Falling in Love With the Trains of Japan

In the 1860s, shortly after the country emerged from its self-imposed multicentury isolation from the outside world, Japan’s extensive railway system was born. The government contracted with foreign experts to engage in a knowledge transfer that allowed the Japanese to perfect rail technology for their own context. The first railway between Shimbashi (later Shiodome) and Yokohama (present Sakuragichō) opened in 1872. By 2017, Japanese trains carried nearly 30 percent of all rail passengers in the world, more than all of Europe. But unlike many European countries, Japanese rail companies are privatized, with for-profit publicly traded companies running separate rail lines all around the country.

It wasn’t always this way. Until the late 1980s, the national government owned and operated a state rail system (Japanese National Railways). In 1987, the government broke up the debt-ridden national railway into private firms that together operate a mix of high-speed intercity lines (Shinkansen), metropolitan rail (i.e., urban subways), regional rail services and related rail businesses. While the nine companies — six passenger rail companies organized geographically, one freight rail, one IT company and one technical research institute — all carry the name JR, they are entirely independent of each other.

JR East, the largest of the JR companies, carries 17 million passengers per day on 12,300 trains. (By comparison, Amtrak carried just 31.3 million passengers during all of 2016, a record year in ridership; the New York City subway averages 5.5 million daily rides and BART, 430,000.) And JR East’s $26 billion in annual revenue includes no government subsidies.¹

How is this possible?

The reason is simple: Both the rail service (which generates $16.5 billion in annual revenues from passengers) and the real estate and other “lifestyle” businesses they own are profitable and reinforce each other. The nonrail businesses fall into two main groups: retail and services (including 2,000 department stores, restaurants and other retail establishments, plus advertising) and real estate and hotels (including 162 shopping centers, 34 office buildings and 46 hotels with 7,000 rooms). These businesses and related nontransportation revenues account for one-third of JR East’s total revenues, a figure that has increased from 25 percent in 1996.

How did the rail companies make the decision to expand into real estate and other lifestyle businesses? Previously, they had focused primarily on the individual stations, but then they expanded into real estate around stations as a way to provide greater services to their existing rail customers while also attracting new riders. Those 17 million daily passengers on JR East are an extensive base of customers passing through the stations, one that the rail companies have leveraged. Not only have the rail companies developed real estate around the stations, they have also invested in businesses (like department stores or vending machines) that directly cater to their customers. The rail companies know more about their customers than anyone else, and they internalize that information to pass to other divisions intent on finding ways to sell to these customers. For example, nearly 770,000 passengers per day take JR East rail at Tokyo’s Shinjuku station. To make sure these customers are buying more than just train tickets, JR East is finding ways to keep them in the station area: They are building a 600,000-square-foot office tower, two 400,000-square-foot shopping centers and, later, an additional 120,000-square-foot shopping center. JR East also has major development projects in the works at Shibuya, Tokyo, Shinagawa, Yokohama and Chiba stations.

JR East is now thinking of moving toward what it describes as “creating lifestyle [services] that enhance life and work”: restaurants and health, security and energy services. It’s a first step toward even more integrated stations and services targeting nontransit users.

Another key move by the Japanese rail companies has been to expand the Shinkansen network to smaller cities and, in so doing, bring them more into the Tokyo economic orbit. For example, JR East’s extension of the Shinkansen service all the way to Kanazawa (280 miles from Tokyo) led to a decrease in travel time from nearly four hours to just two and a half. This led to an increase in the market share for rail (relative to air) from 42 percent to 76 percent, as well as an overall increase in passengers from 5 million to 8 million annually. In JR East’s Aomori-to-Tokyo segment (443 miles), reductions in travel time from four and a half hours to three hours resulted in a similar increase in market share from 43 percent to 76 percent between 2001 and 2011.

In Japan, rail companies have learned that what is good for their riders is good for their bottom lines. This happened because they built the competency to understand and measure people, their activities, their needs and their preferences, which ultimately allows them to deliver what is of greatest value to their customers. What are the lessons for California?

1. Allow rail operators to become real estate developers to capture the value they bring to the stations.

Japanese rail companies have developed deep expertise to deliver real estate projects and manage lifestyle businesses. At a time when some of California’s major transit agencies are becoming more customer-focused and are also rethinking their organizational structure to integrate real estate development and management, looking at the Japanese railway companies’ history can provide relevant lessons. There is no reason Caltrain, BART and the California High-Speed Rail Authority cannot be similarly innovative and market-driven in their approach to real estate and other “lifestyle” services that riders need. But it will take policy changes to allow the transit agencies to own sufficient land around stations, as well as management and staffing changes to ensure the deep expertise to succeed in the real estate business.

2. Turn stations into major destinations.

So much of the transit-oriented development discussion in the United States focuses on residential development. While housing is the primary economic and planning challenge in California, it is not the only land use we should be planning for. The Japanese stations are focused on destination uses that drive ridership such as retail, office and leisure/travel functions. Furthermore, locating so many functions at a station cuts down on the need for additional travel, as riders can access so many goods and services. California stations should do the same. San Francisco’s Transbay Terminal is a good example of a multimodal station where the local land use planning prioritized office development on adjacent parcels, and it should be replicated in other cities. San Jose’s Diridon Station is on the path to becoming a major multimodal transit center adjacent to office buildings housing tens of thousands of workers. Ultimately, California must learn to grow more compactly around rail stations as Japan does. This allows people to remain close to services and leisure activities while also protecting open spaces and keeping development out of fire-prone areas.

3. Build over tracks to create new land opportunities.

In land-constrained Japan, many station development projects are built directly on top of the tracks in order to maximize developable space. A decade ago, SPUR proposed this idea for the 4th and King rail yards. If the market can support such projects, they are worth pursuing.

4. Dramatic reductions in travel time between cities can lead to major increases in rail’s market share.

The value of time matters. Japan’s continued extension of the Shinkansen shows that riders value the time competitiveness of super high-speed rail. Overall travel has increased, as has the share of those taking rail. Here in California, high-speed rail investments connecting Gilroy, Fresno and other cities have the potential to reshape travel and economic opportunity in the state.

5. Interoperable rail cards are key to making rail easy to use nationwide.

Across Japan, various regional rail cards (the country’s version of Clipper) are interchangeable because they use the same back-end system. There are 10 separate transport cards throughout Japan (such as Suica) across 142 different operators, with 100 million cards in circulation. Yet any card works on all of the systems nationally (and can often be used as a debit card at stores as well). A statewide ticketing system is under discussion in California; it should include interoperable rail cards that allow riders to access local, regional and statewide rail services.

Endnotes

¹ It must be noted that the success of JR companies that benefit from the popular Shinkansen superexpress services, profitable local train operations for urban commuters as well as diversification of their business, does not address the challenges faced in rural regions, where many train services remain in the red — a problem that threatens to get worse across the country as Japan’s population continues to shrink. “Privatization of JNR, 30 years on,” Japan Times, April 4, 2017.