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Free Trade Zones in Okinawa, Japan.

In Japan, Free Trade Zones (FTZs) exist only in the Okinawa Prefecture, the southernmost prefecture near Taiwan. These FTZs, coupled with Bonded Areas scattered around all of Japan, including Okinawa, make up Japan's Custom Bonded System (CBS). Okinawa has two FTZs and they are not as effective as one may think; they remain less competitive than similar systems in Hong Kong, Taiwan, and Singapore. This is partly because of Okinawa's geographical location far from Tokyo. But more importantly, Okinawa faces an uphill battle against its own national government in Tokyo when it wants to strengthen the international competitiveness of its FTZs. On the one hand, the administrative structure of CBS at the national-government level is so fragmented. On the other hand, the national government, especially the Ministry of Finance, has an upper-hand over prefectural governments in the area of taxation. These institutional conditions work against Okinawa's efforts to enhance the two FTZs' position in the global market place. This article is organized in two sections. It starts with a brief history of the CBS and the advent of the two FTZs in Okinawa. The article then examines the features of the FTZs.

A Brief History

In the old policy regime since the Meiji period (1868-1912), the Customs Bureau of the Ministry of Finance was the sole government agency in charge of Japan's CBS. The Bureau lost its authority in 1943 due to the war. After World War II ended in 1945, the United States occupied Japan until 1952. The Supreme Command for Allied Powers (SCAP) led by General Douglas MacArthur pursued numerous reforms in Japan. The foreign trade policy regime was no exception. SCAP ordered the Japanese government to restore an effective Customs Bureau immediately. (2)

But the old Customs Bureau was never reestablished. Instead, its jurisdictions were divided up by several agencies: the Animal and Plant Quarantine Service went to the Ministry of Agriculture and Forestry; the Quarantine Station was picked up by the Ministry of Welfare; the Ministry of Transportation acquired the Maritime Safety Board; and the Bureau of International Trade and Industry moved to the Ministry of International Trade and Industry. (3)

The upshot of all this was that customs administration became more complicated and policy coordination became more difficult among the agencies involved. For example, it became a constant feature of Japan's CBS to see turf wars, such as the one between the Ministry of Agriculture and Forestry on the one hand, and the Ministry of International Trade and Industry on the other.

SCAP's reform attempts also touched on the relationship between the national and prefectural governments in an effort to enhance the democratization of Japan. As a result, the Local Autonomy Law of Japan became enacted in April 1947. This was meant to be "an Act of Devolution" that established the local government structures, including prefectures and municipalities, in Japan. On the surface of it, the law encouraged formal democratization; however, as far as the authority of taxation was concerned, democratization was not achieved as it remained in the firm grip of the Ministry of Finance in Tokyo.

Japan regained its independence after the U.S. occupation ended in 1952. But the U.S. occupation continued in Okinawa until 1972. In October 1959, the first FTZ was established at Miegusuku in Naha Port, Okinawa. (4) When Okinawa was returned to Japan in May 1972, the legal status of the Okinawa FTZ system was secured with the enactment of the Act on Special Measures for the Promotion and Development of Okinawa. In December 1987, the head of the Okinawa Development Agency in Japan's national government officially designated the Naha FTZ as a Free Trade Zone, which was formally opened for business in July 1988. After that, it was expanded and reinforced through the measures to reduce taxes and tariffs. In March 1999, another FTZ was established in Okinawa: the Special Free Trade Zone in the Nakagusuku Bay District (SFTZ). The new Act on Special Measures for the Promotion of Okinawa replaced the old Act on Special Measures for the Promotion and Development of Okinawa in April 2002. (5)

The Present Situation of FTZs in Okinawa

At present, the two FTZs in Okinawa promote business and trade 1) by providing tax/financial incentives to businesses located within the zones, which are provided by the Okinawa Development Finance Corporation; and 2) by operating as bonded areas, that is, containing bonded warehouses and bonded factories, as specified under customs law and prescribed by the aforementioned Act on Special Measures for the Promotion of Okinawa. (6)

Furthermore, the SFTZ has the following functions: (a) It can be utilized as a center to process and assemble imported raw materials, semi-processed intermediate goods, and parts for domestic (mainly mainland Japan) and foreign exports; (b) it is a bounded area, so that it can be utilized as an international trading center, i.e., as an entrepot and stock point; (c) it can be utilized as a testing and inspection ground for imported goods before those are delivered to consumers; and (d) it can be utilized as a world fair site which can provide facilities for the exhibition of products and actual transactions. Thus, the SFTZ presents various incentives for prospective investors.

In addition, the SFTZ provides tax exemptions. (7) That is to say, within the SFTZ, a corporate income tax of 35 percent--compared with the standard 40.9 percent--will be deducted from taxable income for ten years for manufacturing, packaging, and warehouse activities, provided the investor employs at least twenty locals. Furthermore, the SFTZ tax rate for small- and medium-sized enterprises will be only 19 percent compared to 34 percent in the non-SFTZ enterprises. The other incentives are investment tax credit, special depreciation allowance for machinery and equipment, and wage subsidy for those investors who employ young regular workers through the Public Employment Office. (8)

Despite these incentives, however, the FTZs in Okinawa are not as effective as one may imagine in boosting the economy of Japan's southernmost prefecture. Both per capita income and the rate of unemployment in Okinawa remain the worst in Japan. The FTZ has attracted only a small number of firms because their tax exemptions system is actually less favorable than those of Taiwan, Hong Kong, Mainland China, and Singapore. Furthermore, many firms--even Japanese firms--are hesitant to invest in the Okinawa FTZs because of high transportation costs. Okinawa is just too far away; the distance between Tokyo and Okinawa is about 1,500 km.

Why can't the Japanese national government help Okinawa to increase its FTZs' competitiveness against other Asian nations and alleviate the problem of Okinawa's geography? The national government, as it turns out, is another source of problems for Okinawa.

As was noted earlier, Japan's CBS is rather fragmented within the national government. This requires a time-consuming and sometimes rocky process of inter-agency policy coordination. Coupled with this, the national government is superior to the prefectural governments in the area of taxation. In other words, the Ministry of Finance has strong control over the tax policy of the prefectural governments. Because of these administrative structures, the Okinawa prefecture faces an uphill battle against the national government in Tokyo when it comes to the question of the FTZs.

For example, in the late 1990s, the Okinawa Prefectural Government proposed a plan named "Grand Design of Okinawa 21st Century." This policy initiative was meant to make the existing FTZs larger. But it eventually collapsed after the negotiation with many ministries of the national government was deadlocked. (9) Among these ministries, it was particularly the Ministry of Finance that put a major stumbling block against "the Grand Design of Okinawa 21st Century" because this plan proposed no tax zones throughout the Okinawa prefectures.


Okinawa is unique in Japan. It has Japan's only FTZs. But they are less competitive than other Asian countries' FTZs due to the administrative structures surrounding them. Logically then, what is required is strong political leadership for administrative reform at the national-government level of Japan. When and how will such political leadership come by and help Okinawa's FTZs? Only future historians can tell.

Koji Furukawa (Chukyo University) (1)

(1) Professor of International Relations, Chukyo University, 101-2 Yagoto-Hommachi, Showa-ku, Nagoya 466-8666, Japan. Email:

(1) Professor of International Relations, Chukyo University, 101-2 Yagoto-Hommachi, Showa-ku, Nagoya 466-8666, Japan. Email:

(2) SCAP Instruction Note (SCAPIN) 941-A, April 8, 1946; for more information, see Japan Ministry of Finance, ed., The History of Finance during the Showa Period: From the End of War to the Peace Treaty (Tokyo: Toyo Keizai Inc., 1984), 6:495-96. (The Ministry of Finance publication is in Japanese.)

(3) Ministry of Finance, 528-35.

(4) Nobuyuki Yamada, "Okinawa in a Perspective of 'FTZ' Problem--Interplay between 'Coreness' and 'Peripherality'," Teikyo Journal of Sociology 14 (2001): 139-141. (This journal is published in Japanese.)

(5) Okinawa Prefectural Industrial Site Promotion Division, "Naha Free Trade Zone," zone/zone/english/004/index.html (accessed March 21, 2013).

(6) Visit english/001/img/doro_l.gif to see a map of the area.

(7) Hiroshi Kakazu, Okinawa in the Asia Pacific (Okinawa: The Okinawa Times, 2012), 57. A comparison of effective corporate tax rates inside and outside the Free Trade Zone can be found at English-20101031.pdf, 16. "Effective tax rate (ETR)" means actual tax burden of a corporation. ETR is lower than the nominal tax rate, which is a simple average of various taxes imposed on a corporate firm.

(8) Kakazu, 58.

(9) Akihiro Sado, "A Pitfall between Grand Design of Okinawa toward Twenty-First Century and Modern Sovereign State System," in The View in Asia-Pacific, ed. Jin Kikkawa (Seibundo Inc., 2007), 150-54; Yamada, 145-147. (Both publications are in Japanese.)
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Title Annotation:Special Section: Genocides in World History
Author:Furukawa, Koji
Publication:World History Bulletin
Article Type:Essay
Geographic Code:9JAPA
Date:Mar 22, 2013
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