Japan's Provinces Are Withering Away

On the block where Mika Nasu's clothing shop sits along the main street of Atami, a resort town 65 miles south of Tokyo, 13 of 19 stores are shuttered. "Recovery? What recovery?" asks Nasu, 50. "It just gets worse and worse."

Nasu's struggles are reflected in the Bank of Japan's Sakura Report, a regional survey akin to the Federal Reserve's Beige Book. In the July 8 report, companies from seven of Japan's nine regions expect business to worsen in the next three months. Kanto, the region that includes metropolitan Tokyo, is the only one where business anticipates any improvement.

If the economy consisted solely of urban areas like Tokyo, Osaka, and Nagoya, things would look better. Tokyo's unemployment rate is a few notches below the national average of 5.2 percent and well below the 8 percent recorded in the north. While the young flee rural Japan, Tokyo's population has grown by 1 million in the last decade. The economy of Tokyo and its surrounding areas generates 31 percent of GDP. Factory jobs are disappearing throughout Japan as the country's multinationals shift production abroad. Still, Japan's big companies are expected to stay based in Tokyo, where the service industry is strongest and the talent pool deepest. "The disparity is widening," says economist Tamai Chino, who studies regional economies at Mizuho Research Institute.

Chino worries about the impact of the drive to cut the national deficit. Local governments rely on funds generated by taxpayers in Tokyo, a reliance that discouraged independence in the regions, according to Martin Schulz, a senior research fellow in Tokyo at Fujitsu Research Institute. "They never saw the [need] to develop their own business models, their own products, their own bridge to global markets," he says. In the July 11 upper house elections, rural voters punished Prime Minister Naoto Kan for slashing public works. With the deficit so huge, though, the cutbacks are likely to continue. For places like Atami, revival will just be harder.

The bottom line: The gap between Tokyo and rural Japan is growing ever wider. Budget cuts will accelerate rural decline.

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