Osaka revitalization amid plummeting prices: Osaka has long been Japan's "second city." Now is the time to change that - In Depth

Japan, Inc., Dec, 2003 by Alex Stewart

WHAT MAKES OSAKA SPECIAL? A resident Japanese might reply: good okonomiyaki (a pizza-like dish), the origin of cup noodles, the headquarters of Matsushita, the unbreakable spirit of the Hanshin Tigers baseball team and ... falling property prices.

Osaka's property prices have declined steadily since the end of the bubble economy. In 1992, the average asking price for office properties in the city zone was over [yen] 16,000 per tsubo (3.3 square meters). In September 2003, it was down to [yen] 9,650, according to data supplied by Ikoma Data Services.

The slide in land prices has been even more severe. According to Ichiro Kumazawa, chairman of the Osaka Real Estate Appraisal Association, if pre-bubble land prices in 1983 are indexed at 100, the corresponding index in 2002 was 56.3 for commercial property. In fact, he says, prices are equivalent now to 1972 levels if adjusted for increased economic buying power. In short, most of the last 30 years or more of property speculation has gone up in smoke.

Since the bubble, Osaka's economy has suffered a severe lack of investment, especially from overseas (the FDI to GDP ratio is so small it barely registers). Following the financial "Big Bang" and other steps to deregulate the economy, more foreign capital, more know-how and ultimately more head office functions have moved to Tokyo.

The Tokyo exodus largely accounts for the soft state of the Osaka office market in the last five years. So long as there is a continuing outflow of major tenants, the risk for property developers remains high. Very little foreign capital has entered the market, although companies like GE Capital are beginning to become more active.

Osaka has long wanted to maintain its standing as Japan's "second city," and has even tried to maintain a set of institutions that parallel Tokyo's. Osaka is the home of several of the largest general contractors and house-building companies in Japan. Building--almost for its own sake--is one of the city's passions.

The result is a city with hardly any open space, which is now a major handicap for planning a post-industrial city. What Osaka has instead is the longest and largest underground and over-ground shopping mails in Japan, a gleaming international airport that is a major financial liability, and until the recent building spree in Tokyo, one of Japan's tallest skyscrapers.

Osaka is still a genuine metropolis. In its downtown area, which is not much larger than two of Tokyo's central wards, Osaka contains all the vitality and variety of the capital city, minus the conspicuous wealth and international business activity. There is an opportunity for Osaka to promote itself to a wider audience, especially since it stands at the gateway to a regional economy larger than that of Taiwan.

What Osaka needs to do is reinvent itself, not as a second city, but as a new style of regional city, like Glasgow and Manchester in the UK. Its best chance to do this has been activated by the central government's policy to use urban regeneration, increased tourism and foreign direct investment as levers to stimulate domestic demand and fight deflation.

Prime Minister Koizumi established the Urban Renaissance Headquarters in May 2001 under the Cabinet Office. In July 2002, the office designated 17 sites in four main metropolitan areas for promotion under special measures drawn up to simplify planning consent and building regulations. (The number of designated areas has since expanded to 52 nationwide.) The Osaka region obtained the highest number: four for the city and four for the prefecture, the latter mostly on the outskirts of the city itself. The government also introduced the Special Measures for Urban Renewal Law, which provides financing for the selected "urban renewal districts."

The city established an Urban Revitalization Task Force in April 2003 to coordinate the various initiatives to revitalize the economy. By using urban regeneration as a platform, Osaka has the opportunity for the first time since the postwar building boom to create a new kind of city--an urban center that first attracts increased numbers of visitors from Kansai, then from greater Japan, and finally from the whole of Asia. To achieve this, the city needs to market itself differently, upgrade the current infrastructure and reduce real estate investment risk.

The new Urban Renewal Law simplifies building permit processes and reduces the time-risk which hampers many large-scale projects. The law also allows local governments to obtain central government funding for half the cost of building infrastructure--activities such as widening roads, creating open spaces or implementing new traffic systems within the designated urban renewal areas.

From a commercial point of view, the parts of the city with the most potential for development are where people already congregate, which in Japan generally means the main railway hubs. Strengthening them helps improve land values. (In the past, Osaka has created new projects in new areas, hoping to draw investment to them.)