PSPC CHAIRMAN TANAKA WANTS TO END MARKET

UNCLAS TOKYO 002302

SIPDIS

SENSITIVE
SIPDIS

STATE PLEASE PASS TO USTR/MICHAEL BEEMAN

E.O. 12958: N/A
TAGS: EAIR ECON EFIN EINV JA
SUBJECT: PSPC CHAIRMAN TANAKA WANTS TO END MARKET
DISTORTIONS BUT ALSO ENSURE JAPAN POST CAN COMPETE


1. (SBU) SUMMARY: A level playing field should be
established before the successor companies of Japan Post (JP)
can expand their product offerings, Naoki TANAKA, chairman of
the Postal Services Privatization Committee (PSPC) clearly
stated to ECOUNS on April 21. He was also positive on the
need for the PSPC to operate in a transparent manner. He
emphasized, however, that the committee also has a
responsibility to ensure the postal companies are able to
develop the capabilities to compete in the open market. END
SUMMARY


2. (SBU) BACKGROUND: The PSPC is provided for in the
Postal Privatization Law as an outside panel of experts
charged with considering applications for new products or
expanded business from the privatizing postal companies. As
such, it is expected to play a critical role in advising on
how to balance what the government calls management freedom
for JP with concerns from the private sector (including many
US companies) that the new companies will continue to enjoy
preferential regulatory, tax or other treatment as they
expand into new business areas. US firms concerned over this
possibility (including insurance and express delivery service
providers) were buoyed by the appointment of Tanaka to the
chairmanship. Tanaka, a long-time proponent of Japan Post
privatization, is the head of a think-tank, the 21st Century
Institute, and is an economist with a strong belief in free
markets.


3. (SBU) Although Japan Post will privatize in October
2007, the law specifically allows for the company to expand
its business activities in the express delivery area from
April 2006. The first case came earlier this month, when
the committee, after three closed-door meetings, quickly
approved JP,s proposed joint venture with All Nippon Airways
(ANA) to provide international express delivery services.
Tanaka stated unambiguously that the committee did not
believe the new company would unfairly harm private
businesses competing in the express delivery market. The
committee received a detailed briefing from the Ministry of
Internal Affairs and Communications (MIC) and JP on the
proposal, but did not offer private industry a chance to air
concerns over possible unfair competition. In fact, a US
express mail representative has told us that there was little
concern about the joint venture and the PSPC stipulated that
joint venture be periodically reviewed. However, the lack of
transparency in the process has also alarmed US firms;
meeting minutes were released ex-post, but there was no
opportunity for ex-ante input or provisions for public
comment. END BACKGROUND.


4. (SBU) During a courtesy call by ECOUNS, Tanaka
emphasized the importance of eliminating market distortions,
which historically have plagued the Japanese economy. The
"dividends of reforms", that is, future increased economic
efficiency for the benefit of consumers, will result from
this emphasis on economic rationalization, and he added that
Prime Minister Koizumi has emphasized to him the importance
of this dividend in the case of Japan Post privatization.
Tanaka was emphatic that Japan should be open to all market
participants, including foreign ones. Given Japan,s
demographic challenge in the years to come, foreign companies
should have access to Japan,s markets to enhance
productivity and increase efficiency. The way to do this, he
added, is with a level regulatory playing field, an
atmosphere of confidence for foreign investors, and
transparent decision-making.


5. (SBU) On transparency, he acknowledged that a rule-based
system with ex-post and ex-ante transparency is critical for
creating a good environment for investment. He seemed to
understand our concerns over the need for advance notice of
meeting agendas and the opportunity for meaningful input from
private sector stakeholders. When urged to provide
opportunity for stakeholders to submit their comments, and
ample time for the committee to consider such comments, he
stated simply, "I accept this." He said the PSPC would hold
an initial discussion of issues and then seek public comment
before a final decision. He noted that transparency would
also be important for JP workers and unions.


6. (SBU) However, Tanaka emphasized that there is another
side to this equation: his responsibility to help the
thousands of JP employees have an opportunity to enhance
their capabilities to compete in the market. The way to do
so is by allowing development of new products and services.
He strongly agreed, however, that the introduction of new
products should be preceded by the creation of a level
playing field and the elimination of monopoly protections,

the possibilities for cross-subsidization arrangements
between the JP companies, and tax and regulatory benefits.


7. (SBU) When urged to establish transparently criteria for
the PSPC to apply to its decisions, Tanaka insisted that to a
certain extent, an ad hoc, case-by-case method was
inevitable, because there is no textbook for how a
privatization on this scale should be carried out. Still, he
acknowledged that the PSPC should define guidelines on how it
will proceed, and lay out more specifically the scope of
their work. Tanaka also stated that the Regional and Social
Contribution Fund, which was included as a compromise in the
privatization law, will only be used to ensure universal mail
delivery service, not for JP,s insurance or banking arms.

COMMENT
==========


8. (SBU) Tanaka appears to be genuinely convinced of the
importance of eliminating government-supported market
distortions, and his call for participation in Japan,s
market by foreign firms is encouraging. As a free-market
economist, he believes market efficiency is critical, as is
seen in his call for an end to market distortions and his
repetition of the phrase "the dividend of reform" as
something of a mantra for his committee,s actions.


9. (SBU) However, he also clearly believes he must bear
responsibility for the postal employees and appears to be
sincerely dedicated to providing opportunities to help them
develop the skills they will need to survive in the market.
Although he described this responsibility as "a big headache"
he is evidently dedicated to carrying it out. Also, as an
economist perhaps more used to working with the theoretical,
he seems to be feeling his way through transparency issues.
After initial bemusement, he responded favorably to our push
for transparency, public comment and stakeholder input, but
his reaction suggests he did not expect this to become such a
priority for us. We also had the impression that he may have
been thinking through some of the practical issues as we
spoke. Nonetheless, it is clear his general instincts on our
concerns are favorable.
DONOVAN