Proposals for the Revitalization of Industry Following the Kobe (Hanshin/Awaji Region) Earthquake

March 28, 1995


Two months have passed since the massive earthquake in southern Hyogo Prefecture, known abroad as the ``Kobe Earthquake,'' struck the Hanshin and Awaji regions of central Japan. Essential utility services, as well as transportation and communications infrastructure, are gradually being restored by government authorities. In addition, financial donations and offers of volunteer assistance have poured in from all over the country. The commutative effect of these efforts has been the creation of a solid foundation for future reconstruction, albeit at a measured pace.

Meanwhile, the private sector has been assisting in the reconstruction process by providing emergency supplies, donations and a wide range of support facilities and equipment; by supporting employees who have volunteered; and by assisting in the emergency restoration of industrial facilities. The national and local governments have undertaken major reconstruction efforts in the affected areas through a variety of avenues, including a hastily enacted second supplementary budget for FY1994, tax relief and a town plan covering urban redevelopment projects in 16 wards covering 250 hectares. Despite these comprehensive efforts, the level of anxiety among survivors is rising once again due to growing concerns about how and when local industry will recover. This is a complex question, many aspects of which remain unanswered.

The regeneration of any area devastated by a major disaster begins with the reconstruction of its sources of economic vitality _ its business community. Small and medium-size enterprises, as well as major corporations in the Hanshin/Awaji region, are facing significant challenges in reconstruction. Inoperable industrial plants and closed businesses will inevitably lead to a chain of bankruptcies throughout the region. Furthermore, the disaster has prompted many firms to shift their production facilities out of the area, leading to concern about a hollowing-out of local industry. Given this unfortunate reality, local government must draft and implement medium- to long-term master plans for industrial revitalization, while the national government must provide support, on a massive scale, to all companies, through tax relief and financial support, supplemented by sweeping deregulation and financial support for reconstruction of both public and private harbor facilities.

In light of these requirements, this proposal, which is Keidanren's second list of suggested disaster relief strategies, presents a general policy position, as well as a list of industrial revitalization initiatives to be implemented in the disaster area.

I. Policy Position on Industrial Revitalization in the Disaster Area

  1. The Link Between Self-Help and Government Assistance
  2. Ordinarily, reconstruction after a natural disaster is dependent on the self-motivated efforts of local residents and businesses. Naturally, the primary role of national and local governments has always been to provide an environment that is supportive of these efforts. The potential exists in the Hanshin/Awaji region for just such efforts _ reconstruction is consequently just a matter of time rather than a mater of insurmountable difficulties. But the devastating earthquake occurred when Japan was experiencing a rapid appreciation of the yen, which during normal times would require urgent action to prevent the hollowing-out of local industries. So there is not a moment to lose in rebuilding the entire region. Given these circumstances, the national government must provide generous and effective assistance that significantly exceeds its conventional level of response to disaster restoration.

  3. Government Aid Must Apply to Big Business As Well
  4. In view of the fact that the Hanshin/Awaji region is in such a critical situation, it is vital to establish a massive aid structure that covers both large and small companies. Not until the reconstruction plans of major industries in the region are clearly understood, allaying fears of unemployment, will local and smaller businesses be able to tackle the task of reconstruction with resolve. Therefore, national and local governments must supplement existing measures with a range of new tax and financial strategies designed to help rebuild and restore business as usual at firms of all sizes in the disaster area.

  5. Proposal for a Pilot Program of Deregulation and Decentralization of Power in Local Government
  6. To ensure effective use of these suggested strategies, local governments as the driving force behind restoration must adopt a flexible approach toward changes, such as the location of new factories and the production of new products. Hyogo Prefecture should be designated as a pilot project for deregulation in local government, implementing sweeping initiatives principally in land use, industry, employment and trade. The national government should also implement major deregulation initiatives together with measures to transfer greater authority to local governments.

  7. Enactment of an Aid Package for Reconstruction of Industry in the Disaster Area
  8. The national government must act quickly on implementing a support package for industrial reconstruction because any delay could adversely affect employment, forcing large numbers of workers to leave the disaster area in search of work. Since this would render all restoration plans worthless, it is important that reconstruction of industrial facilities and normalization of production and commercial activity, which will form the central plank of regional restoration efforts, be carried out on a priority basis. Such an aid package would provide new strategies, including deregulation, transfer of government authority and initiatives in taxation, funding and finance. The national government should also provide the public with a comprehensive description of the measures being undertaken.

II. Specific Proposals for the Reconstruction of Industry

  1. Expedite Restoration of Industrial Infrastructure and Disposal of Debris
  2. The key to speeding up reconstruction of industrial facilities lies in the prompt rebuilding of roads and harbor facilities, as well as the restoration of the infrastructure necessary for the delivery of water and gas. With essential services now restored to some extent, the government must turn its full attention to the restoration and improvement of the industrial infrastructure.

    The government should also provide assistance to all sizes of companies to speed up the disposal of building debris, which is a prerequisite to reconstruction of the disaster area and will help reduce the burden placed on the private sector.

  3. Measures to Support Reconstruction of Industrial Facilities
  4. While it is to be expected that reconstruction of industrial facilities in the disaster area should be undertaken by the affected companies, the extent and scale of the damage warrants the maximum government support possible from both national and local levels.

    1. Government Loans

      The Japan Development Bank has introduced low-interest loans with annual interest rates of 3.65 percent for the first five years, for public infrastructure, such as electricity, gas and railways. The same low-interest financing should be made available for private sector facilities, such as commercial, distribution, manufacturing and harbor facilities, which now pay a rate of 4.55 percent for the first 5 years.

      The introduction of interest supplementation, for instance, through the Industrial Investment Special Account or the Special Account for Promotion of Electric Power Resources Development, should be given top priority.

    2. Taxation Measures

      Taxation relief strategies, which extend no further than emergency measures at present, should be expanded to promote reconstruction of businesses in the disaster area. The following proposals should be considered:

      1. Reform corporate taxes in the following ways:

        1. Widen the scope to include back payment of losses over the past three years;
        2. Exempt investment in reconstruction from taxation;
        3. Provide special treatment, under the Land Acquisition Tax, for profits resulting from sales made to finance reconstruction;
        4. Exempt from taxation expenses associated with debris removal; and
        5. Allow disaster relief donations and support for private sector volunteer groups (those not considered "designated donations" or donations to specified public interest foundations) to be entered as losses for tax purposes;

      2. Reduce land taxes, fixed asset taxes and other taxes on land and fixed assets in the disaster area;

      3. Exempt relief supplies from the consumption tax.

    3. Financial Measures

      A FY1995 supplementary budget, discussed later in this text, should be formulated and adopted as soon as possible, and should include a range of measures to support the reconstruction of industrial infrastructure and the revitalization of industry in the disaster area.

      The government's first task should be to obtain the necessary funds by reducing expenses through resolute administrative and financial reforms, and by postponing unnecessary or non-essential projects. If further funding is required, the government should not hesitate to adopt a flexible approach to issuing national bonds.

  5. Revitalizing Commercial Activity and Goods Distribution
  6. Revitalization of commerce and the distribution systems, which make all commercial activity possible, is vital to the rebuilding of Kobe and other commercial centers. In this process of reconstruction, care should be taken to maintain an organic relationship between large stores and local shopping districts. To this end, local governments should promptly formulate detailed plans with the approval of their constituents.

    The national government and relevant local governments should greatly expand current subsidies for modernization and the upgrading of distribution systems, in support of self-help efforts by local stores and businesses.

  7. Deregulation
  8. Although deregulation must be undertaken by the nation as a whole, the kind of comprehensive deregulation suggested as special measures for the disaster area, may be very significant in expediting the reconstruction of industry. The benefits of this ``experimental'' deregulation should then be spread throughout the nation.

    Specifically, with respect to regulations regarding public safety and security, special measures, such as simplified notification and independent inspection and security procedures, should be approved in order to speed the process of reconstruction of industrial facilities.

    The regulations governing industrial land use under such laws as the Act Concerning Industry Restrictions, the Factory Location Law and the Industrial Relocation Law, should be revised in order to encourage new research and development industries to locate in the disaster area, and prevent an exodus of existing firms _ and the consequent hollowing-out of the industrial base.

  9. Preserving and Creating Employment Opportunities
  10. The prompt reconstruction of industry is the first requirement in preserving jobs and creating new employment opportunities in the disaster area. As an interim measure, during the reconstruction process, employment adjustment subsidies should be both extended and expanded.

    The reconstruction and preservation of homes, and related social amenities, is also essential to the preservation of jobs. Public sector agencies should be encouraged to build high-quality rental housing and private sector subsidies should be provided for residential housing development, and construction of owner-occupied dwellings and company housing.

  11. Reconstruction of Small and Medium-Size Enterprises
  12. The revitalization of industry cannot occur without healthy recoveries by large enterprises, which exert a major impact on the region, as well as small and medium-size enterprises. Both the national and local governments should provide generous subsidies for the reconstruction of local manufacturers and traditional industries, whose bases are eroding due to the yen's appreciation.

    Given that the stricken area itself boasts a wealth of advanced technological infrastructure and human resources, strategies that promote new high-tech industries should be given top priority, particularly the establishment of a high-tech incubator and dedication of the necessary funding.

III. Specific Proposals for Reconstruction of Harbor and Distribution Facilities

  1. The Importance of Restoring Kobe's Harbor Functions and Facilities
  2. Reconstruction of harbor facilities, particularly around the Port of Kobe, which has become an international trading base, is an urgent task that must be given top priority in revitalizing industry in the disaster area. This reconstruction is equally critical for the healthy functioning of the marine transportation and distribution systems for the entire nation, and to restoring smooth distribution systems throughout the East Asia region. The government should establish a Kobe Port Authority (suggested title), which would be responsible for reconstruction of the port, and ensure comprehensive, coordinated restoration and management of the harbor facilities.

    At the same time, prompt reconstruction of privately owned harbor facilities is vital to the overall restoration of the functioning of the harbor and government funding, and other subsidies should be made available as soon as possible. Temporary wharves and jetties should be built immediately to enable local companies to contribute their resources, knowledge and technology to restoration of the harbor.

    Finally, one pivotal aspect of harbor restoration is the complete overhaul of regulations governing the use of harbor land and facilities, which will facilitate the construction of major harbors in the cities where harbor-related industries develop naturally.

  3. Restoration of the Transportation and Communications Infrastructure
  4. The transportation infrastructure linking Osaka and Kobe is of critical significance, not only to the surrounding regions, but also as a main artery of the nation's transportation system. The Hanshin Expressway and other network trunk roads destroyed in the earthquake, should be promptly restored using advanced disaster prevention technology that can serve as a model for transportation infrastructure development throughout the nation. Due consideration should be given to the establishment of distribution routes to help normalize economic activity in the disaster area.

    It is now clear that diversifying and upgrading the modes of transportation and communications are vital to the safety and disaster preparedness of the nation as a whole. Therefore, the government must adopt a comprehensive approach to the improvement of transportation and communications infrastructure, rather than simply aiming to restore what was destroyed. This comprehensive approach must be seen as central to an economic recovery led by domestic demand.

  5. Expanding the Functions of Airports
  6. The earthquake vividly demonstrated the critical importance of air and sea transportation links at a time of major disaster. The New Kansai International Airport played a particularly important role as a junction for air and sea transport of relief supplies. An overall concept for the airport should be implemented as soon as possible in order to diversify and upgrade modes of transportation and communication.

IV. Conclusions

  1. Local Government Plans for Restoration and National Government Support
  2. The national government, local governments, local enterprises and local residents must all work together toward the reconstruction and revitalization of the Hanshin/Awaji region, and this must naturally be supported by the business community.

    The disaster has graphically illustrated the need to incorporate advanced disaster preparedness and relief into town planning. The reconstruction of Kobe and these regions should serve as a model of how this kind of preparedness can be put into practice. To this end, local governments should immediately formulate medium- to long-term reconstruction programs that faithfully reflect the interests of the affected residents and businesses, while the national government should provide its complete support. In particular, land use policies should be drastically revised while expanding publicly owned land holdings, in a new approach to urban and regional development that will stimulate economic activity in businesses affected by the disaster.

    The national government must take heed of the lessons to be learned from this major earthquake. It should work to minimize the personal and material damage experienced by our citizens, and also carry out a wide-ranging investigation, covering everything from strengthened Cabinet powers to deal with disasters, to new organizations to assist the victims of these disasters. The earthquake has demonstrated the value of cooperation, particularly the link between the local governments and volunteer organizations. In light of these lessons, the concept of developing a public-private sector entity should be thoroughly explored.

    Keidanren hopes that these proposals will be seriously considered and discussed by the Council for the Reconstruction of Hanshin/Awaji, an advisory body to the prime minister charged with developing a set of recommendations on strategies that should be undertaken by the national government.

  3. The Need to Re-evaluate Disaster Prevention in Industry
  4. The Great Hanshin/Awaji Earthquake has taught us a number of lessons about disaster prevention and safety in industry. Of tremendous significance is the way in which the measured response by businesses hit by the disaster was instrumental in minimizing the extent of damage and preventing the outbreak of significant secondary disasters at industrial facilities. It is most important that we analyze and share these valuable experiences in the process of re-evaluating disaster prevention policies and emergency response procedures at industries throughout Japan. Industrial disaster prevention should be tackled quickly in preparation for major earthquakes that are predicted to occur, such as an earthquake directly underneath Tokyo, in the Southern Kanto region.

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