JAPANESE MORNING PRESS HIGHLIGHTS 07/10/06

UNCLAS SECTION 01 OF 11 TOKYO 003818

SIPDIS

SIPDIS

DEPT FOR E, P, EB, EAP/J, EAP/P, EAP/PD, PA;
WHITE HOUSE/NSC/NEC; JUSTICE FOR STU CHEMTOB IN ANTI-TRUST DIVISION;
TREASURY/OASIA/IMI/JAPAN; DEPT PASS USTR/PUBLIC AFFAIRS OFFICE;
SECDEF FOR JCS-J-5/JAPAN,
DASD/ISA/EAPR/JAPAN; DEPT PASS ELECTRONICALLY TO USDA
FAS/ITP FOR SCHROETER; PACOM HONOLULU FOR PUBLIC DIPLOMACY ADVISOR;
CINCPAC FLT/PA/ COMNAVFORJAPAN/PA.

E.O. 12958: N/A
TAGS: OIIP KMDR KPAO PGOV PINR ECON ELAB JA

SUBJECT: JAPANESE MORNING PRESS HIGHLIGHTS 07/10/06
SPECIAL PRESS-HOLIDAY EDITION FROM THE WEEKEND DAILIES


Index:
1) 48 PERCENT of public support Abe for next prime minister in
Yomiuri poll

2) Yomiuri poll: 92 PERCENT would back sanctions on North Korea
over missile issue; 63 PERCENT want MD installation speeded up

3) Kyodo poll finds 80 PERCENT favoring tougher sanctions on North
Korea due to missile launches

4) JDA chief Nukaga: North Korea used new type of Scud missile in
missile tests

5) JDA: Little chance of another North Korea missile launch soon

6) Government will impose financial sanctions on North Korea if
another missile launched
7) Missile defense: PAC-3 deployment to be speeded up due to North
Korea missile threat

8) Foreign Minister Aso strengthens cooperation on North Korea
issues with Secretary Rice, seeks same with Russian counterpart

9) Government may float idea of Japan-North Korea foreign
ministerial meeting; G8 summit to criticize North Korea in statement


10) US, Japan, China agree to push for restart of 6-party talks on
North Korea issues this month

11) Joint seven-country proposed resolution to impose sanctions on
North Korea to be presented to UNSC on July 10

12) Japan, US to try to persuade China, Russia to back proposed UNSC
resolution against North Korea

13) Government is bullish that China, Russia will either abstain or
be absent from UNSC vote on North Korea sanctions

14) GSDF begins pullout from Iraq

15) JDA suddenly refuses to let press corps cover the Kuwait portion
of GSDF pullout from Iraq

16) Prime Minister Koizumi sets off on July 11 for the Middle East
and then G8 Summit

17) Minshuto President Ozawa's soft statements on North Korea
missile issue not sitting well with his party

18) Government sets economic policy guidelines for 2006 that gives
consideration to future consumption tax hike

Articles:
1) Poll: Abe tops all others at 48 PERCENT in post-Koizumi race

YOMIURI (Page 2) (Full)
July 8, 2006

In the latest Yomiuri Shimbun survey, respondents were asked to pick
the most appropriate person as Prime Minister Koizumi's successor

TOKYO 00003818 002 OF 011


from among five lawmakers in the ruling Liberal Democratic Party. In
response, 48 PERCENT picked Chief Cabinet Secretary Abe, with one
of his predecessors in the CCS post, Yasuo Fukuda, ranking second at
21 PERCENT .

In this July's face-to-face survey, Abe stood at 44 PERCENT ,
followed by Fukuda at 19 PERCENT . The results of previous polls and
the one taken this time cannot be simply compared due to different
polling methodologies. However, the increase rate of Abe's
popularity is higher than that of Fukuda, with Abe retaining his big
lead over Fukuda. Abe is known as a hardliner toward North Korea. He
meets the press every day as chief cabinet secretary and has shown a
strong attitude toward North Korea. This can be taken as reflecting
public support for Abe.

2) Poll on North Korea's missile launches: 92 PERCENT support
sanctions, 63 PERCENT insist on need to hurry up missile defense

YOMIURI (Page 2) (Full)
July 8, 2006

In the wake of North Korea's recent firing of missiles, the Yomiuri
Shimbun conducted a telephone-based spot nationwide public opinion
survey on July 6-7. The government has already invoked such sanction
measures as barring the North Korean ferry Mangyongbong's entry into
Japanese ports and restricting visits to and from North Korea. In
the survey, 92 PERCENT answered "yes" and 5 PERCENT said "no" when
they were asked they if they supported these sanctions. The poll
shows that many people, shocked at the missile launches, think Japan
should take a tough stance toward North Korea.

The government is preparing a draft resolution for the United
Nations Security Council to denounce North Korea with sanctions.
Asked whether to support this UNSC resolution, 90 PERCENT answered
"yes," with only 4 PERCENT saying "no." The government is planning
additional economic sanction measures, such as stopping remittances
from North Korean residents in Japan to their country and
restricting trade with North Korea. Asked about these measures, 65
PERCENT or a majority of respondents answered that the government
should implement these measures immediately, with 28 PERCENT
preferring to take such measures in stages. Respondents were also
asked if they thought even more strongly of North Korea as a threat
after its firing of missiles. In response to this question, 77
PERCENT answered "yes," with 20 PERCENT saying "no."

In the survey, respondents were further asked if they thought Japan
should expedite its introduction of a missile defense system to
shoot down enemy missiles in cooperation with the United States. In
response, 63 PERCENT answered "yes," with 24 PERCENT saying "no."

Asked about diplomatic normalization talks between Japan and North
Korea, 43 PERCENT answered that Japan should normalize its
diplomatic relations with North Korea but there was no need to
hurry, with 21 PERCENT saying there is no need to normalize
diplomatic relations with North Korea. The proportion of those who
think Japan should normalize diplomatic relations with North Korea
but there is no need to hurry showed a decrease of 11 percentage
points over a previous telephone-based survey taken after Prime
Minister Koizumi's second visit to North Korea in May 2004. There
was an increase of 10 points in the proportion of those who think
there is no need to normalize diplomatic relations with North Korea.

TOKYO 00003818 003 OF 011


Meanwhile, 28 PERCENT said Japan should normalize diplomatic
relations with North Korea.

In the latest survey, 78 PERCENT answered "yes" when they were
asked if they thought the missile launches would further delay a
solution to the issue of Japanese nationals abducted to North Korea.
Negative answers accounted for 13 PERCENT .

3) Poll: 80 PERCENT call for stronger pressure on North Korea

TOKYO SHIMBUN (Page 1) (Full)
July 9, 2006

In the wake of North Korea's July 5 firing of missiles, Kyodo News
conducted a telephone-based spot nationwide public opinion survey on
July 7-8. In the survey, 80.7 PERCENT said Japan should step up its
economic sanctions against North Korea, including measures to stop
remittances from North Korean residents living in Japan to their
country, and intensify trade controls. Those negative about such
strengthened economic sanctions accounted for 12.6 PERCENT .

The government has now invoked economic sanctions for the time
being, including an order to bar the North Korean ferry
Mangyongbong-92's entry into Japanese ports. In the survey,
respondents were asked if they supported these measures. In response
to this question, 82.6 PERCENT answered "yes," with 12.9 PERCENT
saying "no." The poll shows that the Japanese people are taking a
serious view of the missile launches.

Respondents were also asked if they felt uneasy about North Korea's
missile launches. In response, a total of 87.0 PERCENT answered
"yes," broken down into 45.2 PERCENT feeling very uneasy and 41.8
PERCENT feeling somewhat uneasy. Among other answers, 9.9 PERCENT
did not feel very uneasy, with 2.8 PERCENT not feeling uneasy at
all.

Polling methodology: The survey was conducted by Kyodo News Service
over a period of two days, July 7-8, on a random digit-dialing (RDD)
basis. The computer-aided RDD methodology, which makes and puts out
telephone numbers at random for polling, can survey those who do not
have their telephone numbers listed in telephone directories. Among
those randomly generated telephone numbers, those actually for
household use with one or more eligible voters totaled 1,461.
Answers were obtained from 1,011 persons.

4) North Korea fires 3 Rodong, 3 Scud missiles: Nukaga

YOMIURI (Page 1) (Full)
Eve., July 8, 2006

Appearing on a Fuji-TV program this morning, Defense Agency
Director-General Nukaga said three of the seven missiles North Korea
fired on July 5 were possibly of the Rodong type with a range of
1,300 kilometers and three others the Scud type with a range of
300-500 kilometers. Nukaga also said the three Scud missiles might
have included a new-type Scud missile with a longer range. "I hear
they might have tested a new enhanced version of the Scud missile
with a range close to the Rodong's range," Nukaga said. North Korea
reportedly has about 200 Rodong missiles and about 600 Scud
missiles. The Rodong could reach Japan, but a conventional Scud
could not.

TOKYO 00003818 004 OF 011



Nukaga has also indicated that North Korea would not fire a second
long-range Taepodong-2 missile soon. "They're not ready for now to
launch another one," Nukaga said on a Yomiuri TV program.

5) JDA: Possibility of another missile launch soon now slim

NIHON KEIZAI (Page 2) (Full)
July 8, 2006

North Korea had deployed a patrol boat into the Sea of Japan when it
launched its missiles, but according to Defense Agency (JDA)
officials yesterday, the boat returned to port on the night of July

6. Based on the view that the deployment of the boat was intended to
track the projectiles' paths, JDA officials have made this analysis:
"Judging from the patrol boat's moves, the possibility has now
become slim that the North will launch an eighth missile soon."

The patrol boat appears to be on a mission of spotting the point of
impact based on the angle of reflection calculated by irradiating a
missile with a laser. It reportedly is possible to spot frequency
band waves emitted from a missile anytime day or night.

6) Government starts preparations to impose financial sanctions if
North Korea launches another missile

NIHON KEIZAI (Page 2) (Excerpts)
July 8, 2006

The government has started preparations to impose additional
sanctions in the event that North Korea launches another Taepodong-2
missile. If the process of adopting a resolution denouncing North
Korea does not smoothly move forward at the United Nations Security
Council, Tokyo will consider invoking financial sanctions, including
limiting or banning remittances and trade under the revised Foreign
Exchange and Foreign Trade Law, also keeping in mind sanctions by a
possible "coalition of the willing" under the lead of the United
States.

There is a possibility that North Korea would launch a Taepodong-2
missile from the missile base located in northeastern North Korea.
The Defense Agency considers: "Although a missile has yet to be set
on the launch pad, assembly work might have been underway at a
nearby missile silo."

In a press conference after a cabinet meeting yesterday, Finance
Minister Sadakazu Tanigaki said that the government would make full
preparations on the assumption of North Korea launching another
missile. He said: "It is necessary to make preparations for the
government to be able to apply (the revised Foreign Exchange and
Foreign Trade Law) when needed.

7) Defense Agency to deploy four sets of PAC-3 missiles in 2007 as
part of missile defense

YOMIURI (Top play) (Excerpts)
July 8, 2006

The government decided yesterday to deploy three sets of Patriot
Advance Capability-3 (PAC-3) ground-to-air missiles in 2007 as part
of missile defense (MD) ahead of the original timeline of March

TOKYO 00003818 005 OF 011



2008. In the wake of North Korea's ballistic missile launches, the
government has recognized the need to build the interceptor system.

The Defense Agency plans to deploy by the end of fiscal 2006 one set
at the Air Self-Defense Force's Iruma base in Saitama Prefecture,
which houses headquarters of the 1st surface-to-air missile group.

The agency originally planned to deploy one set each at Kasumigaura
(Ibaraki Prefecture),Narashino (Chiba),and Takeyama (Kanagawa) by
the end of fiscal 2007. But now, the agency intends to complete
deploying them in 2007.

8) Aso, Rice reaffirm Japan-US cooperation in adopting resolution
condemning North Korea's missile launches

NIHON KEIZAI (Page 2) (Full)
July 8, 2006

Foreign Minister Taro Aso held a telephone conversation with United
States Secretary of State Rice for about 10 minutes last night. They
reaffirmed that Japan and the US would cooperate in ensuring the
adoption of a resolution submitted by Japan to the United Nations
Security Council denouncing North Korea for missile launches.

Aso also talked with Russian Foreign Minister Lavrov on the phone
for about 20 minutes, In reference to missile parts landing in
waters off Nakhodka, Aso asked Lavrov to support Japan's draft
resolution, saying: "It should be in the interest of Japan and
Russia to send a resolute message." Lavrov stopped short of making a
clear-cut reply, just saying: "We share Japan's concern."

Aso proposed that North Korea's missile problem should be taken up
at the upcoming G-8 summit (St. Petersburg Summit). Lavrov replied:
"We are ready to discuss the issue."

9) Japan to call for adoption of statement condemning North Korea at
G8 summit at St. Petersburg and other international arenas; Japan
also working on North Korea to hold foreign ministerial talks

NIHON KEIZAI (Page 2) (Excerpts)
July 9, 2006

The Japanese government intends to call for the adoption of a
statement condemning North Korea for its recent missile launches at
the series of international conferences to take place during July,
including the Group of Eight industrialized countries (G8) summit
conference at St. Petersburg that will start on July 15. The purpose
is to put pressure on North Korea to exercise self-restraint in the
way for a broad range of countries, such as the G8 and Asian
nations, to express concerns. Tokyo has also begun sounding out on
North Korea about arranging a foreign ministerial meeting on the
sidelines of the ASEAN Regional Forum (ARF).

The Japanese government is working on other G8 members to put the
North Korean issue including missile launches on agenda for the
upcoming G8 Summit. While condemning North Korea's moves, Japan
intends to call on North Korea to (1) exercise self-restraint on
taking such provocative acts as re-launching missiles; and (2)
return to the six-party talks.

The Foreign Ministry is considering creating a special statement (on

TOKYO 00003818 006 OF 011


North Korea) to be released at the upcoming G8 Summit, but the host
nation of the Summit is Russia, a country that is friendly with
North Korea. Russia may express disagreement to releasing a strong
message that could irritate North Korea. Whether such a statement
will be released in the form of a special statement, a chairman's
summary statement or a chairman's statement remains unclear.

10) Japan, US and China agree to urge North Korea to resume
six-party talks within July

NIHON KEIZAI (Page 1) (Excerpts)
July 8, 2006

Hirotada Momoi, Beijing

The governments of Japan, the United States and China held
government-to-government meetings separately on July 7 in Beijing of
their chief envoys to the six-party talks on North Korea's nuclear
programs. In order to prevent another ballistic missile launch by
North Korea, the three chief negotiators reached an accord to work
on Pyongyang to rejoin the six-party talks, which have been
suspended, before the end of this month. They also confirmed that
Chinese Vice Foreign Minister Wu Dawei, who is expected to travel to
Pyongyang early next week, would convey the decision by the three
countries to North Korea. Tokyo, Washington and Beijing, which have
different views on whether to impose sanctions on the North, are
keeping in step on this matter.

11) Seven countries to jointly submit UN resolution condemning North
Korea for a vote on July 10; 13 UNSC members support it, China
against it, Russia keeps silent

YOMIURI (Top play) (Excerpts)
Evening, July 8, 2006

Yoshikazu Shiraishi, New York

Japan, the United States, Britain, and France jointly submitted to
an informal UN Security council meeting held on the afternoon of
July 7 (early hours of July 8, Japan time) a resolution condemning
North Korea's missile launches. Denmark, Slovakia, and Greek are
also expected to become cosponsors of the resolution. Opposed to the
resolution, China is prepared to exercise its veto. Japan, the US,
Britain, and France, however, are expediting efforts with the aim of
adopting the resolution on July 10.

An outline of the draft resolution condemning North Korea

7The series of missile launches by North Korea posed a threat to
international peace and stability.
7The Security Council will act in accordance with Article 7 of the
UN Charter (allowing economic sanctions and military action).
7The United Nations condemns North Korea's missile launches.
7North Korea must immediately halt developing, testing, deploying,
and proliferating ballistic missiles.
7The transfer of funds, supplies, and technologies to North Korea
for the development of missiles and weapons of mass destruction and
the procurement of missile-related materials and technologies from
North Korea must be blocked.
7North Korea must return to the six-party talks immediately and
unconditionally and implement swiftly the joint declaration issued

TOKYO 00003818 007 OF 011


by the six-party talks in September 2005.

12) Japan, US to do everything to persuade China, Russia to agree to
sanctions resolution

NIHON KEIZAI (Page 1) (Excerpts)
July 9, 2006

The Japanese and US governments will do everything to persuade China
and Russia, which are both opposed to the sanctions resolution
against North Korea as jointly proposed by Japan, the United States,
Britain, France, and other countries on the United Nations Security
Council (UNSC). Japan and the US also are considering an option of
imposing sanctions by a "coalition of the willing" that would
consist of nations favoring the resolution if their efforts to
persuade China and Russia end in failure.

"We will firmly pursue the issuance of a resolution that contains
sanctions," Foreign Minister Taro Aso stressed in a speech delivered
in Osaka City on the afternoon of July 8. Aso held consultations
with senior officials of his ministry at the minister's office until
late at night the previous day. During the discussions, they
confirmed the policy direction of opposing China's move to have the
UNSC issue a less binding chairman's statement instead.

Japan's tough stands comes from the judgment that if it fails to
take a severe stance now, it would set a bad precedent for the
future. Most UNSC members favor the resolution, but China and
Russia, both of which have a veto right, are reluctant to adopt it.
Tokyo has made this analysis about Russia: (1) Given that the Group
of Eight industrialized nations (G8) summit conference at St.
Petersburg is nearing, it would be difficult for Russia, the host of
the G8 St. Petersburg Summit, to be lenient toward North Korea; and
(2) China appears reluctant to exercise its veto right alone.
Considering these factors, Japan has calculated that China and
Russia would prefer to abstain from voting.

Diplomatic maneuvering over this resolution involving the UNSC is
likely to affect the now stalled six-party talks. China has begun
moving to get the talks resumed. Reportedly, the Japanese government
has informally conveyed to the countries concerned this stance: "If
the six-party talks are restarted, the resolution could be modified
on a step by step basis." If North Korea were to move to try to gain
time, Tokyo is ready to impose sanctions by the UN or a join a
coalition of the willing to oppose that country. Japan intends to
use a carrot-and-stick policy in order to encircle North Korea.

13) Kantei pushing China, Russia not to veto resolution on North
Korea; hopes they will be absent or abstain

ASAHI (Page 1) (Excerpts)
July 9, 2006

Japan has led the move to submit a punitive resolution on North
Korea's missile launches to the United Nations Security Council,
reflecting the strong desire of the Prime Minister's Official
Residence (Kantei). By pushing China and Russia not to use their
veto when the resolution is put to a vote at the UNSC, Japan intends
to get these two countries to be absent or abstain from voting.

"Japan's move this time is far different from the previous tendency

TOKYO 00003818 008 OF 011


of Japanese representatives to the UN, who have given priority to
balance and been attentive to others."

This sort of view was exchanged in hallways and lounges at the UN
headquarters among representatives from other countries who were
surprised at Japan's rush to submit a resolution. A Japanese
diplomatic source at the UN revealed: "The Kantei made the decision
without regard to our situation at the UN."

On July 6, the day after missile launches, Prime Minister Koizumi
told reporters: "Even China and Russia cannot accept North Korea
launching missiles."

14) 1st group of GSDF troops arrives in Kuwait from Iraq by air

TOKYO SHIMBUN (Top play) (Excerpts)
July 8, 2006

Takeshi Hamaguchi, Kuwait City

The first group of Ground Self-Defense Force troops has arrived in
Kuwait from the southern Iraqi city of Samawah to head home.
Following a withdrawal order issued on June 20, the 10th GSDF
contingent in Samawah and a support group have begun transporting
equipment and supplies. Some 600 GSDF troops will head for Kuwait by
air in groups. All GSDF troops are scheduled to leave Iraq in July,
bringing an end to Japan's first "battlefront" mission.

The first group composed of some 30 GSDF troops left the Samawah
camp at around 6:10 a.m., July 7 (11:10, July 7, Japan time) on a
coalition helicopter and arrived at the Kuwaiti Abdulah Al-Mubarak
Air Base via Tallil Airport some 100 kilometers southeast of
Samawah. The withdrawal from Iraq will be completed in a short
period of time for security reasons. After spending about a week in
Kuwait, troops from Iraq will head for Japan in groups.

The transport of vehicles, including light-armored vehicles, and
equipment started June 25 by using private firm trailers. A
100-strong transport unit dispatched to Kuwait will load them onto
civilian vessels after thoroughly cleaning them. The Air
Self-Defense Force's C-130s will airlift weaponry and ammunition to
Kuwait. They will later be transported to Japan on civilian planes.

The transport unit is expected to return home in September.

15) Defense Agency shuts out press in Kuwait

TOKYO SHIMBUN (Page 1) (Full)
July 8, 2006

In order to cover the arrival of the first group of Ground
Self-Defense Force troops from Iraq, some 40 journalists were
waiting at the Kuwaiti Abdulah Al-Mubarak Air Base. But shortly
before the troops' arrival, the journalists were forced onto a bus
prepared by the Defense Agency and moved outside of the airport.

An agreement had been reached between the Defense Agency press club
composed of major newspapers and television broadcasters and the
Defense Agency to allow the press to cover the troops' arrival at
the airport. But the press was shut out of the airport without any
clear explanation.

TOKYO 00003818 009 OF 011



16) Prime Minister Koizumi to leave tomorrow for Middle East and
then G-8 summit in Russia

YOMIURI (Page 2)(Excerpts)
July 9, 2006

Prime Minister Junichiro Koizumi will leave tomorrow for a three-day
trip to Israel and the Palestinian-ruled territory. Koizumi intends
to urge both sides' self-restraint to ease tensions caused by the
series of armed conflicts, such as Israeli military's intrusion into
the Palestinian-controlled Gaza Strip on the pretext of rescuing a
soldier abducted by Palestinians.

The Japanese prime minister will visit Israel and the Palestinian
Authority for the first time in 11 years since Prime Minister
Tomiichi Murayama went in 1995. After visiting Jordan on July 12-15,
he will fly to Russia to attend the G-8 summit to be held in St.
Petersburg. He will report the results of his Middle East tour to
the summit.

Koizumi will meet on July 12 with Israeli Prime Minister Ehud Olmert
to urge him to resume a dialogue with the Palestinian Authority for
an early peace settlement and to express his concern about the armed
conflicts. The expectation is that the two leaders will agree to
strengthen bilateral relationships on such areas as politics, the
economy, and culture.

Koizumi will hold talks on the 13th with Palestinian leader Abbas to
announce Japan's support for his peace policy. He will also tell
Abbas that Tokyo will continue to assist the Palestinian Authority.
He will then urge the Palestinian leader to release the Israeli
soldier as early as possible since his abduction by a Palestinian
armed group has brought about the present turmoil.

17) Minshuto head Ozawa plays up stance of placing emphasis on
China; Some party members unhappy with remarks about sanctions on
North Korea

YOMIURI (Page 4) (Full)
July 8, 2006

Ryota Akatsu, Tailien

Minshuto (Democratic Party of Japan) President Ichiro Ozawa wrapped
up on July 7 the main part of his trip to China. He will return home
on the 8th. With Prime Minister Junichiro Koizumi unable to find
ways to repair relations with China, Ozawa was about to realize a
meeting with Chinese President Hu Jintao and succeeded in playing up
a stance of attaching importance to China relations. During his
China tour, he was also required to make clear his party's position
when North Korea launched missiles.

Ozawa proudly said to reporters accompanying him to China:

"To resolve the North Korea issue, the Chinese side promised to deal
with it through calm discussion. As I happen to be in Beijing, I was
able to obtain a certain level of achievement."

All eyes were focused on a series of his meetings with Chinese
leaders as he was in Beijing where countries concerned were working

TOKYO 00003818 010 OF 011


actively on North Korea's missile launches. Chinese Vice Foreign
Minister Wu Dawei told Ozawa that he would visit Pyongyang soon. As
a result, Ozawa succeeded in strengthening his political identity.
Some senior Minshuto members looked into the possibility of having
Ozawa and other senior party members visiting China protest at the
North Korean Embassy in Beijing, but Ozawa rejected such an idea,
saying, "That's what the Japanese government should do." He appeared
to have been alert to the possibility of it being taken as just a
performance by the main opposition party.

Ozawa told the reporters: "There is a possibility of using military
power as a sanction. We need to consider what countermeasures would
then be taken." His remarks created quite a stir in Japan since
Ozawa was taken as being negative about imposing economic sanctions
on North Korea. Junior Minshuto lawmakers, who believe that tough
sanctions are needed, were unhappy with Ozawa's remarks. One young
lawmaker said, "Since Mr. Ozawa is not in Japan, he does not
understand public opinion."

One senior member explained:

"Mr. Ozawa made that remark thinking that if Japan imposes
sanctions, it must prepare for the aftermath. He did not reject
sanctions. He was just calling for a calm argument in consideration
of the situation in the party in which there were cautious and
Hard-line arguments."

All the more because the missile issue will likely be prolonged,
Ozawa will probably find it difficult to set the party's policy
after he returns home.

18) Primary balance to be brought into black in fiscal 2011;
Government adopts basic policy guidelines on economic and fiscal
management and structural reforms for fiscal 2006 budget;
Consumption tax hike eyed as social security funding resource

NIHON KEIZAI (Top Play) (Full)
July 8, 2006

The government during a special cabinet meeting on July 7 adopted
basic policy guidelines on economic and fiscal management and
structural reforms for the fiscal 2006 budget. For fiscal
reconstruction, it intends to bring the primary balance of both the
national and local finances into the black without fail by fiscal

2011. It will aim at achieving a balanced budget, under which
necessary expenditures are covered without borrowings. The report
also included a plan to cut expenditures up to 14.3 trillion yen.
Under the guidelines, the government will consider increasing the
consumption tax in order to finance social security expenditures,
which are expected to rise, though a specific rate has not been
included in the package.

The basic policy guidelines for fiscal 2006 is the last package
mapped out under Prime Minister Junichiro Koizumi, who has declared
his intention to step down in September. The prime minister told
reporters after the cabinet meeting: "It was unprecedented for the
ruling camp to have been cooperative for spending cuts to this
extent. I want to make the best use of this cooperative relationship
for the compilation of the next fiscal year's budget." Koizumi also
released a dialogue, in which he pointed out the need to facilitate
his reform initiative over the mid- to long-term in order to settle

TOKYO 00003818 011 OF 011


such issues as the declining birthrate and the colossal amount of
fiscal deficit.

The package clearly indicates a government policy of achieving
fiscal reconstruction by the middle of the 2010s under two
timeframes. In the first stage, the deficit in the primary balance -
an indication of impossibility of financing administrative expenses
without borrowing - will be reviewed and the national and local
finance will be brought into the black in combined terms. The report
then noted that in the second timeframe, the underlining uptrend in
government debts would be stemmed so as to lower their ratio to
gross domestic product (GDP) in a stable manner.

Regarding the first task of bringing the primary balance into the
black, the report estimated under the reliable premise of a nominal
economic growth rate of about 3 PERCENT that there would be a
shortage of 16.5 trillion yen, of which 11.4 - 14.3 trillion yen
would be covered through spending cuts and 2-5 trillion yen with a
tax hike.

The Liberal Democratic Party (LDP) undertook coordination of
spending cuts at the order of the prime minister. As a result, a 2.6
trillion yen cut in personnel expenses for national and local
government employees and 1.6 trillion yen cut in social security
spending have been decided. Public works expenditures are expected
to be slashed in the range between 3.9 trillion and 5.6 trillion
yen. The latitude has been allowed out of consideration for local
economies. For other spending items, the report noted that necessary
examinations and revisions would be carried out. To this end, a
flexible clause allowing a revision of the latitude has been
incorporated.

Regarding revenues, the report referred to the need to reform the
tax system, including a tax increase. Though it did not touch on a
possible timeline and tax items subject to a hike, it judged that an
increase in expenditures in the social security field would be
unavoidable due to an increase in social security payments and the
need to improve measures to deal with the declining birthrate.
Consideration will be given to the possibility of characterizing the
consumption tax as a stable funding resource for the payouts of
social security benefits.

Following the adoption of the guidelines, the government will get
down to compiling the fiscal 2006 budget. It will adopt budgetary
request guidelines on the 21st.

SCHIEFFER