July 27 - Aug 02, 2009

Japan plans to commence construction of the Japan Special Economic Zone (JSEZ) in September at an initial cost of $5 billion for Japanese investors in Pakistan near the southern port city of Karachi. The JSEZ would be a tax free zone with no import duty on raw materials and income tax holidays to encourage Japanese investment in export-oriented industry. Spreading over an area of more than 2000 acres of land, the JSEZ is meant mainly for hi-tech and heavy industry. The zone would provide one-window operations (OWP) and essential utilities to attract Japanese entrepreneurs in the south Asian country, which already has the presence of 22 Japanese companies. The new Japanese entrants into the country have been rare in recent years due to security concerns.

The JSEZ would be similar to the "Chinese economic zone", which has already been set up near Lahore city. The production of high quality and hi-tech products at cheaper rates in the proposed Japanese zone would favorably compete globally. Local analysts believe that JSEZ would promote a healthy competition with China that has so far proved not only a hard competitor but a bottleneck to Japanese business to enhance operations and investment in Pakistan.

The proposed Japanese zone would be established at village Dhabeji, 50 kms from Karachi airport on national highway and railway track between Karachi and Thatta town. The zone is in close vicinity of Pakistan steel mills and Port Qasim. Ideal location of the zone site, which is close to city centre and linked to national highways, main rail tracks and major seaports would help minimize transportation costs. The proposed zone would transform into a Japanese village having its security arrangements and all the required facilities and utilities close to the choice of Japanese including Japanese restaurants, recreation spots, markets, housing and parks.

By establishing a Japanese special economic zone, Pakistan would benefit from its technology, expertise, innovations and best practices. The country has offered the best incentives for investment, including 100 percent equity, free flow of money with remittance of royalty and technical fee. Officials in Islamabad claim that Pakistan is rated higher in business ratings around the world, as there is as such no restriction on the foreign investor to repatriate his capital, assets, profits and royalty. The economic benefits hence accrued would be mutually shared by the two countries. A proposal for a joint Investment Company (JIC) is also under consideration between the two countries to boost investment activities by providing soft loans for setting up of industries in the south Asian country.

Several Japanese manufacturing units, including Suzuki, Sony, Yamaha, and Marubeni, are interested in establishing their units in the JSEZ, according to the official sources. Major Japanese automakers, including Suzuki Motor Corp and Toyota Motor Corp already have manufacturing plants in Pakistan, and several of Japan's biggest trading companies also have outlets in the country.

In 2007, Japan had reached basic agreement with Pakistan to revise a nearly 50-year-old tax treaty to promote investment and build closer economic ties. Under the current treaty, when a Japanese company has a branch in the country, Pakistani taxes are levied on all the income made within the country even if it is made through a direct business with its headquarters in Japan. The same applies to companies in Japan. The revised treaty will however impose taxes only on income made through operations of branches in the other country. Other revisions include rationalizing investment income tax levels for dividend, interest income and other fees. In this regard, Japan and Pakistan are expected to sign the agreement this year.

Japan has been stepping up efforts to revise tax treaties in recent years. It revised its tax treaty with the United States in 2004 and since then, it has revised tax treaties with India, Britain and signed similar agreements with the Philippines and France. It has recently been in talks for similar deals with Australia, Kuwait, the United Arab Emirates (UAE), and the Netherlands.

Present government of Prime Minister Yousaf Raza Gilani has already directed the Board of Investment (BOI) to prepare a workable report suggesting remedial measures to remove all sorts of hindrances and bottlenecks to encourage the Japanese business sector to enhance operations and investment in the country.

Under FTA deal with Pakistan, the China is selling Pakistan more and more goods ranging from household items to textile plants and highly-sophisticated and latest technology items, besides getting cheap raw material and easy access to Pakistani ports for onwards export of its goods to world destinations at reduced freight rates. By introducing the modular-type manufacturing, Chinese manufacturers are producing labour-intensive products by mobilizing cheap labour force in Pakistan.

Some five years back, Japan was dominating the motorbike market in Pakistan. Presently, the Japanese makers of Honda, Yamaha and Suzuki motorcycles are losing their sales to Chinese bikes. Out of 53 units assembling two wheelers in the south Asian country, 50 Chinese units are competing with 3 Japanese assemblers units. Owing to the rising competition with their Chinese counterparts, the Japanese bike makers have slashed prices of various models for improving their sales volume, which have been on the decline for the last five years. By offering bikes at very competitive rates, the Chinese have captured market in Karachi, which is the country's financial, industrial and commercial hub. The sale share of Chinese bikes in Karachi has been more than 80 percent.

The Japanese bike-makers had begun slashing the prices of their products in September 2004 to attract more buyers. The move was aimed at improving market share and customer base at a place overjoyed over entry of the Chinese bikes, both local and imported. Local market people link the cut by Japanese bike makers to the entry of Chinese bikes which created a healthy competition, thus proving beneficial for the end-users to select the bikes as per their pockets and savings. Japanese bikes are still more popular in rural and urban areas of the country but if the Chinese bike makers also reduce prices, they are likely to capture more markets in the country and prove a hard competitor to Japan in motorcycle manufacturing. In last four years, the Japanese bike-manufacturers have been making downward adjustments in their prices.

President Asif Ali Zardari during his visit to Japan in April to attend friends of Pakistan meeting in Tokyo, had told Japan's Trade Minister Toshihiro Nikai that JSEZ was aimed at encouraging entrepreneurs from the world's second-largest economy to invest in Pakistan. He reportedly said that Japanese investment would not only help in reviving the country's economy but would also enable the Japanese entrepreneurs to benefit from the liberal pro-investor policies adopted by his government.