TREASURY DEPUTY SECRETARY KIMMITT'S TOKYO MEETINGS

C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 006484

SIPDIS

SIPDIS

TREASURY PASS TO CATHERINE DOWNARD, VICKI ALVO

E.O. 12958: DECL: 11/09/2016
TAGS: KNNP PARM PINS JA CH KS IZ
SUBJECT: TREASURY DEPUTY SECRETARY KIMMITT'S TOKYO MEETINGS
WITH BANKERS, MOF VM, AND BOJ GOVERNOR FUKUI

REF: 184738

Classified By: J.Thomas Schieffer for reasons 1.4 (b/d)


1. (C) Summary. Deputy Secretary of Treasury Robert
Kimmitt met on November 7 with senior representatives of
Japan,s three mega-banks, had lunch with Ministry of
Finance (MOF) Vice Minister for International Affairs
Hiroshi Watanabe, and met with Bank of Japan (BOJ) Governor
Toshihiko Fukui. Deputy Secretary Kimmitt used these meetings
to highlight the importance of the International Compact with
Iraq, to discuss measures to keep global financial markets
safe,
sound, and secure, to discuss the climate for foreign direct
investment in the United States, and the US economic outlook.
Meetings with Foreign Minister Aso and Finance Minister Omi
reported septel. End Summary.

Bankers on Financial Measures against
Terrorism and Proliferation
--------------


2. (C) Deputy Treasury Secretary Kimmitt met with senior
representatives of Japan,s three mega-banks November 7 to
discuss the climate for foreign direct investment in the
United States, and financial measures taken by the United
States against illegal conduct by Iranian and DPRK entities.
Japanese participants at the meeting were, from Bank of
Tokyo-Mitsubishi UFJ, Ltd Norimichi Kanari, Deputy
President and Group CEO of Global Banking and Akira
Kamiya, Executive Officer and General Manager, Global
Planning Division; from Sumitomo Mitsui Banking
Corporation, Shutaro Higashi, Senior Managing Director and
Head of the International Banking Unit, Treasury Unit and
Asia-Pacific Division and Hiroshi Ozaki, Senior Vice
President, International Banking Unit; and from Mizuho
Corporate Bank, Tsunehiro Nakayama, Deputy President and
Yutaka Endo, Executive Officer and General Manager,
International Coordination Division.


3. (C) Deputy Secretary Kimmitt described the climate for
foreign direct investment in the United States, noting that
while there had been a few recent high-profile cases like the
CNOOC and Dubai Ports World deals that had not been approved,
about 98 percent of foreign direct investment deals that are
considered by the Committee on Foreign Investment in the
United
States are approved. He explained that the U.S. government
believes strongly in the benefits of foreign investment to the
U.S. economy and wants to maintain an open investment climate.


4. (C) Turning to Iran, the Deputy Secretary made a
distinction between sanctions, which are political actions
taken at the United Nations or through other political
authorities, and financial measures, which are enforcement
actions taken by the Treasury Department under U.S. laws.
He explained that financial measures are taken to keep the
banking system safe, sound and secure and that they focus
on illegal conduct, not on countries. He noted that the
USG is careful not to apply financial measures
extraterritorially. Kimmitt explained that the USG had
taken financial measures against Iran,s Bank Saderat, which
has been a primary vehicle for Iranian government payments
to Hezbollah. He cautioned that due to the Iranian
government,s use of deceit, denial, and front companies,
financial institutions must be very careful in their
dealings with Iranian companies and financial institutions,
as it is almost impossible to "know your customer". He
explained that Treasury is trying to provide as much
information to the GOJ as possible for them to share with
financial institutions to help them make sound business
decisions and assess risks in doing business with Iran.


5. (C) Turning to the DPRK, Kimmitt explained that
there are links between the Iranian and DPRK nuclear
programs. However, in the case of the DPRK, there are
multilateral political sanctions, in addition to financial
measures that the USG has taken against Banco Delta Asia,
with strong evidence of laundering of counterfeit US
currency, and links to cigarette smuggling and weapons
proliferation. He went on to say that as financial
measures are U.S. law enforcement actions they are not
subject to political discussions and will not therefore be
a matter of multilateral discussion for the Six Party Talks.
However, Treasury remains willing to discuss in a separate
but related bilateral channel the basis for our financial

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measures and ways that the DPRK could rejoin the
international financial community.


6. (C) The bankers asked questions about financing
of legitimate oil imports, and about U.S. processes for
implementing financial measures. Kimmitt said that
financing for oil imports is still ongoing through other
Iranian banks, though they are being closely monitored, and
that some dollar-denominated transactions are shifting to
euros or yen to avoid the need for access to the U.S.
financial system.


7. (C) Turning to USG efforts to coordinate with
other governments to maintain a safe, sound, and secure
global financial system, Kimmitt explained that the U.S.
values international fora such as the Financial Action Task
Force (FATF). He acknowledged that some reporting
requirements are difficult and costly for banks, and
encouraged private sector feedback on ways to be more
efficient in asking for the right information in a less
burdensome way. Kimmitt explained that the first
preference is to act in a multilateral setting, such as the
UN, G-8, or FATF, however the USG still has to undertake law
enforcement responsibilities under our own laws. In those
cases, Treasury explains our actions to our Asian and
European colleagues and shares information with appropriate
law enforcement and regulatory authorities.

MOF Vice Minister Watanabe
--------------


8. (C) During a lunch meeting, Deputy Secretary
Kimmitt and MOF Vice Minister Watanabe exchanged views on a
wide range of topics, including the Iraq Compact, financial
measures against illegal conduct by Iranian and DPRK
entities, and a brief exchange on the topics for the
upcoming G-20 Finance Ministers Meeting in Australia.
Regarding the Iraq Compact, Deputy Secretary Kimmitt
explained that he was hoping to encourage all major
creditors of Iraq that had not already done so to commit to
at least 80 percent debt relief in the Paris Club and for
countries that had already forgiven 80 percent of Iraq,s
debt, such as Japan, to consider forgiving 100 percent, as
the USG is prepared to do. Kimmitt clarified that Iraq
would need additional financial assistance over the next 5
years beyond debt relief and the Madrid pledges of
assistance. Vice Minister Watanabe agreed that it was
important to get other donors to commit to 80 percent debt
relief in the Paris Club. He explained that it would be
difficult at this juncture for Japan to commit additional
resources to Iraq, given Japan,s difficult fiscal situation
and the fact that a portion of Japanese aid already
contributed to the IRFFI remained undisbursed and that
nearly $3.5 billion in soft loans committed by the GOJ has
not be committed due to lack of an Iraqi signatory for the
loans.


9. (C) Regarding financial measures against illegal
conduct by Iranian and DPRK entities, Deputy Secretary
Kimmitt explained the basis for actions taken by Treasury
and made the distinction between financial measures taken
under U.S. laws against illegal conduct and political
sanctions against countries. He talked about Treasury,s
willingness to hold bilateral discussions with DPRK
authorities about U.S. financial measures against Banco
Delta Asia, but specified that would be a separate process
from the Six Party Talks and that U.S. law enforcement
measures are not negotiable. Watanabe agreed that it was
very important for these distinctions to be maintained, and
noted the importance of unity in the positions of the
non-DPRK members of the Six Party Talks.

BOJ Governor Fukui
--------------


10. (C) Governor Fukui began the meeting by asking
Deputy Secretary Kimmitt about the prospects for the U.S.
economy. Kimmitt described recent economic performance,
explaining that growth is moderating but near and medium
term prospects for economic performance are good. However,
there is much to be concerned about in the long-term,
including the U.S. savings rate, trade deficit,
and funding for entitlements programs. While
none of these issues is a crisis now, if they are not
addressed, these problems could be a concern that starts to
affect public confidence in the short-term. Kimmitt

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highlighted the importance of G-7 and G-20 work on global
imbalances, noting the importance of structural reform and
domestic-demand-led growth in Japan and Europe, continued
reform and additional exchange rate flexibility in China,
and the need for emerging actors in the global economy,
such as Brazil and China, to play by the rules of the road


11. (C) Kimmitt asked Fukui,s views on Prime
Minister Abe,s pro-growth strategy, inflation, and how Japan
could spur domestic-demand-led growth. Fukui opined that
the long expansion of the Japanese economy could not have
happened without structural reform, however, after 5 years
of intensive reform efforts, a backlash against reform is
emerging. The public is clamoring against income
inequalities and this is an increasing problem on the
political front. Japan needs to elevate its potential
growth rate to deal with two obstacles: the aging
population and the need for fiscal consolidation. Fukui
noted that the BOJ had ended the quantitative easing policy
in March 2006 and implemented a new forward-looking
monetary policy framework. He stated that the BOJ has a
medium- to long-term understanding of price stability, and
that BOJ wants to retain more flexibility than an inflation
targeting regime would allow. In his view, BOJ,s stance is
consistent with the government,s long-term growth plans.
Kimmitt asked if BOJ could foster non-inflationary growth,
but promote consumer demand at the same time. Fukui
reiterated that Japan needs to raise its potential growth
rate from the current 1.5-2 percent, and that the Abe
government plans to increase potential growth to 2.2
percent through promoting innovation. Fukui added some
view BOJ,s 0-2 percent range for inflation as too low, but
noted that inflation in Japan has traditionally been very
low, with the CPI averaging 0.6 percent over the past 20
years and 1.0-1.2 percent, excluding the deflationary
years. Kimmitt reiterated that domestic demand led growth
in Japan will be very important for global adjustments and
for the U.S. economy.


12. (C) Turning to China, Fukui opined that the
Chinese economy needs more efficient use of resources and
market mechanisms, and that a more flexible exchange rate
is not sufficient. Kimmitt agreed that our dialogue with
China must go beyond the exchange rate and that more needs
to be done in market liberalization, state-owned enterprise
reform and decreasing barriers to foreign direct investment.
He added that part of the reason the Unocal-CNOOC deal was
blocked by Congress was because it was investment proposed
by a state-owned company in a sector that is closed to
foreign investment in China. With the global economy and
Chinese economy performing well, China should take additional
reform steps now.


13. (C) Fukui expressed concern that it is difficult
to predict how the Chinese economy will develop, due to
lack of good information to make simulations. Kimmitt
agreed, saying that Treasury hopes to learn more about the
Chinese economy through the Strategic Economic Dialogue,
which will involve a wide range of actors and elevate the
discussions.


14. (C) Kimmitt then turned to the issue of keeping
global financial markets safe, sound, and secure. He told
Fukui about his meeting with bankers where he had drawn the
difference between financial measures and sanctions.
Kimmitt explained that the USG wants to work closely with
our Japanese and European partners to be sure the global
financial system cannot be used for illegal purposes.
Fukui agreed and said that he is sensitive to the problem.
He stated that the Financial Services Agency is mostly in
charge of these issues, but that BOJ does act a bit in this
area. Director-General of the International Department
Idesawa explained that BOJ acts as MOF,s agent in
monitoring dubious transactions. He expressed regret that
while BOJ cooperates in that job, they are not kept well
informed on discussions between our two governments.
Kimmitt stressed the importance of effective multilateral
networks, and the hope that information that is shared with
the GOJ would be disseminated so that all parties have the
information to act.


15. (C) Explaining that his trip to Japan was also
focused on the Iraq Compact, Kimmitt described economic
progress in Iraq and the timeline for the Compact. He
asked Fukui to consider what could be done to develop or
enhance BOJ,s relations with the Central Bank of Iraq

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(CBI). He noted that while Iraq has a stable currency and
sizable reserves, there are inflationary pressures and the
credit markets are very immature. He advised that
interaction with major central banks could be very
beneficial for CBI. Fukui noted that while BOJ has TA
programs with some emerging market central banks, they do
not yet have one with Iraq. Kimmitt suggested that BOJ
might think about outreach to CBI through the Japanese
Ambassador in Iraq, and said he would mention this
conversation to CBI Governor Shabibi.
SCHIEFFER