INVESTMENT WORKING GROUP REVIEWS PAST ISSUES, SETS FUTURE

1. (U) SUMMARY: The U.S.-Japan Investment Working Group (IWG), a
joint undertaking of the bilateral Investment Initiative, held its
semi-annual meeting on October 31 via digital video-conference.
After a review of ongoing investment-related concerns on both sides,
most prominently, the final implementation of triangular merger
regulations in Japan, the two sides agreed to a future program of
work that includes a review of investment chapters in trade
agreements and model investment treaties and a regional exchange of
"best practices" of local and region governments in promoting
investment. END SUMMARY



2. (U) The bilateral IWG, co-chaired by U.S. Ambassador for APEC
Michael Michalak and Ministry of Economy, Trade and Industry (METI)
Director-General for Multilateral Trade Systems Tsunehiro Ogawa,
held its semi-annual meeting via digital video-conference on October
31 (October 30 Washington time.) The full list of participants in
both Tokyo and Washington appears in paragraphs 17-18. Ogawa, who
was co-chairing the IWG for the first time, praised the past work of
the Initiative in creating a "deeper understanding of the importance
of foreign direct investment and the investment environment in our
two countries." Japan has benefited from this initiative, he said,
not least through a doubling of the country's stock of FDI in the
past five years but also from the various joint investment promotion
activities under the Initiative. In his opening remarks, Ambassador
Michalak praised the concrete cooperative programs of the
Initiative, including recent investment promotion seminars in Sendai
and Yokohama and a forthcoming program in Santa Clara, California.
Michalak opined that at this five-year anniversary of the Initiative
and in light of ongoing discussions at the sub-cabinet level on how
to renew the bilateral economic relationship, this was the
appropriate time for the IWG to review its current work and set a
medium-term agenda for future activities.

Review of U.S. Concerns: Triangular Mergers


--------------------------





3. (SBU) Ambassador Michalak expressed U.S. concerns about recent
media reports that the Japan Business Federation (Keidanren) planned
to formally oppose draft Ministry of Justice (MOJ) rules that would
allow foreign companies to undertake triangular mergers in Japan.
This liberalization of Japan's M&A regime was included in the 2005
Company Law but the GOJ delayed final implementation until May 2007.
Ambassador Michalak requested an update on the status of the new
draft regulations. MOJ's Senior Attorney explained the Ministry was
following the wide range of public discussion on this issue as well
as awaiting possible future discussions within the ruling Liberal
Democratic Party. Once those discussions were complete, he said,
the ministry would review the existing draft but he would not say
whether any changes might be necessary. He assured the U.S. that
MOJ had no particular conclusions in mind at this point in time.



4. (SBU) METI's Director of the Industrial Organizations Division
addressed the issue more directly. He affirmed that METI believed
its interpretation of the Company Law was the same as MOJ, namely
that, under the spirit of the law, only a general shareholders'
meeting "special resolution" (tokubetsu ketsugi) should be required
for corporate reorganization or M&A activity such as triangular
mergers. Keidanren's desire for a more stringent condition - an
extraordinary resolution (tokushu ketsugi) - was unreasonable. "If
we implement the law as written, we do not need to add any onerous
conditions (for triangular mergers)," he added. MOJ's attorney
again noted that the final form of the implementing regulations
"depended upon the discussion going forward." After listening to
those discussions, MOJ would decide if a review was necessary but
"can not exclude the possibility that the result would be in line
with Keidanren's position," he concluded. METI's Director reported
further that METI Minister Amari met with Keidanren Chairman Mitarai
a day earlier (October 30.) At that time, Amari told Keidanren that
it was particularly important to consider the triangular merger
issue in light of the "international environment" and "in
particular, to take heed of the government's stated policy of
seeking to encourage inward FDI." In view of that, Amari told
Keidanren that METI could not support the Federation's position.



5. (SBU) Ambassador Michalak repeated the U.S. view of the
importance of an open M&A regime for promoting FDI. For that
reason, implementing the triangular merger regulations on schedule
was an important sign of Japan's ongoing commitment to improving its

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investment climate. Since the government had already delayed
implementation of the triangular merger provision one year to allow
companies to implement defensive measures, Michalak asked whether
METI or the Tokyo Stock Exchange had undertaken a study of the
effects of new defensive measures on the M&A environment. METI
Industrial Organizations Director noted that METI had sponsored a
study group in 2005, which drafted model guidelines for defensive
measures. Since then, 160 companies (or about 5% of all Japanese
listed companies) had implemented such measures. METI's Director
agreed with Ambassador Michalak's observation that one year should
be sufficient to allow companies to implement defensive measures.
In response to a final question on the status of amendments to the
tax law that would provide tax deferral for stock swaps and other
non-cash transactions, METI noted that it was coordinating with
Ministry of Finance (MOF) on this proposal. (Note: Subsequent to the
DVC, MOF officials met informally with U.S. business representatives
to discuss the details of the tax deferral proposals. End note.)

Review of U.S. Concerns: Educational Services


--------------------------





6. (SBU) Ambassador Michalak thanked the Ministry of Education,
Culture, Sports, Science and Technology (MEXT) for its recent
designation of a fourth U.S. institution (Columbia University
Teachers College) as a Foreign University Japan Campus. (FUJC). He
asked for an update on MEXT's discussion with Temple University
(TUJ) on its taxation concerns. MEXT's Deputy-Director of the
Higher Education Policy Planning Division said MEXT officials had
met with TUJ on October 4 to explain the various requirements under
Japanese law and regulations for designation as a Japanese
university. TUJ had expressed interest in continuing the
discussions and MEXT hoped it would be able "to provide appropriate
answers." MEXT also promised to inform the Embassy of whether there
would be a public comment period for proposed regulations that would
loosen requirements on institutions of higher education to own land
and buildings. Subsequent to the DVC, MEXT informed the Embassy
that it had already determined to implement nation-wide the
provisions of the special deregulation zone ("tokku") that would
liberalize ownership requirements. Nation-wide implementation and
application procedures for approval of the establishment of
universities under the new rules could begin in FY2007 (April 2007.)
MEXT is working on a detailed study of the implementing regulations
for this new proposal and planned to ask for public comments. When
the results of the public comments are available, MEXT will inform
the Embassy.

Review of U.S. Concerns: Labor Mobility


--------------------------





7. (SBU) Ministry of Health, Labor and Welfare (MHLW) Assistant
Director of International Affairs told the IWG that the Ministry was
undertaking a five year review of the defined contribution pension
schemes as called for in the 2001 law authorizing such schemes. The
review would verify how companies are implementing these programs.
As part of that study, MHLW had received requests from companies to
raise the contribution ceilings and it would study that input before
making a final decision. On the issue of allowing monetary
settlements in disputed dismissals, the Chief of the Inspection
Division of the Labor Standards Bureau said the Labor Affairs
Council was now deliberating on possible revision of the Labor
Standards Law and Labor Contracts Law. Currently, in Japan only one
provision of the Labor Standards Law (Article 18.2) deals with
dismissals. Most of the legal framework in this area rests on case
law and precedents from local and Supreme Court rulings. The
Council is now studying the precedents to determine what might be
included in the revised law. The guiding principle is that the
amended rules should encourage early resolution of any problems and
meet the concerns of both employers and workers.



8. (SBU) On the issue of the white-collar exemption, MHLW was less
responsive. Japan's labor situation differed from the U.S.' system
and it was difficult, therefore, to introduce such a scheme.
Nevertheless, he explained, the Council was aware of the "increasing
diversity of Japan's white-collar sector" and the Council was
looking for ways to reform the system to "enable white collar
workers to better use their skills and talents to the maximum extent
possible." On the worker dispatch law, the Chief of the Private
Employment Service Division of the Employment and Security Bureau
said the government had undertaken a substantial review of the
worker dispatch law in 2003. At that time, the government extended

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the allowed dispatch period for 26 categories of workers from one to
three years. This reflected the need for increased flexibility in
the labor market required by both employers and workers. Since
then, the government had received additional demands from employers
to eliminate all limits on dispatch periods. Labor representatives,
however, opposed this proposal, insisting that companies that wished
to employ workers for a longer period should hire them as full time
workers. With such a large gap between the two sides the government
did not plan further changes to the dispatch rules.



9. (SBU) In response to a U.S. request for a briefing on the
government's "second chance" programs (a top priority of the new Abe
Cabinet), METI explained that a number of GOJ ministries were
working on these proposals under the guidance of a Cabinet Office
task force. They were reviewing a multitude of issues including
measures that would address the problems of the unemployed, young
persons unable to find full-time employment ("freeters"), as well as
businessmen whose companies had failed and who were trying to start
new ones. METI hoped to arrange a detailed briefing on the
government's proposals at a later date.

Review of Japanese Concerns: Visas


--------------------------





10. (SBU) Noting that timely issuance of visas is essential to
efficient business operations, METI reiterated its ongoing concerns
about renewals of U.S. visas and again requested the U.S. to
consider increasing the number of visa-issuing posts in Japan, in
particular, adding Fukuoka and Nagoya. A representative of the
Second North American Division of the Ministry of Foreign Affairs
(MOFA) noted that, in the June 2006 Regulatory Reform report, the
U.S. had said it was studying the possibility of resuming domestic
visa renewals and asked for an update on that study. METI also
requested an update on plans to increase the number of posts in
countries near the U.S. that could renew E-visas and the possibility
of revising visa validity periods.



11. (SBU) Ambassador Michalak responded by noting the success of
the program to accept visa applications in Sapporo that began in
April 2006. At present, he noted, there were no plans to extend
that program to Fukuoka in light of the "significant physical
limitations" and workload constraints at that post. Nagoya on the
other hand had never been intended as a visa issuing post. So there
were no current plans to extend the number of visa issuing posts in
Japan. However, as new technology becomes available, the U.S. will
re-evaluate the situation. The U.S. was deeply interested in
exploring ways to use technology to enhance security and facilitate
visa issuance. Through discussions between Secretary Rice and
Foreign Minister Aso and between Homeland Security Secretary
Chertoff and Aso, our two countries had discussed the visa issue at
the highest levels. At the same time, we continue to have regular
working level discussion on visa issues. On the question of visa
validity, Ambassador Michalak noted that this needed to be discussed
on a reciprocal basis between consular representatives. He promised
to pass Japan's proposal to U.S. consular officials and, if Japanese
consular counterparts were interested, perhaps expert discussions
could be held.



12. (SBU) On the issue of domestic and third country renewals, the
U.S. "remains committed to making E-visa renewals for qualified
Japanese applicants as convenient as possible." In an effort to
address this issue, State Department's Consular Bureau met
internally in May 2006, with the participation of visa officials
from Embassy Tokyo and Consulate General Osaka. The U.S. is
continuing to work on a mechanism to share E-visa information
between posts. There was, however, no new information to report and
no plans to resume renewals of visa in the United States. METI
concluded the discussion by reaffirming the importance of this issue
to Japan and expressing the wish to see greater efficiencies in the
visa issuance process. Japan was willing to do whatever possible to
help the U.S obtain additional resources to address this issue. The
Japanese side also asked to be "educated in detail" through other
channels as to why visa renewal in the U.S. was not possible.

Review of Japanese Concerns: Secure Trade


--------------------------





13. (SBU) METI's Americas Desk Director opened the discussion by
distributing a diagram that he had prepared for the sub-cabinet
meeting the week before entitled "Supply Chain and Security

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Measures." In examining the issue of secure trade, he said, the
entire chain "must be put on the radar screen" and borne in mind as
either side considered or implemented new programs in this area.
The Japan side continued to have concerns about DHS' "24-hour rule"
which, he claimed, had increased shipping lead times by up to two
days. Shipping lead-time was something that Japanese business had
worked very hard in recent years to reduce. Citing industry
figures, he claimed that the 24-hour rule has resulted in increased
inventory levels of USD 300 million in bilateral trade and USD 3
billion worldwide. Between Japan and the U.S., Japan wished to
ensure security while maintaining efficiency. It also sought to
ensure the integrity and harmonization of secure trade programs
worldwide. Finally, Japan believed the U.S. and Japan, as two of the
world's leading trading nations, must take the initiative to improve
secure trade standards throughout the world. As Japan had
previously noted in the sub-cabinet meetings, this was not a request
but a proposal on which the U.S. and Japan could work together.
Ambassador Michalak strongly agreed and noted that this forum may
not be the best place to take up the issues in detail. The two
sides should raise this within the general framework of broadening
U.S.-Japan relations; if issues were identified that would be
appropriate for this group, then we could discuss details at a
future time.

Review of Japanese Concerns: Exon-Florio


--------------------------





14. (SBU) At Japan's request, the Bureau of Economic and Business
Affairs Office of Investment Affairs (OIA) provided a brief summary
of the progress of Congressional consideration of amendments to the
Exon-Florio law. The U.S. remains committed to maintaining an open
investment policy while managing a process to identify and address
possible threats to national security. The administration supports
amendment of the Exon-Florio law to reflect the post 9/11 security
environment. On July 26, the House of Representatives, with
administration support, passed a bill to amend the CFIUS process.
The Senate passed a similar bill the following day. However,
neither side has appointed conferees to reconcile the drafts and the
Administration did not expect Congress would take up this
legislation in the post-election "lame-duck" session.



15. (SBU) The Administration has enunciated to Congress several
principles it believed should guide Congress' deliberations. These
include integration of national security concerns in a post-9/11
environment, continuing to welcome FDI, and keeping what is working
well in the law while making improvement and maintaining the
integrity of the decision-making process. In addition, the
Administration has committed to working to preserve the
professionalism and independence of the process, strengthen the
scrutiny of cases involving state-owned enterprises and increasing
transparency to Congress. OIA noted that the Treasury Department
maintains a website which explains the CFIUS process, and both
Treasury and OIA work closely with companies involved in the process
to understand their concerns and address them. In conclusion, the
Japanese side asked the U.S. to keep it informed as the reform
process continues.

Future Program of Work


--------------------------





16. (SBU) The two sides agreed to take up the following items in a
future program of work:

- Continue discussion of existing agenda items.

- Subject to further discussion, begin an examination of investment
chapters in existing bilateral Free Trade and Economic Partnership
agreements and model bilateral investment Treaties with a view to
identifying best practices and what might be gained by adopting them
for future bilateral and/or regional agreements. Japan proposed
that within a short period of time, perhaps by the end of the year,
an expert group from both sides could begin to gather material for
this research. The two sides could then intersessionally coordinate
on how best to proceed and make recommendations at the next working
group meeting.

- Promote an exchange of best practices among State, Prefectural and
Local governments on how to promote investment at local levels.

- Sponsor a "Lessons-Learned" Briefing from the Industrial

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Reconstruction Corporation of Japan on how outside investors can
promote investment and economic and corporate governance reform.

- Seek direction from the sub-cabinet level on how to proceed in the
area of secure trade and whether to continue discussions in this
forum or in a new forum under the sub-cabinet process.

Video-conference Participants


--------------------------





17. (U) IN TOKYO:

JAPANESE SIDE:

MINISTRY OF ECONOMY, TRADE AND INDUSTRY

Co-Chair:
Tsunehiro Ogawa, Director-General, Multilateral Trade System

SIPDIS
Department, Trade Policy Bureau

Noriyuki Mita, Director, Americas Division, Trade Policy Bureau

Takeo Ijuin, Deputy-Director, Americas Division, Trade Policy
Bureau

Teppei Uemura, Section Chief, Americas Division, Trade Policy
Bureau

Keiichi Kawakami, Director, Trade and Investment Facilitation
Division, Trade and Economic Cooperation Bureau

Hiroyuki Kago, Chief, Trade and Investment Facilitation Division

Mitsutoshi Okabe, Chief, Trade and Investment Facilitation Division

Emi Numata, Chief, Trade and Investment Facilitation Division

Kenji Goto, Director, Industrial Organization Division, Economic and
Industrial Policy Bureau

MINISTRY OF FOREIGN AFFAIRS

Junichi Takahashi, Official, Second North America Division, North
American Affairs Bureau

Hidenari Inamoto, Researcher, Economic Policy Division, Economic
Affairs Bureau

MINISTRY OF JUSTICE

Shin Matsumoto, Attorney, Civil Affairs Bureau

Tsuyoshi Shimizu, Attorney, Civil Affairs Bureau

SIPDIS

MINISTRY OF EDUCATION, CULTURE, SPORTS, SCIENCE AND TECHNOLOGY

Kazuhiro Kotani, Deputy-Director, Higher Education Policy Planning
Division, Higher Education Bureau

Ryoei Chijiiwa, Unit Chief, Office for international Planning,
Higher Education Policy Planning Division, Higher Education Bureau

Masaki Uemura, Unit Chief, Office of Director General for
International Affairs

MINISTRY OF HEALTH, LABOR AND WELFARE

Atsushi Kawai, Chief, Inspection Division, Labor Standards Bureau

Chiaki Miyazaki, Chief, Corporate Pension and National Pension Fund
Division, Pension Bureau

Kosaku Sano, Chief, Private Employment Service Division, Employment
and Security Bureau

Yoshihiko Sano, Assistant Director, International Affairs Division,
Minister's Secretariat

U.S. SIDE:


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Daniel Fantozzi, Economic Counselor, U.S. Embassy Tokyo

David DiGiovanna, First Secretary, Economic Section, U.S. Embassy
Tokyo

Michael Garrote, Consul, U.S. Embassy Tokyo

Michael R. Cox, Attach and Department of Homeland Security
Senior Representative. U.S. Embassy Tokyo

Marc Dillard, First Secretary, Economic Section
U.S. Embassy Tokyo

Mateo Ayala, Deputy Financial Attach, U.S. Embassy Tokyo


Satoshi Hattori, Economic Specialist, U.S. Embassy Tokyo



18. (U) IN WASHINGTON:

U.S. SIDE

Co-Chair:
Ambassador Michael Michalak U.S. Ambassador for APEC, U. S.
Department of State

Ann Kambara, Deputy Director, Office of Investment Affairs, U.S.
Department of State

Jessica Webster, Chief, Economic Unit, Office of Japanese Affairs,
Department of State

Robert Winship, Economic Officer, Office of Japanese Affairs, U.S.
Department of State

Ronald Meyers, Director, Japan Affairs, Office of the U.S. Trade
Representative

JAPANESE SIDE

Atsushi Taketani, First Secretary, Embassy of Japan

Keiji Hattori, First Secretary, Embassy of Japan



19. (U) Ambassador Michalak has cleared this cable.

DONOVAN