Pollution: Digging Up Trouble In Japan

The country finds a legacy of tainted soil, and cleanup costs will be steep

Residents of Tokyo's Ogikubo suburb were overjoyed earlier this year to learn that a mothballed aerospace factory in their midst was to be replaced by a condo development and park. At least they were until the bad news broke: Turns out the former Nissan Motor Corp. facility sits atop a brew of potentially cancer-causing chemicals.

Nissan knew as far back as 1994 that decades worth of the degreasing agent trichloroethylene had leaked into the soil. In fact, the company knew that levels of the chemical were up to 16,000 times what is officially considered safe. Yet Nissan didn't go public until September, more than a year after informing city authorities that pressured it to come clean. Nissan defends its actions, saying the contamination did not pollute surrounding land or local water supplies. Besides, says Masayuki Hori, a company environmental official, "we didn't want to upset the neighbors."

That is no consolation to Hiroshi Kitamura, a 42-year-old white-collar worker who lives nearby with his wife and three sons. He claims his family has suffered rashes and breathing problems since excavation of the site began weeks before Nissan's public disclosure. His doctor can't substantiate a direct link, but Kitamura is taking no chances: He keeps all the windows shut and filters the air. "Is this any way for a world-class company to act?" he asks.

"WITH TEETH." A growing number of Japanese say it isn't. In December, a government-appointed panel began looking into legislation that is expected to make soil pollution a punishable offense and force Corporate Japan to clean up its act. The bill will probably be based loosely on the U.S. Superfund Act of 1980 that mandated cleanup with public and industry funds. Activists and legal experts are calling for tough wording and stiff fines for noncompliance. "It's important to have a law with teeth," says Izumi Sato, an environmental lawyer. Yet manufacturers fret about getting hit with costly lawsuits and cleanup costs. The total bill to scrub Japan's black spots: an estimated $122 billion.

Industrial pollution is hardly a new phenomenon in Japan. Thirty years ago, hundreds of people died, and thousands more were disabled or born with defects following the mercury poisoning of fishing grounds off the southwestern town of Minamata. The tragedy sparked laws that imposed harsh restrictions on emissions of toxic chemicals into the open air or water. Lawsuits stemming from Minamata and other such incidents also prompted Japan's miserly courts to give victims the right to compensation. But soil contamination, as opposed to water and air pollution, remained hidden from public view. It wasn't until the early 1990s that the government even bothered to draft unenforceable guidelines determining unsafe levels of land contamination.

As in other countries, the use of some particularly toxic substances such as trichloroethylene was gradually phased out at many Japanese plants by the late 1980s. But as elsewhere, the chemicals had already seeped into the ground. With little fear of liability, landowners have had no impetus to dig up trouble. What's more, until recently, property buyers typically did scant due diligence on the environmental state of their purchase--for fear of insulting the seller.

That has started to change, now that Japan's economic downturn has forced indebted companies to sell commercial properties. Some of the buyers have been foreign investors, including investment banks such as Goldman, Sachs & Co. and funds such as California's Colony Capital. They have started to ask hard-nosed questions about environmental risk. "We treat industrial land in Japan the same way we would in the U.S.," says Daniel Klebes, managing director in the Tokyo office of Goldman Sachs.

Such due diligence is becoming standard practice among real estate investors. Given Japan's limited disclosure of public and corporate records, following the paper trail to determine who has owned a piece of land--and for what purpose--is rarely easy. As a result, many investigations involving polluted Tokyo land are farmed out to such specialist research boutiques as Environmental Resources Management (ERM). "It's kind of like detective work," says Dylan Tanner, who helps run the company's branch in Japan. "We can't hire enough people to do it." ERM says its $2 million Japanese operation is doubling revenues each year.

As part of the effort to pin down liability, environmental sleuths like Tanner spend months piecing together missing land records, occasionally even digging out U.S. aerial surveys of Japan done during World War II. The market for this type of eco-consulting and cleanup is now worth up to $410 million a year. And demand is expected to mushroom, especially with the enactment of tougher regulations on soil pollution. Many large companies are angling for a piece of the action, including blue-chip trading house Mitsubishi Corp. and steelmaker NKK Corp., which established a joint soil-purification venture in September.

WHO PAYS? In the meantime, Corporate Japan is coming to grips with the reality that cleanups are part of the cost of doing business. Consider Nomura Real Estate Development Corp. In February, it was forced to dismantle a nearly completed condo project near

Osaka after its engineers belatedly detected toxic chemicals. The company has filed suit against the former landowner to recover part of its undisclosed losses on the failed project, built on what it now realizes was an unregistered dump for hazardous waste.

Indeed, the most controversial part of any new legislation is deciding who will pay to clean up such messes. Many of the worst sites were despoiled by companies that are bankrupt or too poor to foot the bill. Officials say some form of public funds will probably have to be made available for such cleanups. In other cases, current tenants will have to find the money themselves.

Back in Ogikubo, Nissan's cleanup is under way. Each day, trucks cart tons of contaminated soil to an on-site facility where the toxic agents are neutralized. The company figures the operation will take six months and cost upwards of $20 million. So far, Nissan has avoided legal entanglements. But the lesson for other companies is clear: Clean up now--or pay a higher price in lawsuits and business losses later.