The Japan Economic Scope Q Economic News At-

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1. (SBU) Table of Contents

Paragraph 3 Q Japan Announces DPRK Sanctions
4 Q Ambassador Addresses Business Leaders
5 Q MOFA DG Discusses APERM, Economic
Relationship
9 Q EMIN Pays Call on Former Foreign
Minister Nobutaka MACHIMURA
12 Q American Infinity Aviation Group Ties
with Nakanihon Air Service Co., Ltd. to
Sell Business Jets in Nagoya
14 Q Kusakari to Head CPRR
15 Q Next Generation Aerospace of Interest to
Kansas Visitors to Nagoya
17 Q Japan Appeals U.S. Use of "Zeroing" to
WTO Appellate Body
18 Q Bubble economy in Osaka, again?
19 Q Hankyu and Hanshin merge to create giant
Osaka conglomerate
21 Q Apple's Efforts in the Hokkaido PC
Market
23 Q Lehman Brothers Among Investors in $171
million Hokkaido Luxury Resort
25 Q Economic Benefit of Baseball
Championship Up to $185 million
26 Q Daihatsu Mini-car Sales to Set Record
27 Q Northeast Asia Monthly Newsletter


2. (U) The Japan Economic Scope (JES) is a weekly e-
newsletter produced by Embassy Tokyo's ECON section in
collaboration with other sections and constituent
Posts and published every Friday. It provides a brief
overview of recent economic developments, insights
gleaned from contacts, summaries of the latest cables
and a list of upcoming visitors. This cable contains
the October 6, 2006, JES, minus the attachments that
accompany many of the individual stories in the e-mail
version. To be added to the e-mail list, please email
ProgarJ@state.gov.

Japan Announces DPRK Sanctions
--------------


3. (SBU) Japan Announces New Sanctions on North Korea:
The Japanese government October 11 announced that it
had decided to impose a third round of unilateral
sanctions against North Korea, banning all imports,
denying port access to vessels registered in that
country, and barring North Korean citizens from
entering Japan. The restriction against North Korean
citizens went into effect immediately. North Korean
vessels currently docked in Japanese ports will also
be ordered to leave. According to the Japan Coast
Guard, North Korean ships entered the nation's main
ports 578 times from January through September. The
import and port bans are slated to begin October 14,
after gaining cabinet approval. These sanctions are
set to expire in six months. Imports from North Korea
totaled JPY 13.7 billion (about $124 million) for
fiscal 2005, mainly consisting of apparel and such
agricultural and marine products as mushrooms and
clams. According to one study prepared by the
Australian Government, Japan was North Korea's second
largest export market in 2004, accounting for 12
percent of total exports, after China's 41 percent.

Ambassador Addresses Business Leaders
--------------


4. (U) Ambassador Schieffer addressed on October 11 in
Tokyo the Keizai Doyukai, a leading association of
reform-oriented Japanese business leaders. The
ambassador's speech reviewed key challenges facing the
U.S. and Japan: enhancing open, innovative and
flexible markets; securing adequate energy supplies;
and maintaining a clean environment. During the

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ensuing Q&A, the first inquiry had to due with the
possibility of a U.S.-Japan FTA. The ambassador
responded that any FTA would have to be comprehensive,
inter alia requiring a solution to the problem of
access to Japan's agricultural market. Questions that
followed touched on the U.S. response to the DPRK
nuclear test, the future of the Kyoto Treaty, the
challenge of aging societies, and differences in the
way U.S. and Japanese baseball umpires count balls and
strikes.

MOFA DG Discusses APERM, Economic Relationship
-------------- -


5. (SBU) MOFA DG for Economic Affairs Kaoru Ishikawa
covered a range of subjects at a dinner he hosted
October 11 to welcome EMIN to Tokyo. Flanked by 2nd
North Americas Division Director Mizushima and OECD
Division Director Tsutsumi, Ishikawa termed MOFA's
Asia Pacific Economic Research Mechanism an
"apolitical" attempt to improve the region's economic
data compilation and asked for USG support. The GOJ
will sponsor a conference on APERM November 6-7 in
Kyoto (see Tokyo 5943).


6. (SBU) On bilateral trade issues, Ishikawa quipped
that if Japan and Australia cannot work out an FTA, he
was ready to work on one with the United States. The
MOFA DG noted that Vice Foreign Minister Yachi raised
the idea in Washington of the two countries proposing
a private sector study on the feasibility of an FTA.
Ishikawa was cautious on the concept's immediate
prospects, and spoke in particular of the agriculture
interests that would oppose it. Mizushima was even
more frank about the difficulties.


7. (SBU) On the bilateral economic relationship with
the United States, Ishikawa sees no reason to make a
big public event out of the exchange of
recommendations for the two countries' regulatory
reform process. Specifically, he said that the
November APEC Summit in Hanoi would not be an
appropriate place for the exchange. Although both
countries' interests are addressed in the process,
regulatory reform is too much of a lightning rod for
Diet members in advance of Upper House elections next
summer.


8. (SBU) On the sub cabinet meeting, he underscored
that success would be determined by attention to the
details. The two sides must avoid potential land
mines to be sure the sub cabinet goes well and there
is progress where possible.

EMIN Pays Call on Former Foreign Minister Nobutaka
MACHIMURA
--------------


9. (SBU) Machimura was happy to share his views with
the EMIN on a wide range of topics including next
steps for the bilateral economic relationship and the
new Kantei organization. Machimura noted that a
possible bilateral FTA currently is not a subject of
discussion in Diet circles. He hailed ongoing
initiatives such as regulatory reform, while
suggesting that we should freshen it up with a new
name and agenda to reflect the start of the new Abe
administration. He noted the occasional criticism the
regulatory reform initiative has encountered from the
opposition party in the Diet as being overly driven by
American objectives. He also worried that anti-
globalization sentiments could gain traction in Japan,
as some associated deregulation with an increase in
crime and a loss of national values.


10. (SBU) Machimura welcomed foreign direct investment
into Japan and supported Prime Minister Abe's policy
to double FDI stock by 2010, specifically pointing out
the need to increase productivity in the service

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sector made it an area which could be subject to
further bilateral cooperation.

11.(SBU) On the new Kantei organization, Machimura
revealed that the Policy Advisors to the Prime
Minister, especially Yuriko Koike (national security)
and Takumi Nemoto (economic and fiscal affairs),need
to choose their issues carefully and not duplicate the
work of the respective ministries. Machimura pointed
out that he had advised Koike personally to work on
improving e coordination among Japan's intelligence
agencies, something he believes is very necessary. To
our surprise (given the sensitivities surrounding the
sector),Machimura raised port services as a sector
ripe for reform.

American Infinity Aviation Group Ties with Nakanihon
Air Service Co., Ltd. to Sell Business Jets in Nagoya
-------------- --------------


12. (U) The daily "Mid-Japan Economist" reported
October 12 that aircraft and helicopter chartering
firm Nakanihon Air Service of the Nagoya Railroad
Company group will team up with New Hampshire's
Infinity Aviation Group to sell U.S.-registered used
business jets to Central Japan corporations with
operations in Asia, particularly China. Infinity will
operate and maintain the jets, supplying pilots and
other staff, for customers out of the Aichi
Prefecture-owned Nagoya Airport.


13. (U) This will be the first joint effort by U.S.
and Japanese companies to sell and operate business
jets in Japan. A used business jet typically costs
about $11 million and annual operating costs are about
$2.6 million, based on 40 round trips to China and a
total of 400 flight hours per year. The firms plan to
start small, aiming at sales of two jets in 2007 and a
third in 2009. To date, the Japanese business
aviation market remains miniscule, with only 26
business jets registered in the country, compared to
over 14,000 in the U.S.

Kusakari to Head CPRR
--------------


14. (U) As reported in the September 22 JES, Takao
Kusakari, Chairman of Nihon Yusen, will officially
succeed Yoshihiko Miyauchi as the Chairman of the
Council for the Promotion of Regulatory Reform (CPRR)
on October 19. Kusakari, who has been an executive
member of CPRR since April 2004, is expected to carry
forward the Council's reform agenda until its term
ends in March 2007. In addition, he will lead the
Council in developing a proposal regarding the form of
CPRR's successor body as the end of its term
approaches. Press reports state that Kusakari was
personally recommended by former CPRR Chairman
Yoshihiko Miyauchi and speculate that he will likely
stay on to chair the next version of the organization.

Next Generation Aerospace of Interest to Kansas
Visitors to Nagoya
--------------


15. (U) During a three-day visit to Nagoya, a
delegation from the State of Kansas and the Greater
Wichita Economic Development Coalition focused on
deepening ties with manufacturers in the booming
Central Japan aerospace sector, including Mitsubishi
Heavy Industries and Kawasaki Heavy Industries, as
part of efforts to make a smooth transition to the
next generation of aircraft manufacture. Wichita has
established a $40 million technical training center,
in large part to help workers gain skills in composite
materials manufacturing, and is a "center of
excellence" for both the FAA and NASA.


16. (U) Kansas and Wichita are seeking FDI from Japan,

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particularly from suppliers of advanced aviation
technologies, to maintain their strength as a key
aerospace hub. At the same time, Wichita companies
like Boeing spin-off Spirit Aerospace, the world's
biggest supplier of commercial aircraft assemblies and
components, are working with Japanese companies like
Toray to develop jointly the specs for composite
materials to be used in future aircraft.

Japan Appeals U.S. Use of "Zeroing" to WTO Appellate
Body
--------------


17. (U) Just weeks after losing its anti-dumping case
against the United States at the WTO, Japan launched
an appeal on October 11. The GOJ is contesting a WTO
dispute settlement panel's finding that rejected
Japan's challenge against the U.S. "zeroing"
methodology, a case first brought by Japan in November

2004. The WTO panel issued its finding in September,
indicating that the U.S. methodology was consistent
with the WTO Antidumping Agreement. Japan's Ministry
of Economy, Trade and Industry claims that the WTO
panel's decision is not in tune with earlier decisions
in which it ruled against the United States in what it
claims are similar cases brought by the EU and Canada.
For more details on this case, see the link below.
http://www.wto.org/english/tratop_e/dispu_e/c ases_e/ds
322_e.htm

Bubble economy in Osaka, again?
--------------


18. (SBU) Office real estate prices in the center of
Osaka are rising. The market prices of land under
large-scale office buildings on major business streets
have almost doubled to a level three times the
government-appraised land prices. Investment trust
companies have begun grabbing major office buildings.
MD REIT Investment Ltd in MID Urban Development Group,
formerly Matsushita Real Estate, has recently
purchased six office buildings and commercial
facilities for 113.5 billion yen in Osaka. This is
the highest trade price for real estate in the region
following the collapse of the bubble economy. MD REIT
raised 94 billion yen from investors, mostly
individuals, for the purchase. The recent market
prices are high but still one third of that during the
peak of the bubble.


Hankyu and Hanshin merge to create giant Osaka
conglomerate
--------------


19. (SBU) Hankyu Holdings and Hanshin Electric
Railways Co. have merged to become Hankyu and Hanshin
Holdings as of October 1. The new entity is the third
largest railway company in Japan, following Tokyo-
based Tokyu and Kansai-based Kintetsu. Hankyu and
Hanshin Holdings is also a huge transportation,
distribution, and service company, boasting more than
1 trillion yen in annual sales. Nonetheless, the new
firm has acquired the same amount in debt through the
merger, and management faces challenges in how to
resolve overlaps in Hankyu and Hanshin subsidiary
business units.


20. (SBU) Their hotel operations have begun to
consolidate under Hankyu's lead. However, the giant
conglomerate's other businesses, such as travel, rail
and bus transportation, distribution, retail, and real
estate operations have not worked out their new modus
operandi. Hankyu and Hanshin are targeting JR as the
rival for its full portfolio of businesses in the
Osaka-Kobe corridor. A contact at Mitsubishi-Tokyo
UFJ Bank commented that the local economy will benefit
from the merger; the bank welcomed the increased
competition between JR and Hankyu/Hanshin as a way to

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enhance asset values and boost consumer convenience.

Apple's Efforts in the Hokkaido PC Market
--------------


21. (U) Over the summer, Apple Computer opened its
seventh Japan-based Apple Store in a prime location
near Sapporo's Odori Park. Offering hi-tech, chic
displays of more than 1000 products, Apple Store
Sapporo is proving popular with longtime Hokkaido Mac
users and local iPod customers, who flock to the store
to obtain limited edition Sapporo iPod covers. Since
its opening a few months ago, it has attracted local
clientele in their twenties and thirties, especially
female customers. Apple Store Sapporo has also had
some success attracting older customers by offering a
variety of services unknown at typical Japanese
electronic stores. These include daily in-store Mac
intro sessions, additional private and group lessons
for new Mac users, advanced Mac computing courses for
professional users, and in-store concerts twice a
month. However, since Mac sales make up only four
percent of total computer sales in Japan, it remains
to be seen if Apple can continue to find customers
here looking to buy more than iPod accessories.


22. (U) Hokkaido's prefecture-wide emphasis on local
IT and biotech development may offer new market
opportunities to Apple. In 2005, the city of Fukagawa
(about 150km north of Sapporo) replaced the PCs used
by all five of its junior high schools with 160 iMac
computers. Using Mac's "NetBoot System," the city
built a centrally managed and controlled information
network for the schools that saved $51,000 in
operating costs during the school year. Apple hopes
news of this success story will generate additional
sales to local governments throughout Hokkaido.

Lehman Brothers Among Investors in $171 million
Hokkaido Luxury Resort
--------------



23. (U) Nikkei reported 10/7 that Lehman Brothers
Japan will join The Windsor Hotels International and
SECOM in investing in $171 million to build a new
luxury resort complex at Lake Toya, Hokkaido.
Construction on the time-share resort is slated for
2008-2011. 200 individual suites at the resort, priced
at $2.2 million each, will go on sale overseas in
February 2007 and in Japan from Fall 2008. The hotel's
management will partner with the NY-based luxury
hospitality organization Leading Hotels of the World
and Cornell University's School of Hotel
Administration.


24. (U) The resort will be constructed next to the
successful Windsor Hotel Toya Resort & Spa. Located
1.5 hours southeast of Sapporo Chitose International
Airport at one of Hokkaido's most famous tourist
attractions, the five-star hotel has maintained a 90%
summer room occupancy rate since opening in 2002.

Economic Benefit of Baseball Championship Up to $185
million
--------------


25. (U) The regional economic impact of a victory by
Nagoya's Chunichi Dragons in the Japan Series could be
up to %22 billion (approx. $185 million) according to
Mitsubishi UFJ Research & Consulting. The direct
impact of a Series victory by the Central Baseball
League champion Dragons, including tickets and
increased sales at department stores and supermarkets
is estimated at %13.2 billion (approx. $111 million),
and the indirect impact, such as inducement of
additional production, is pegged at %8.8 billion
(approx. $74 million). The Dragons have not won a
Japan Series in 52 years, explaining the strong

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interest.

Daihatsu Mini-car Sales to Set Record
--------------


26. (U) According to Bloomberg, Osaka mini-car maker
Daihatsu has revamped its popular Move and Move Custom
lines in an attempt to beat Suzuki as the largest
seller of mini-cars, which use engines of 0.66 liters
or less. Sales are reportedly on a record pace for
the firm, as consumers have been shifting to the
vehicles to combat rising fuel and maintenance costs.
Owning a mini-car is estimated to save Japanese
consumers nearly half a million yen (USD 4,000) in
taxes, insurance and other costs over five years.
Daihatsu sales are up two percent so far in the
calendar year. Toyota Motor Corp. has a 51 percent
ownership stake in the company.

Northeast Asia Monthly Newsletter
--------------


27. (U) The Northeast Asia energy officers produce a
monthly newsletter on regional energy topics. This
month's newsletter features a new look courtesy of the
Seoul Embassy. If you would like to be included on
the mailing list please send a note to John Wecker
mailto:WeckerJA@state.gov


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