovations with a global reach. For example, a municipality can host an "innovathon" -- an online and offline forum where ideas are exchanged by entrepreneurs from around the world.

The cities can help entrepreneurs by connecting them to the local economy and local funding sources. The central Japanese government can help create this virtuous cycle through gentle traffic control to avoid regions duplicating innovathon themes, and through providing funding.

The innovathons must be global, and so entice both Japanese and non-Japanese ideas, talent, and capital. No more zero-sum games with Tokyo. Executed correctly, the innovathon can be a mechanism to breed a new generation of "hidden champions" -- and much more.

There is already evidence of domestic start-ups and regional cities being drawn together. Alt Design, a blockchain start-up found operational home in Fukui City, about 300km west of Tokyo, taking advantage of a local rent subsidy. On a larger scale, Fukuoka City is a poster child for a rare case of population increase, with a net addition of 75,000 from 2010 to 2015, taking the total to 1.5 million.

Start-ups of both Japanese and overseas origin flock to a public-private business incubation center, Fukuoka Growth Next. Fukuoka, alongside Tokyo, is one of seven government-selected special districts to offer a so-called "Start-up Visa" program for non-Japanese entrepreneurs, with relaxed entry conditions.

English-friendly clusters can be found in odd places outside Tokyo. For example, Ritsumeikan Asia Pacific University located in Beppu City, Oita Prefecture, more than 1,000km from Tokyo in Kyushu Island, hosts 2,700 or close to half of its students from overseas. International alumni who choose to stay create a sustainable community integrated in the region.

Focusing on a particular industrial sector, regions or cities could bid to become global incubation hubs for emerging sectors such as bio-drugs or AI. Granted, the global competition for such centers is very tough. But Japan has unique strengths. For example, even the country's aging and declining population can be a selling point. Japanese cities and regions could become world leaders in services and products that address the problem in potentially profitable ways. Talent would have to be drawn from a wide range of domains spanning medicine, information technology, and social entrepreneurship.

Coupled with the promotion of lower living costs than in Tokyo, a higher quality of life and unique local culture, such efforts could put smaller cities back on global map. The new breed of hidden champions in the regions could bring economic success and promote population growth well beyond the internationally-recruited staff on their payrolls.

Offence is the best defense. Rather than focusing on trying to resist the exodus of the young to Tokyo, regional cities can go on offence by going beyond the capital to the world and giving the world a reason to come to their doorsteps. Japan's success model in the 20th century was importing materials to manufacture, and exporting value-added goods under the guidance of the Tokyo-based central government. Why not, in this century, adopt a new model of importing ideas, talent and capital to export global solutions through the initiative of Japan's regions?

Nobuko Kobayashi is a partner with A.T. Kearney, a global management consulting firm. Based in Tokyo, she specializes in the consumer sector with a special focus on multi-national corporations operating in Japan.

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