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Reviving Japan’s old shopping arcades

by and

As everyone knows, Japan has an unmanageable surplus of vacant housing. According to the latest government surveys there are more than 8 million unoccupied houses and apartment units in Japan and that number will increase to the point where one in four or five residences will be empty by 2030.

The government’s solutions so far involve measures to find uses for these residences or incentives to get owners to tear them down. There is also a corollary problem: Shuttered shopping arcades.

In June, the Cabinet approved the draft of a bill it hopes to submit to the Diet by the end of the year and which would affect the property taxes of businesses that use their residences as offices or retail outlets. The tax assessment rate for residential land drops to one-sixth the normal rate when owners erect a building on it, and that adjustment extends to the owner’s business if the owner’s residence includes a space for business. However, the new law would remove this exclusion for the business portion of the property if it is vacant, even if the residential portion is occupied.

The law’s main target is the number of retail outlets in shopping arcades (shōtengai) that double as residences. According to property tax regulations, these outlets qualify as housing, and thus the one-sixth property assessment rule applies to them. Under the new law, however, any unused retail space would be considered a “resting asset” and thus would not qualify for a property tax exception.

The idea is to force property owners to do something about these spaces. Ideally, the government wants them to sell them or rent them out to other potential businesses in order to revive stagnating commercial districts, which exist not only in regional towns and cities, but in large metropolises like Tokyo. Another purpose of the bill is to prod local governments into coming up with solutions, since it is local governments who receive most of the money collected from property taxes.

Shopping arcades were once the lifeblood of neighborhoods, and businesses contained therein were for the most part family-owned, with the families themselves living on the premises. Arcades organically developed near busy train stations or bus terminals. In the late 1980s, however, due to pressure from the U.S., Japan passed the so-called Big Store Law, which allowed large chain-type discount and specialty stores to be built without much regulation. The result was a kind of Americanization of the Japanese suburbs and countryside. Big box stores and shopping malls with huge parking lots appeared all over Japan, and they were easy to access by car. Such stores also sold goods at lower prices than the smaller retailers who filled shopping arcades. Consequently, the arcades were gradually “shuttered” and have remained that way for two decades.

But according to an article in the business magazine Toyo Keizai published last October, shopping arcades could be revived if proper city planning were implemented. Many of the newer malls built in the ’90s are now in trouble as well, with outlets shutting down due to loss of customers to phenomena such as online shopping and rural depopulation. The customer base is also getting older to the point where they can no longer drive to these big stores, which are not always located along public transportation routes.

Older people would gladly shop in arcades, but according to Toyo Keizai, there is little incentive for the owners of empty retail properties to revive their businesses. In most cases, they themselves have gotten older and don’t have the energy or wherewithal to reopen their stores, while their children have most likely grown up and moved away. In the 2013 land and housing ministry survey, 37 percent of people whose retail outlets were vacant at the time said the situation was “not a problem” for them financially, and 45 percent said they used their buildings for storage or some other non-retail purpose. In truth, they had no desire to reopen their businesses, because they thought it would be too much trouble. It was easier to leave them vacant.

One urban planner told the magazine that most retired owners of shōtengai businesses are relatively wealthy, having made money during the high growth period of the ’70s and ’80s. They remain in homes that are already paid for, so they have no housing expenses. Moreover, when their property was still worth something, they borrowed money on their assets and used the cash to build residential rental units or parking lots nearby in order to earn extra income. Thus they feel no need to unload their business properties as long as the property taxes are low.

The one-sixth rule accelerated the destruction of shopping arcades, since it paid for owners to keep their stores shuttered, and the more shuttered stores there are, the more likely other stores in the arcade will go out of business in a kind of domino effect.

The new law is mainly aimed at these complacent business owners. But in areas outside the central cities, property values are so low that even if the tax is levied at its maximum assessed value, the owner may conclude it’s still more economically viable to pay it than tear down the building, which can be very expensive.

Government subsidies to businesses and organizations that rent out vacant storefronts is another problem. Property owners take advantage of this system by charging artificially high rents to groups that receive these subsidies, thus raising rents in the general area and exacerbating the problem by making property too expensive for others.

The urban planner mentioned in the Toyo Keizai article recommends an even more aggressive tax policy to force owners to give up their property combined with incentives for local realtors to find new businesses that are looking to rent or buy. Such real estate programs have started of their own accord in places like Kokura in Kitakyushu and Osaka, which are blessed with robust infrastructure. The new generation inheriting these moribund properties may be another positive change, as they appear to want to do something constructive with their properties.

Philip Brasor and Masako Tsubuku blog about Japanese housing at www.catforehead.wordpress.com.