TMCnet News
Japan risk: Infrastructure risk(RiskWire)COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentB28B28Infrastructure riskA16A16Note: E=most risky; 100=most risky.SUMMARY Risk in this category is low as the quality and reliability of much of Japan's infrastructure are high. The road network is extensive, although the high percentage of car ownership will continue to keep roads highly congested. The rail network is among the most advanced in the world; the continued expansion of high-speed rail links will further enhance the efficiency of rail transport. Telecommunications are also highly reliable with further improvements expected as the programme of installing a nation-wide fiber-optic network continues. High charges have impeded maximum Internet penetration, but these are expected to become more competitive during the next two years as deregulation of the sector proceeds. Electricity is the most expensive within the OECD. While liberalisation of the market will help bring down electricity tariffs in the long term, during the next two years prices are not expected to decline significantly. SCENARIOS Poor competition and efficiency keep Japanese maritime port costs high (High Risk) Although some progress in deregulating Japan's ports has been made since the late 1990s, resistance to more far-reaching change by labour unions at the ports has limited the extent of such reforms. This in turn has kept costs for foreign shipping firms, both domestic and foreign, using Japanese ports high. Specific concerns include the short working hours for Japanese ports--which increases the time taken to process cargo--the tight grip maintained on hiring dock workers by the Japan Harbour Transport Authority (JHTA), (which is under the jurisdiction of the land, infrastructure and transport ministry), and high minimum manning levels for new container terminal operators. Problems with Japan's nuclear programme create energy shortfalls (Low Risk) Japan's nuclear programme has long been at the core of its long-term energy policy. The safety record of the nuclear industry has, however, been appalling. The most recent accident came in August 2004 at the Mihama reactor operated by Japan's second-largest electricity utility Kansai Electric Power Company (KEPCO). Four people died and seven were injured following a steam leak at the reactor; as in previous accidents a lax safety regime was the main reason for the accident. The KEPCO accident coupled with the revelations in mid-2002 of a systematic flouting of safety rules at nuclear facilities operated by the largest utility, Tokyo Electric Power Company, have triggered a public backlash against the government's ambitious plan to build more reactors. The risk of further accidents at Japan's nuclear reactors also remains moderate-to-high, with an associated risk of interruption to electricity supplies, particularly in densely populated urban areas such as Tokyo. Companies operating in such areas are advised to plan for blackouts by, for example, arranging backup facilities in other locations. A large earthquake hits the capital, Tokyo (Moderate Risk) The earthquakes in Niigata prefecture in north-central Japan in October and November 2004--the most powerful to hit Japan since the Kobe earthquake in 1995--were a potent reminder of Japan's vulnerability to seismic activity. Tokyo, which was also shaken by the Niigata earthquake, lies in a particularly earthquake prone part of Japan. Based on historical cycles the city sustains a large earthquake once every 70 or so years, which suggests that one is already overdue. A government report suggests that 7,000 or so people would be killed and some 500,000 homes destroyed if a magnitude 7 earthquake were to hit Tokyo. Depending on the time of day, however, the total would probably be considerably higher. An large earthquake directly under the Tokyo region would also cause considerable economic damage, particularly if telecommunications and transport links became unusable. Companies operating in and around Tokyo should therefore ensure that they have backup facilities outside the capital in case of an increase in seismic activity in the region. Kansai International Airport continues to struggle (High Risk) Concerns over the long-term viability of Kansai International Airport, which was built on a man-made island off Japan's second city of Osaka and opened in 1994, are likely to remain, despite the agreement of the Ministry of Finance to allocate funds to build a second runway by 2007. One reason for this is the growth in the competition from other better situated airports. Osaka is already served by one airport, Itami, which is closer to the city centre, and yet another airport, Chubu, began operations in neighbouring Nagoya in February 2005. Worryingly for Kansai, Chubu is already catering for more domestic routes than either Kansai or Tokyo's Narita. Many of these flights will also be international. A smaller airport serving only domestic destinations is also scheduled to open at Kobe in 2006. Kansai also faces stiff competition from South Korea's new Incheon airport near Seoul, which already has two runways and plans to build a further two, as well as from rising international flights from Tokyo's Haneda aiport, which originally only served domestic destinations. Although Kansai recorded its first ever profit (of Y4bn) in the first half of fiscal year 2004/05 (April-March), the airport continues to depend on generous subsidies from the central government. Kansai expects passenger numbers to rise by 40% over the next four years, but, in view of the competition from other airports, this forecast looks optimistic. BACKGROUND (Background material is updated twice yearly. Last update: October 24th, 2005) Natural Resources and the Environment The Japanese archipelago, which includes some 7,000 islands, stretches for around 3,000 km from north to south through several climatic zones--the subarctic, the temperate and the subtropical--and its weather patterns are accordingly highly varied. There are generally distinct seasons, with extremes of temperature in summer and winter because of the countrys location between the Eurasian landmass and the Pacific ocean. The mountain ranges running through the centre of the four main islands (Hokkaido, Honshu, Shikoku and Kyushu) expose the northern and western areas to heavy snowfalls in winter, but also protect those regions from the typhoons that batter the south and east in the summer. In those years when the heavy rains of June are sparse, the hot and dry months of July and August can sometimes bring droughts. Land classification(% of total)Mountains53.5Volcanic areas6.8Hills11.1Plateaux11.9Piedmont4.0Lowlands12.7Total100.0Source: Geographical Survey Institute.Some 70% of Japans landmass is mountainous terrain that is essentially uninhabitable, so the residual areas are used intensively and command high prices. This natural scarcity is exacerbated by inadequate urban planning, the concentration of industry in the Kansai region around Osaka and the Kanto region around Tokyo, and a legal system that protects inefficient patterns of use. Land prices reached their peak in the late 1980s and early 1990s, when the governments easy monetary policy inflated a variety of asset bubbles. The market has cooled down markedly since those heady days, but tangible fixed assets still comprise 60-70% of Japans national wealth, compared with less than 30% in the US. Land use(% of total)19752002Agricultural land15.312.8Forests & fields67.066.4Water areas3.43.6Roads2.43.4Inhabited areas3.34.6Other8.79.2Total100.0100.0Source: National Land Agency, Tochi Hakusho.As a result of the large number of tectonic plates that converge beneath the Japanese archipelago, Japan is one of the most earthquake-prone countries in the world. Estimates suggest that Japan may sustain upwards of 1,000 earthquakes per year, or about 10% of the worlds total. Japan is also one of the worlds most volcanically active areas, with nearly 90 active volcanoes. Although most of Japans earthquakes are minor, two in recent memory have been devastating: the Great Kanto earthquake of 1923, which destroyed one-third of Tokyo and much of neighbouring Yokohama and left more than 140,000 dead, and the Great Hanshin-Awaji earthquake of 1995, which flattened much of Kobe and killed more than 6,000 people. Tokyo lies in a particularly earthquake-prone region of the country. Based on historical cycles, the city sustains a large earthquake once every 70 or so years, which suggests that one is already overdue. A government report estimates (optimistically) that 7,000 or so people would be killed and 500,000 homes destroyed if a magnitude 7 earthquake were to hit Tokyo. Transport and Communications In the immediate aftermath of the second world war the development of domestic air transport was hampered by the ban placed on building aircraft by the occupation authorities. In the early years after this ban was lifted in 1953, two main airlines were established: the national carrier, Japan Airlines (JAL), founded in 1951, and put under state ownership in 1953; and Japan Helicopter and Aeroplane Transports, founded in 1952, which became All Nippon Airways (ANA) in 1957. Another airline, Japan Domestic Airlines, was set up in 1964; it became Japan Air System (JAS) in 1988. Until 1986 JAL enjoyed a monopoly on international routes, from which year ANA was also allowed to operate international flights. In response to pressures on domestic airlines to rationalise and to boost efficiency, in October 2002 JAL and JAS merged under the auspices of a holding company, Japan Airline Systems; full integration took place in April 2004 and in July the holding company was renamed Japan Airlines. The new Japan Airlines is the worlds sixth largest carrier in terms of passenger kilometres, and the third largest in terms of market capitalisation. With around 48% of the lucrative domestic market, JALs position now rivals that of ANA, which had hitherto carried the lions share of local passengers. Japan has more than 20 important regional airports serving domestic routes, the most important of which is Haneda in Tokyo. It also has two main international airports: Narita, which serves Tokyo and its environs; and Kansai, which serves Osaka, Kobe and Kyoto. Kansai has struggled since opening in the mid-1990s, reflecting both its heavy debt burden and the failure to attract significant passenger volumes. Kansai is also likely to suffer further after the opening in mid-February 2005 of Chubu airport in neighbouring Aichi prefecture. Chubu also serves international routes, particularly those to Asia; heavily financed by the private sector, it will start operations in considerably better financial shape than did Kansai. Partly reflecting government support for domestic air travel as a means of fostering Japans own aircraft industry, passenger numbers have been increasing steadily in recent years--according to government data, in 2002/03 Japans airlines carried 97m passengers, more than double the 1980/81 level. Largely because of the high costs involved, air remains the least popular means of transporting freight--in 2002/03 less than 1% of domestic freight was carried by air, a rate almost unchanged since 1980/81. Although Japan is surrounded by sea, maritime transport has recently been in decline. This partly reflects the completion of bridges and tunnels connecting the most important islands on the archipelago, which has lessened the reliance on sea transport. As a result of this decline, the number of freighters registered to Japan fell from 4,808 in 1980 to just 2,359 in 2003. In terms of gross tonnage carried, the decline has been even steeper, from 19,593 gross tonnes in 1980 to just 4,978 in 2003. Kobe is Japans largest port, but the large earthquake in January 1995 damaged most of its container berths and wharves. Most of these facilities have, however, now been repaired, although some of the diverted cargo traffic may have shifted permanently to other harbours. Other major ports in order of importance include Nagoya, Yokohama, Tokyo and Osaka. Although some progress in deregulating Japans ports has been made since the late 1990s, resistance to more far-reaching change by labour unions at the ports has limited the extent of such reforms. This in turn has kept the costs high for foreign and domestic shipping firms using the ports. Specific concerns include the short working hours for Japanese ports, which increase the time taken to process cargo, the tight grip maintained on hiring dock workers by the Japan Harbour Transport Authority (which lies under the jurisdiction of the Ministry of Land, Infrastructure and Transport), and high minimum manning levels for new container terminal operators. One by-product of Japans rising wealth has been an explosion in car ownership--the rate of car ownership soared from just 22.1% in 1970 to 86% in 2004. This, coupled with the large amount of freight that is transported by road (91% of the total in 2002/03), has strained Japans road network, despite massive spending on improving and extending key parts in recent years. The resulting congestion on highways and in urban areas is compounded by the fact that the Japanese tend to take trips at the same time, for example when schools close or during public holidays. Roads19852002000 km% paved000 km% pavedMain national roads47.583.353.989.4Metropolitan & prefectural roads127.541.8128.557.6City, town & village roads952.412.4987.917.3Total1,126.418.71,170.425.0Source: Ministry of Land, Infrastructure & Transport.The countrys subway and rail systems are extensive and efficient. This is reflected in the 31.7% increase in the number of passengers carried on Japans public and private railways between 1970/71 and 2002/03. The shinkansen (bullet train) service began in 1964 with the opening of the line between Tokyo and Japans second city, Osaka. In 2002/03 shinkansen trains carried 278m passengers, a level almost unchanged since the beginning of the previous decade. In part this stagnation reflects increased competition among domestic airlines, which has made airfares more competitive than shinkansen fares. With annual revenue of some US$110bn (OECD data), Japan has the second-largest telecommunications market in the world after the US (US$257bn). The main Japanese carrier, Nippon Telegraph and Telephone (NTT), is the largest carrier in the world, with around US$80bn in annual income. Although deregulation of the telecoms industry has allowed new entrants into the sector, NTTs dominance remains overwhelming, controlling as it does around 95% of landlines in Japan. As a result of this dominance, the company was long able to resist pressure from the government and the private sector to reduce prices, particularly for local calls and Internet connections. Telecommunications Infrastructure Recent years have seen an explosive growth in mobile phone penetration in Japan. The personal handyphone system (PHS) was introduced in 1995. These machines were smaller and lighter than traditional mobile phones, and the fees charged for their use were much lower. The advent of this alternative alarmed the conventional providers, who reacted by systematically cutting prices in order to attract new customers. Fierce price competition among providers fuelled rapid growth in the numbers of mobile phone subscribers from the late 1990s. By end-November 2004 the total number of mobile phone subscribers had reached 85m, a 7% rise year on year, according to the Telecommunications Carriers Association. PHS phones are still cheaper to use than conventional mobile phones, but they are less useful because they cannot be used in moving vehicles or in remote regions. The number of PHS subscribers fell by 10% year on year at end-November 2004, to 4.8m. NTT DoCoMo is the largest mobile phone provider by a large margin, with 56.1% of total subscribers at end-November 2004. This was followed by au Group with 21.8% of the total, Vodafone with 17.9% and Tu-Ka Group with 4.2%. NTT DoCoMo was also responsible for accelerating the use of the Internet through the introduction in February 1999 of its 2.5 generation i-mode service, which enabled customers to access the Internet using mobile phones. Before then, Internet use in Japan had been sluggish. NTT DoCoMo became the first company in the world to offer third-generation (3G) services in October 2001, and partly as a result of fierce price competition among providers, web-enabled mobile phone services of the 3G type have become increasingly popular, with 73m subscribers at end-November 2004. According to Global Reach, an Internet services promotion firm, in September 2004 67.3m Japanese used the Internet, making Japanese the worlds fourth most used language on the Internet, after English (282m), Chinese (110m) and Spanish (72m). A total of 8.4% of the global Internet population used Japanese, compared with 35.2% using English, 13.7% using Chinese and 9% using Spanish. Japan has a large and well-developed media infrastructure. There are five main national newspapers, the Yomiuri Shimbun, the Asahi Shimbun, the Mainichi Shimbun, the Nihon Keizai Shimbun and the Sankei Shimbun. Circulations are large, with the largest, the Yomiuri Shimbun, averaging just over 14m per day (including morning and evening editions), giving it the largest circulation of any newspaper in the world. The total circulation of newspapers in Japan has grown rapidly in line with Japans increasing wealth, from around 24m in 1960 to just under 54m in 2002. With the notable exception of the Asahi Shimbun, which is left-leaning, almost all Japans major newspapers are centre-right in terms of political stance. Japanese reporters enjoy close access to news sources through membership of various so-called press clubs, which are attached to ministries, major organisations and which even exist within private-sector companies. Although the existence of press clubs facilitates the quick dissemination of news, critics of the system claim that the relationship between the reporters and the news sources can become too close, with the result that reporters often suppress news unfavourable to their club patrons and therefore rarely engage in investigative reporting. Broadcasting stations have multiplied in the past 20 years. In addition to the state-owned Nihon Hoso Kyokai (NHK, Japan Broadcasting Corporation), numerous private stations operate throughout Japan, the largest of which are Television Asahi, Fuji TV, Nippon Television Network, Tokyo Metropolitan TV, Television Tokyo and Nippon Television Network. Private stations are funded by revenue earned from advertising and sponsorship, whereas NHK is funded mainly through fees paid by television owners directly to NHK. NHK is held in high public regard as a reliable and objective news source. However, as parliament approves its annual budget and appoints its president, it is reluctant to antagonise political parties, particularly the long-dominant Liberal Democratic Party, in its investigative reporting of controversial political issues. As a result, NHK tends to concentrate on presenting information objectively, which often results in blandness, and critical reporting is left to private channels are not under direct parliamentary control. Each private news networks is owned by a large national newspaper, however, and although they claim editorial independence from their parent newspapers, in practice close links exist between television reporters and local newspaper bureaux. Energy Since the two oil crises in the 1970s, Japanese industry has invested heavily in energy conservation measures. As a result, industrial demand for energy was almost flat in the 1980s, despite high rates of economic growth. Energy consumption by industry fell in the early 1990s, but consumption by households and transport continued to rise. The growing use of cars and of domestic air conditioning in the hottest months of the year between June and September contributed to this development. Energy consumption, 2002(tonnes of petroleum equivalent; per head)JapanUSGermanyUKFranceTotal4.067.974.203.834.34Petroleum2.013.131.561.331.4 9Source: OECD, Energy Balance.Although Japan is the worlds second largest importer of petroleum after the US, by promoting energy diversification it reduced the share of oil in primary energy supply from 71.9% in 1970/71 to 49.7% in 2002/03. In recognition of the countrys vulnerability to disruptions in petroleum supplies--imported petroleum accounts for nearly 100% of Japans total oil requirement--the government and private companies began to stockpile petroleum in the mid-1970s. At the end of November 2004 these stockpiles represented 176 days of supply, one of the highest levels in the world. In recent years Japan has tried to diversify its oil imports away from Middle East producers, but with only limited success as currently nearly 90% of total imports are sourced from the Persian Gulf. Other important oil suppliers include Indonesia and China, which provides light oil for use in Japanese power plants. As part of its diversification programme Japan has also built a presence in central Asia. In 1998, for example, Mitsui, together with the Azerbaijani state oil company, bought a 15% share of concessions in the Kur Dashi oil field in the Caspian Sea. In 2000 Japan National Oil Company (JNOC, the state-owned body set up in 1967 to promote overseas oil exploration) purchased a 7% share of Kazakhstans Kashagan field, also in the Caspian Sea. In February 2004 a Japanese consortium comprising Inpex, Japan Petroleum Exploration Company and Tomen signed a deal with Iran to develop the Azadegan oil field in south-western Iran, one of the largest in the region. Energy consumption by use, 2002/03(% of total)Industry47.2Chemicals15.6Iron & steel10.8Other manufacturing15.8Agriculture & construction5.0Private28.8Households13.3Businesses15.5Transport24.0Total100.0Sou rce: Agency of Natural Resources & Energy, Sogo Enerugi Tokei.The overwhelming dependence on imported energy supplies, estimated at more than 80% of the total primary energy requirement, has encouraged the government to invest substantially in the development of nuclear energy; public spending on nuclear energy in Japan is second only to that of the US. At the end of July 2004 52 nuclear power plants were in operation, and in 2003/04 nuclear power accounted for 20% of total power generating capacity and 22% of electric power generated. This greater reliance on nuclear power notwithstanding, the safety record of the nuclear industry has been poor. The most recent accident was at the Mihama plant operated by Kansai Electric Power in Fukui prefecture in August 2004. Coupled with the publics increasing environmental awareness and in late 2002 the admission by the countrys largest electricity utility, Tokyo Electric Power, that it had covered up a series of accidents at its nuclear plants over the years, opposition to the governments nuclear programme is growing. Demand for liquefied natural gas (LNG) is rising in Japan both because of its high calorific value and cleanness. Between 1980/81 and 2003/04 imports of LNG, which accounts for nearly 100% of total gas supply, rose by 245% in volume terms. Indonesia is the largest supplier of LNG to Japan (about 40% of total imports), and Malaysia the second largest (about 20%). In 2002/03 natural gas accounted for 13.5% of primary energy supply, a share broadly in line with that seen as desirable in the governments long-term energy strategy. The domestic coal industry has been in decline for many years. From the peak of coal activity, when it had more than 800 mines in the early 20th century, Japan now has no working commercial mines. The last two, Ikeshima Coal Mine on Hokkaido and Taiheiyo Coal Mine on Kyushu, were closed in 2001-02; both are now being used for a variety of training and research projects. In 2002/03 coal accounted for 19.5% of primary energy supply, a share only slightly lower than the 19.9% recorded in 1970/71. Partly for security reasons the government sees coal as an important alternative to oil, suggesting that coal will continue to account for a large share of total supply well into the future. Electricity prices are the highest in the OECD. Data from the US Department of Energy show that in 2000 the cost of electricity to households in Japan was US$0.214/kwh, compared with US$0.082/kwh in the US and US$0.121/kwh in Germany. In 1999, the latest year for which comparable data are available, the cost to industry was US$0.143/kwh, US$0.039/kwh and US$0.057/kwh respectively. Reasons for these differences include the substantial investment outlay for power plants in Japan as land is expensive, as well as the requirement to make them earthquake-proof; high fuel costs owing to taxes on oil; and high regulatory costs because of the strictness of environmental standards. Another factor that drives up prices is the reliance on a small number of domestic suppliers, which allows them to dominate the market. The government has long sought to bring Japans electricity prices into line with international standards. To this end, in 1995 the Electricity Utilities Industry Law was revised to liberalise entry rules for independent power producers selling power to utilities. A further amendment to this law in mid-2003 allowed independents to sell electricity to all medium- and large-lot consumers of electricity, around 60% of the domestic market from 2004. In mid-2003 parliament passed legislation to facilitate the privatisation of a large electric power wholesaler, the Electric Power Development Corporation (J-Power), which owns 6% of total generating capacity, and it was privatised in late 2004. Although Japan is trying to reduce reliance on imported oil, its dependency on oil-fired electric power generation is still among the highest in the OECD. |