The Japan Economic Scope Q Economic News At-

UNCLAS SECTION 01 OF 07 TOKYO 006140 SIPDIS SIPDIS SENSITIVE PARIS PLEASE PASS USOECD DEPARTMENT PLEASE PASS USTR E.O. 12958: N/A TAGS: ETRD ECON JA ZO EAGR SUBJECT: The Japan Economic Scope Q Economic News At- A-Glance. Sensitive but unclassified. Please protect accordingly. ¶1. (SBU) Table of Contents Paragraph 3. Japan Announces DPRK Sanctions Paragraph 11. Abe: Council on Economic and Fiscal Policy to be "Engine for Reform" Paragraph 18. Japan and Vietnam Agree To Launch FTA Negotiations Paragraph 22. GE Facing Sanctions Paragraph 27. U.S. Telecoms Policy Delegation Meets Top Telecoms Leaders in GOJ and Industry Paragraph 36. Former Japan Fair Trade Commission Secretary- General Discusses Trends in Competition SIPDIS Policy Paragraph 38. Wood Products: Trilateral Technical Meetings in Nara Paragraph 44. Greater Nagoya Initiative (GNI) Heads to the U.S. Paragraph 48. Universal Studios Japan May Have Turned the Corner on Profitability Paragraph 53. Daikin Chairman Inoue Officially Refused the Position of Kankeiren Chairman Paragraph 58. Fukuoka Bank Another Step Closer to Becoming Japan's No. 1 Regional Bank? Paragraph 65. BOJ's Tankan Q The Kansai Economy Continued to Grow Over Last Three Months ¶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. Economic Impact Of North Korean Nuclear Test on Western Japan -------------- ¶3. (SBU) Due to GOJ sanctions, cities in western Japan with high volumes of trade with North Korea are bracing for the economic impact, even as they support the sanctions politically. ¶4. (SBU) The local economy of Sakaiminato City, Tottori Prefecture, (pop. 37,000),which sees the largest amount of North Korean maritime traffic among Japanese ports, largely depends on imported fish, crabs and matsutake mushrooms from North Korea. Fish processing is a major industry in Sakaiminato and there are many related businesses such as can makers, box makers, and shipping companies. Without the North Korean business, these industries are headed for a crisis. ¶5. (SBU) According to a Sakaiminato city official, over 50 percent of the city's economy is dependent on fish products from North Korea. In contrast, in the second largest market for DPRK ship traffic, the Port of Maizuru in Kyoto Prefecture, only about 7 percent of the local economy depends on North Korean imports. ¶6. (SBU) For the nation the economic impact will be limited to a potential increase in prices for luxury food items, but in Tottori this will be another blow to the prefecture's economic health, already reeling from the aging crisis, unemployment and high public debt levels. ¶7. (SBU) The next problem for regional economies is the GOJ Fishing Agency prohibition on crabbing boats trawling for their own catch near North Korean territorial waters. Crab from the northern edge of TOKYO 00006140 002 OF 007 the Sea of Japan is a lucrative product during the fall and winter seasons. ¶8. (SBU) Despite the economic costs, the political mood, for the moment, is supportive of sanctions. Sakaiminato's maritime products industry is going along with the GOJ's DPRK policy without complaints. ¶9. (SBU) Sakaiminato Mayor Katsuji Nakamura announced on October 10 that the city would dissolve its "friendship city" relationship (the only such relationship in Japan) with the North Korean city of Wonsan, which was launched in 1992. The mayor rebuffed city assembly attempts to merely "freeze" ties to the North. ¶10. (SBU) A city official, however, noted that over time opposition to sanctions would grow. Abe: Council on Economic and Fiscal Policy to be "Engine For Reform" -------------- ¶11. (U) The Council on Economic and Fiscal Policy (CEFP) met for the first time with its new membership on Friday, October 13, as council chair Prime Minster Abe urged the CEFP to "consider promptly the course of reform so that we can achieve further economic growth," and underscored that, "I would like the CEFP to become the main engine for reform." Prime Minister Abe further instructed the CEFP to finalize a five- year reform framework by January. ¶12. (U) The CEFP's new non-government members -- Japan Business Federation Chairman Fujio Mitarai, Itochu Corp. Chairman Uichiro Niwa, University of Tokyo graduate school professor Takatoshi Ito, and International Christian University professor Naohiro Yashiro -- called for "concentrated reform" for the first two and a half years so that Japan can complete its shift to a new growth path in about five years. ¶13. (U) The proposal also listed issues that need to be addressed in seven areas, including productivity improvement and deregulation. CEFP members agreed to set specific topics for "intensive deliberation", such as decentralization of the national government. ¶14. (U) Local press noted that the role of the minister for economic and fiscal policy seems to have changed from "group leader to host," suggesting that the ABE government aims to strengthen the policy- making capabilities of the Prime Minister's Office. ¶15. (U) Indeed, we've been told that Cabinet Advisor Nemoto (one of five such advisors appointed by PM ABE to handle key policy objectives) will participate in council meetings in a non-voting capacity and will be particular focused on the committee's review of growth policies. ¶16. (U) During former Prime Minister Koizumi's tenure, the CEFP addressed the final cleanup of the banking sector's non-performing loan problem, assessed road construction revenue, and directed cuts to public works spending. ¶17. (U) Whether or not the CEFP can take on an economic reform leadership role should bureaucrats re- assert policy influence under the new administration promises to be an ongoing question. Japan and Vietnam Agree to Launch FTA Negotiations -------------- -------------- ¶18. (U) Following an October 19 meeting between Prime Minister SHINZO ABE and Vietnamese Prime Nguyen Tan Dong, the two governments announced plans to begin negotiations on an "economic partnership agreement" TOKYO 00006140 003 OF 007 (EPA, essentially a free trade agreement). The first negotiating session is expected in January 2007. ¶19. (U) In their joint statement, ABE and Nguyen put forward a goal of nearly doubling bilateral trade from 8.5 billion USD in 2005 to 15 billion USD by the year ¶2010. ¶20. (U) The two sides also recognized the growing importance of intellectual property protection and called for greater cooperation in this field in order to attract investment and stimulate market growth. ¶21. (U) Although most likely regarded by the Japanese as a way to improve the investment environment in Vietnam for Japanese business, the EPA with Vietnam, if successful, would mark Japan's first agreement with a transitional economy, thus establishing a conceptual framework for possible negotiations with China in the future. GE Facing Sanctions -------------- ¶22. (SBU) Citing a violation of anti-harassment Article 21 of the Money Lending Business Law, the Financial Services Agency (FSA) is poised to impose sanctions on GE Consumer Finance's collection business. ¶23. (SBU) GE representatives reported that among 1.5 million collections calls made in April, in a case of human error, one call was made erroneously to a delinquent borrower's workplace, following a previous request by the borrower not to contact him at work. Though the GE representative left no message or return number, the borrower surmised the nature of the call and made an official complaint to the local finance bureau. ¶24. (SBU) GE reports that in subsequent consultations, the FSA cited Article 21's language prohibiting "intimidation, harassment, and embarrassment," excessive calls, and third-party disclosure as justification for their inquiry. ¶25. (SBU) Although the FSA lauded GE's compliance practices, the FSA informed GE that "a violation is a violation," and is reportedly planning to shut down GE Consumer Finance's nationwide collections operations for five days, a sanction that GE estimates will cost them $1.5-$2 million. ¶26. (SBU) GE contacts noted, "this decision could be political blowback," acknowledging GE's active role in the debate over pending interest-rate cap legislation. U.S. Telecoms Policy Delegation Meets Top Telecoms Leaders in GOJ and Industry -------------- ¶27. (U) The U.S. Telecommunications Policy group, including FCC Chairman Kevin Martin, Ambassador David Gross, Coordinator for International Communications and Information Policy, and John Kneuer, Assistant Secretary and National Telecommunications and SIPDIS Information Administration, U.S. Department of Commerce met with Ministry of Internal Affairs and Communications (MIC) officials, including the new Minister, Yoshihide Suga, and the leaders of Japan's telecommunications industry in Tokyo, October 16-18. ¶28. (U) Bilateral consultations focused on coordinating U.S.-Japan positions before the upcoming annual International Telecommunications Union (ITU) meetings (budget, elections, future role and structure of ITU). ¶29. (U) The two governments also discussed their TOKYO 00006140 004 OF 007 approaches to new regulatory issues such as VoIP (voice over internet protocol),IPTV (internet protocol TV),and changes in the broadband and mobile phone markets. ¶30. (U) In meetings with the Presidents and CEOs of all of Japan's major fixed and mobile phone operators and internet providers, as well as the new entrants -- NTT, DoCoMo, KDDI, Softbank, and eAccess -- the delegation discussed the differences in the U.S. and Japanese telecoms markets, regulatory obstacles, and new technologies. ¶31. (U) All of NTT's competitors agreed that NTT is trying to resume its monopoly status via its control of FTTH (fiber to the home). ¶32. (U) The delegation visited showrooms demonstrating Japan's latest phones and gadgets and some ideas the companies are working on for the future. ¶33. (U) ACCJ leaders told the delegation that the strength of the dominant carriers still impedes competition in Japan and keeps prices high. ¶34. (U) They also expressed concerns about the continuing tendency of Japanese regulators and manufacturers to develop proprietary standards, the lack of investment in healthcare IT, and the fact that the consumer finance industry was singled out as ineligible to use e-notification under GOJ rules. ¶35. (U) Although U.S. companies are much less concerned now about the enforcement of the GOJ's new privacy regulations, they are worried that as each country develops its own privacy policy, the cost will go up for multinationals. One suggestion was to develop a framework for a model Asian privacy policy for countries to use. Former Japan Fair Trade Commission Secretary-General Discusses Trends in Competition Policy -------------- ¶36. (U) Former Japan Fair Trade Commission (JFTC) Secretary-General Akinori Uesugi (now a senior SIPDIS consultant for the law firm of Freshfields, Bruckhaus, Deringer) told EMIN Klemm October 13 that the JFTC hoped to gain greater discretion in the use of its authority, notably the application of punitive surcharges, through the mandatory review of the Antimonopoly Act (AMA) that will take place in 2008. ¶37. (U) Uesugi was pleased and somewhat surprised at the efficacy to date of the amendments to the AMA that went into effect at the beginning of this year, particularly the leniency program that encourages companies involved in bid rigging to inform on their partners in crime in the hope of avoiding surcharges. Wood Products: Trilateral Technical Meetings in Nara -------------- -------------- ¶38. (U) The U.S., Japan, and Canada held annual trilateral technical meetings October 11-12 on wood products in Nara. ¶39. (U) The Ministry of Land, Infrastructure and Transport (MLIT) represented Japan in the Building Experts Committee Meeting (BEC) and the Ministry of Agriculture, Forestry and Fisheries led Japan's participation in the Agricultural Standards Technical Committee meeting (JASTC). ¶40. (U) The BEC meeting focused on construction and building codes, including fire and earthquake related standards, as they relate to building products. Among the topics, GOJ officials explained how they were addressing recent building code scandals. TOKYO 00006140 005 OF 007 ¶41. (U) The JASTC meeting focused on the JAS quality labeling system that applies to various wood products such as flooring, panels, glued laminated timber, and lumber. ¶42. (U) The meetings, considerably less contentious than in past years, have been held annually for 18 years and are used to share information and resolve existing or potential trade barriers for wood products. ¶43. (U) The U.S. delegation consisted of members from FAS, FCS and industry. Greater Nagoya Initiative (GNI) Heads to the U.S. -------------- -------------- ¶44. (U) The Greater Nagoya Initiative (GNI),Central Japan's combined effort to attract FDI, will send its first mission to the U.S. November 6 to 12 to promote business ties and partnerships between the U.S. and the region. ¶45. (U) The mission is led by Gifu Governor Hajime Furuta and includes about a dozen others from various local government organizations and the private sector, including Chubu METI Director General Kiichiro Sato and Toyota Senior Advisor (former executive vice president) Kanji Kurioka. ¶46. (U) The GNI will hold a seminar and exhibition in San Francisco November 6, with the assistance of Sun Microsystems, which has an office at the "Softopia Advanced Information Hub" in Gifu. ¶47. (U) The delegation will also participate in the "JETRO Business Strategy Forum 2006" in Santa Clara November 7, at which U.S. participants include APEC Ambassador Mike Michalak before heading elsewhere in Silicon Valley and to Washington, DC, to meet with Greater Washington Initiative counterparts. Universal Studios Japan May Have Turned the Corner on Profitability -------------- ¶48. (U) After 5 years of operations, Universal Studio Japan (USJ) is finally reducing its debt levels and may move into the black. ¶49. (U) Although for most of its existence it was a member of Osaka City Government's money-losing quasi- public enterprises club, the facility experienced a dramatic turnaround after a 25 billion yen capital infusion by Goldman Sachs and Japanese banks last summer and having a reorganization plan. Starting in 2004, Goldman-affiliated President Glenn Gumpel worked on cutting costs and boosting management efficiency. USJ is studying plans to list on the Mothers stock market of the Tokyo Stock Exchange. ¶50. (U) The company posted a pretax loss of 500 million yen in FY 2005, an improvement from a loss of 3.1 billion the previous year. Also, this year, USJ made its largest investment, 4-6 billion yen over two years, for a new roller coaster. ¶51. (U) The company remains concerned over how to increase attendance. Attendance in FY 2005 was 8.3 million people, a three percent increase from 2004, largely attributed to special discount packages and park annual passes. ¶52. (U) A USJ official said that it is hard to increase attendance without continuing those one-time measures. He said that, although the park's balance sheet improved by cost cutting last year, USJ would need to grow its visitor base in order to achieve TOKYO 00006140 006 OF 007 sustainable profit levels in the future. Daikin Chairman Inoue Officially Refused the Position Of Kankeiren Chairman -------------- ¶53. (SBU) Daikin Industries Ltd. Chairman Noriyuki Inoue, Vice Chairman of Kansai Economic Federation (Kankeiren),firmly refused to take over the helm of the business lobbying organization after current Chair Akiyama retires in May 2007. ¶54. (SBU) Mr. Inoue was the main candidate being considered for the post. According to press accounts and Kankeiren officials, the news came as a bombshell to Kankeiren's secretariat. Mr. Inoue mentioned that he would like to concentrate on his business in Daikin. ¶55. (SBU) Other candidates now include Mr. Tsutomu Okuda, Chairman of Daimaru Co., Ltd. (former Co- Chairman of Kansai Keizai Doyukai) and Mr. Yoshio Tateishi, Chairman of Omron. According to Kankeiren staff, Chairman Akiyama is now considering whether to look for other candidates or continue to urge Inoue to reconsider. ¶56. (SBU) The post of Kankeiren's Chairman used to be competitive among Kansai business leaders. Past chairmen had strong relationships with GOJ and Diet members, and the position was very important in charting economic growth in the Kansai. After the economy declined, the region's major companies turned inward to concentrate on their own businesses at the expense of leadership of business organizations like Kankeiren. ¶57. (SBU) Ironically, many of the Osaka business leaders who could pilot Kankeiren have moved to Tokyo already and are involved in Keidanren in the capital- despite the fact that Kankeiren was established 60 years ago as a foil to Keidanren in Tokyo. Fukuoka Bank Another Step Closer to Becoming Japan's No. 1 Regional Bank? -------------- ¶58. (SBU) On October 13, Bank of Fukuoka (BOF), Kyushu's largest bank, announced plans to become the leading shareholder of Kyushu-Shinwa Holdings Inc. (KSH),a midsize regional bank based in Sasebo, Nagasaki. ¶59. (SBU) According to post's local banking contacts, Tokyo-based investment fund J-Will Partners Co. (JWP), run by a former Goldman Sachs (GS) Japan managing director, initiated the tie-up scheme. Together, BOF and GS will invest 30 billion yen to rehabilitate the ailing KSH. ¶60. (SBU) With nonperforming loans accounting for well over 10 percent of its portfolio, KSH had been facing difficulty in repaying 30 billion yen in public funds on its own. As a result, it had no choice but to seek capital and business alliances with stronger partners such as BOF and JWP, both of whom have a good track record of turning Kyushu businesses around through jointly established rehabilitation funds. ¶61. (SBU) Nagasaki Governor Kaneko and Sasebo Mayor Mitsutake have welcomed the news, and are hoping that the tie-up will contribute to greater financial and economic stability throughout Nagasaki prefecture. ¶62. (SBU) The alliance with KSH is another example of BOF's aggressive expansion strategies, which includes BOF and Kumamoto Family Bank setting up a joint holding company "Fukuoka Financial Group (FFG)" in April 2007. TOKYO 00006140 007 OF 007 ¶63. (SBU) If KSH joins FFG in the future, their combined assets of 11.5 trillion yen will enable them to surpass the Bank of Yokohama as Japan's largest regional financial group. ¶64. (SBU) Increasing competition from Tokyo-based mega banks, possible future implementation of "doshusei" (which will convert Japan's 47 prefectures into 9-13 larger regional blocs),and Japan's postal privatization in October 2007 are among the major factors behind BOF's campaign to pro-actively engage in the accelerating regional bank consolidation now taking place across prefectural borders in many parts of Japan. BOJ's Tankan -- The Kansai Economy Continued to Grow Over Last Three Months -------------- ¶65. (U) According to Osaka Branch of the BOJ, there was good news from the diffusion index for all industries in the Kansai's six prefectures, which at an 8 percent score, beat the national average of 6 percent. However, compared to the last period (April - June),it dropped 2 percent. Manufacturing is still booming, but oil prices made the non-manufacturing sector slow down. ¶66. (U) The director of the Osaka City Credit Union Research Institutes predicted that in the last quarter of CY 2006 the Kansai economy would continue to slow due to rising interest rates stemming from the end of the zero-interest-rate policy, which would exert pressure on business activities, and reduce the demand for housing purchases. ¶67. (U) Most of the businesses in the Kansai are becoming increasingly cautious about expanding their operations given talk of a potential slow down of the U.S. economy and rising interest rates. SCHIEFFER