The economic development of Japan has a long history. When I travelled in Setouchi area, known to be Japanese Mediterranean, I was impressed by its long history of economic development, dating back to hundreds years ago.

1.The importance of industrial agglomeration and cultural tradition
(1) When I was posted to Russia and Uzbekistan, I used to think a great deal about issues of econo-
mic growth and development.

In those two countries, historically the concept of property rights was not established and all
resources were managed by the government or the Communist Party. In contrast to the amount
of difficulty these countries are suffering in their efforts toward a market economy, in Japan the
tradition of independent farmers has continued unabated from the Muromachi period (c. 1336-1573).

Then, as a result of efforts by the feudal lords to promote industry rather than exploit the locals,
starting from the Edo period growth proceeded with a remarkably good balance among farmers, arti-
sans, and merchants. If you visit the local regions, you will readily understand this strength of
Japan.

(2) The growth of local economies during and prior to the Edo period gave rise to what are called
"industrial agglomerations" (sangyo shuseki), which in turn attracted outside investment. One
representative example of this positive growth cycle can be seen in the Okayama/Hiroshima regi-
on. Among other things, the fact that there were few earthquakes in this region appears to have
made it an advantageous site for factories.

2. Contrasts between the economies of the areas around Hiroshima and Fukuyama
(1) The Fukuyama area, rich in the spirit of venture
○ In the Edo period, under the system of national isolation and self-sufficiency, the Setouchi regi-
on was the core place for cotton production in Japan, and with this as a foundation the textile in-
dustry flourished. Also, this region had been ruled by successive generations of the Mizuno family, which was closely related to Tokugawa Shogunate, and as the customs burden for farmers was
light, it was perhaps conducive to capital formation.

Furthermore, the fact that this region had a tradition of metalworking technology, including tatara
iron-making and swordsmithing likely helped give rise to the precision work industry. Thus, starting
from the local industries, and later helped along by military demand centered around Kure and
Hiroshima, the region realized industrial agglomeration in fields such as metal, machines, and elec-
tric machinery.

○ Well-known firms with origins in this region, and the visionary spirit
Let us take a look at some of the well known firms that originated in this region (in no particular
order):

1) Ryobi: A top aluminum die-cast firm
2) Rorze: A top-class maker of semi-conductor wafer transfer systems
3) Kaihara: Top domestic producer of denim cloth for jeans. Originally went into the business in
the Meiji period as a weaver of Bingo patterns. Starting at that time the company sought a national
market.
4) Aoyama Trading Co. (suits)
5) Disco: with production of a dicing saw that cuts silicon wafers into chips, holds a 70 to 80%
share of the global market. Founded in Kure in 1937 as a maker of grindstones for the munitions
industry.

And so on and so forth; there are too many to be listed. Many of these companies are so-called
"niche companies." This visionary spirit and the spirit of venture are also reflected in the fact
that there are many immigrants. For example, Hiroshima Prefecture was the number one origin for
all the people who emigrated from Japan to North and South America between 1899 and 1923.
This bears close resemblance to the high achieving overseas Chinese merchants who originated
with the Hakka people of Fujian, China.

○ Kurashiki has a wonderful culture. The white-walled wholesaler district of
the Edo period, where willow branches droop down on either side of the canal for as far as the eye
can see, is a gorgeous sight.

I was also overwhelmed at the Ohara Museum of Art. This is an art museum
personally created by Magosaburou Ohara, a local businessman born into the family of a village
leader that established Kurabo Industries, but its collection and size are of such a caliber that it
could be proudly displayed anywhere in the world (artist Torajiro Kojima was dispatched all over the
world to assemble the collection). Although the words "spinning" and "textiles" bring to mind the
famous late Taisho-era report The Tragic Story of Factory Women, it seems that Ohara was mind-
ful of the welfare of his factory workers. Around the thirtieth year of the Meiji period (1897) he
was living the life of a student in Tokyo, but after giving himself over to all sorts of debauchery and
dissipation built up massive debts and was brought back home. It was his father who established
Kurabo Industries, but Magosaburou worked to improve labor conditions for female factory workers as if to rebel against his father.

A poster at Kurashiki Cultural Hall said that the Prague Opera would be performing The Marriage of Figaro. In the center of the town there is also an elegant theme park that recreates Tivoli Gardens in Copenhagen. Kurashiki is an example of how culture blossoms like flowers where there is
industrial agglomeration.

(2) Hiroshima, a little different
○ Hiroshima was originally the place where the Mohri family constructed a castle and opened the
town. In 1992, the town was modernized drastically when it hosted the Asian Games, and the
streets are now modern and elegant. However, because of that ever since that time the Hiroshima
City Government's finances have been worried by deficits.

Furthermore, because Hiroshima is a typical "branch office economy," the city fell victim to the
cutbacks on branch offices caused by the burst of the bubble. Even now, the vacancy rate is as
high as 13%, and none of the renewal initiatives being planned at present seem likely to boost reve-
nue.

Because Hiroshima is close to the mountains, land rents are high. This makes entry difficult for
banks and firms from outside of the prefecture.

○ Hiroshima was a military town. The Imperial Headquarters were located there during the First
Sino-Japanese War, and it was a base for supplies. Later, the 5th Army Division was based in Hiro-
shima, and there were army ordnance factories. In the final stages of the Second World War, it was
also the location of the Second Imperial General Headquarters. Troops embarked for the Asian
continent and the Korean Peninsula from Hiroshima's Ujina Port. Hiroshima was the logistical base
for advances into the Asian mainland.

Until surrender, the city of Kure was the location of the highest-level bases of
the Imperial Navy (Kure is shielded by Etajima, so that even if enemy ships invaded the Seto Inland
Sea, they would not be able to bombard it.) and the naval factory complex here supported the
economy of the area, serving as an incubator for local companies.

○ Possibly because many of the companies grew up around military demand, even now the propor-
tion of heavy industries such as iron and steel, general machinery, and shipbuilding in the manufac-
turing sector as a whole in Hiroshima is 10% higher than the national average. Furthermore,
although Saijo in the eastern part of Hiroshima is called one of the "Three Great Sake Brewing
Sites of Japan," alongside Nada and Fushimi, much of the sake brewing that took place in Saijo was
dependent on military demand.

○ Just like the army factories in Osaka, Nagoya, and Tokyo, Kure's naval factory complex (it built
the Battleship Yamato, the largest battleship in the world; unlike the military
factory complex in Osaka, it was not completely destroyed by air raids, and even now a fair number
of the docks and factory buildings are thought to be just as they were back then--one of them is
now producing rockets) spun out that excellent technology and know-how, giving birth to several
famous companies. Compared to the naval factories in Sasebo and Yokosuka, Kure's naval factory
complex stands out in that it had the equipment to produce weapons such as large caliber guns, as
well as foundries for developing armor plate and other items.

Penta-Ocean Construction polished its offshore engineering technological capabilities through its
involvement in constructing the shipbuilding docks of Kure, while Chugoku Kayaku started out as
an explosives processing company in Etajima. Companies that have grown after purchasing govern-
ment property where naval factories once stood include Chugoku Kogyo (a maker of high-pressure
gas instruments and building materials). The story is a bit off, but the Sailor Fountain Pen also got
started as a copy of a fountain pen brought home from the West by a naval officer (on top of
which it invented the split-nib fountain pen). These traditions gave rise as well to a mood of depen-
dence on government demand among some local companies. Even now, they do not seem to be
making much effort to change their operations.

○ Well-known firms with Hiroshima origins
Here I give a few examples of famous firms that originated in Hiroshima (in no particular order):

1) Mazda: The company started out as a supplier of cork for the interior of battleships made at
the Kure shipyards. In 1930 it produced the first Japanese-made motorcycle engine, and in 1938
became a jointly operated army-navy plant. The company today sits on a site that is 7 kilometers
long on one side. The factory suffered minimal damage from the atomic bombing, and soon after
the war it reopened production of three-wheeled trucks.
Mazda's revitalization under the Ford group (during the bubble period the company stretched itself
too thin, setting up a two types of dealer network, among other things) is almost complete. In
2005 the Roadster was selected as Car of the Year. The company is establishing a plant in Nanjing,
and Mazda cars are popular also in Russia.

2) Disco: Transformed from a maker of grindstones into a maker of semi-conductor manufacturing equipment.

3) Andersen Group (bread): Originally Takaki Bakery. The company has received financing of 2 billi-
on yen from the Development Bank of Japan. It freezes bread dough for shipping to ensure
uniformity of taste and productivity.

4) Fumakilla (insecticide)

5) Orico: Issued Japan's first consumer credit card.

6) Calbee: Largest potato chip maker. Headquarters are currently in Tokyo.

7) Molten: Major global maker of basketballs and soccer balls.

The points all these companies have in common is that they are full of ideas and rich in the spirit
of venture.

○ On the other hand, companies in the Kure area near Hiroshima have not lost the tradition from
the days of subcontracting from naval factories, and are lacking in the spirit of innovation.
However, the companies located in industrial complexes near Kure are rich in the visionary spirit;
the company Chugoku Mokuzai is one representative example. The president of the company,
Mr. Horikawa, built the company within his lifetime. His office is on the third floor of a
prefabricated-like building, and yet, already over 70 years old, he climbs the uncovered stairs atta-
ched to the outside of the building at a breakneck pace, leaving his younger employees short of
breath. Chugoku Mokuzai, in addition to drying lumber in a short period of time by steaming it, is
the largest in Japan in the work of planing wood according to carpenters' specifications by compu-
ter, drilling holes, and shipping. That means that on the site the carpenters only have to assemble
the final product.

(3) The importance of military demand to the development of local industry and the Kure naval factory as an incubator
Driving around Kure, the legacy of its past as a military town is still apparent. Many elements of
the infrastructure were created to meet military needs. In other words, the pre-war military
demand strongly resembles the post-war public works projects and supports the local people's
economy, which is why it was difficult to slow it down. The Iwakuni and Otake industrial complexes also started out as munitions plants.

3. About the idea to merge prefectures
Many discussions of merging prefectures to create the "regional system" compile numbers
from the financial perspective, but I have noticed cases where the crucial elements of (1) the bur-
den of history, (2) the actual conditions of local economies, and (3) the presence or lack of human
resources are not sufficiently discussed. To discuss it as it relates to the Setouchi region, the following points are disincentives to the regional system.

(1) The burden of history
To me, raised in Tokyo, it is completely incomprehensible, but the degree of rivalry and bitterness
between cities in regions with a history surpasses all imagination. For example in the Niigata area
the cities of Niigata, Nagaoka, and Joetsu each claim to "lead," and people say, half seriously, half
jokingly, that if under the regional system, they were to be placed under Niigata's authority,
Nagaoka would rather choose to be in Nagano Prefecture and Joetsu in Toyama Prefecture. When
I actually went to Nagaoka, my eye fell on a poster announcing that Governor Tanaka of Nagano
Prefecture would be coming to address an event.

In the Setouchi region the rivalry between Okayama and Hiroshima is strong, and whichever
became the capital of the future "region" the bitterness would surely continue for years to come.
Also, there is a high possibility that if the regional system is introduced the Setouchi region will
be required to merge with the Shikoku and Sanin regions in order to achieve an appropriate eco-
nomic scale (the Chugoku region alone accounts for about 6% of Japan's total GDP. Combined
with Shikoku, it would reach 8.5 to 9%), but in Shikoku the relationship between Ehime and Kagawa
is poor.

Back when the domain system was abolished, there must have been cases of disparate domains put
together into one prefecture. Even in Hiroshima Prefecture, the dissimilar regions of Aki (Hiroshi-
ma, the nonhereditary Asano clan) and Bingo (Fukuyama, the hereditary Mizuno clan) were joined
into one.

(2) The actual conditions of local economies
Only two highways connect Sanyo and Sanin in the north and south, the two have poor communi-
cation (even so, in addition to the coastal road there is for some reason a highway that runs east-
west, right through the mountains in the middle, which locally is said to be the result of strong
influence of local politicians) and there is no bridge between Hiroshima and Shikoku. To get to
Shikoku by rail, there is only the Great Seto Bridge from Okayama. Cities west of Hiroshima are
turning towards the Kyushu economic sphere instead of Setouchi.

(3) The human resources issue
Because of the situation explained above, even if we tried to create regions based on fiscal conve-
nience, human resources who have never thought of setting their sights on the region as a whole
will not be able to get the region moving. If the regions absorbed personnel from central govern-
ment agencies like the local finance bureau the situation would probably change slightly, but it
would become an opposition against the banner of delegation of authority to the regions. On this
trip I heard talk that even now in the local financial circles they are quietly distancing themselves
from central government agencies. (end)

Note １．Regional Economies and History - The Example of Niigata
Unraveling the history, the various aspects of the region's economy begin to show.
Niigata, for example, seems to have developed as a port of call for Setouchi- and Osaka-bound
trading vessels carrying herring from Hokkaido for use as fertilizer, and probably also as base for
smuggling from Korea.
In addition, starting in the Edo period the Tsubame area of the region produced nails, for which
there was renewed and hot demand whenever there was a major fire in Edo (Tokyo). Although
Tsubame later established itself on the world map for producing Western-style tableware, it has
lost out to South Korea and China in that market, and is now uncovering opportunities in cutting-
edge technologies for working with light metals such as titanium and die production. The underside
of the cover of the iPod, which has taken the world by storm, is made of titanium, all of it produ-
ced in Tsubame.
"Niigata" may not evoke any particular emotions for us today, but once there actually was an ele-
gant district where lines of white-walled shop-front homes stood along the banks of roadside ca-
nals and cherry tree branches cast their shadow on the surface of the water. Today there is an
effort to rebuild it. Incidentally, if you really think about it, this scenery which can be thought of as
typically Japanese still exists around Suzhou in China, as well as in South Korea. There are dist-
ricts with similar scenery in Kurashiki as well. Japan has after all always developed within the
sphere of Chinese civilization. In the post war period, we have lost sight of that altogether.

Note ２．Hometown of the Battleship Yamato
○ Driving south from Hiroshima toward Kure, a sign reading "Hometown of the Battleship Yamato"
catches your eye. There is no doubt that when the Yamato set sail from a narrow inlet between
Etajima and Kure, its giant floating form was a truly spectacular sight.
○ The Yamato Museum has just opened. Across from the brand-new concrete building towers a
shopping center as gargantuan as the Yamato itself. On the belly of this "ship" the words "You
Me" are written in English. In front of the museum are an anchor and, for some reason, a statue
of the Greek sea god Neptune. I caught sight of a paper proclaiming "Navyman's Beer." There was
not a trace of militarism.
The people who come in are visitors from elementary and middle schools and people who look like
wheelchair-bound former servicemen. Entering the museum, a Zero fighter plane is on display,
with a written warning that "The Zero is extremely delicately constructed of fragile materials,
such as parts of the wing, which are covered in cloth. Absolutely no touching, please."

Note ３．What is the Bank of Japan doing in the regions?
On this trip, I acted on my curiosity and asked what kinds of things the regional office of the Bank
of Japan is doing. Excerpting the things that I am personally interested in, here is what I learned.

○ The Bank of Japan is also a bank for city and regional banks. Accordingly, these local banks hold
accounts in the Bank of Japan. Note that the regional Bank of Japan offices do not print or issue
banknotes. This is one aspect in which they differ from the Federal Reserve Bank local branches
in the US.
○ When a regional bank is running a deficit, the Bank of Japan provides an advance within the
limits of its collateral (currently, local bank holdings of national bonds are used as collateral).
○ In Japan, the tasks of collecting taxes and awarding budgets are conducted through the Bank of
Japan.
(However, the Japanese government is instructing countries like Uzbekistan, for instance, to draw
a distinction between the national purse and the central banking system.)