The Japan Economic Scope Q- Economic News At-

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1. (SBU) Table of Contents


3. METI Minister Calls for Deepening of U.S.-Japan
Economic Relations

4. Keidanren Joins Call for a U.S.-Japan FTA

5. ACCJ Business White Paper Says Economic Integration
Agreement Is Needed

6. Kansai Business Leaders Meet Finance Minister in
Osaka; FTAs, EPAs Stressed

7. Indonesia EPA Negotiators Near Agreement "In
Principle, on Major Elements"

8. Triangular Merger Issue Still Being Debated

9. Toyota To EMIN: Major North American Production
Increase; Focus on Hybrids Not Flex-Fuel

10. EMIN Discusses Nagoya's Central Japan
International Airport

11. Commercial MC Peters' Nagoya Visit Highlights
Business Aviation and Consumer Products

12. Dreamliner Production Takes Off in Central Japan

13. Mitsui & Co. Confident Russia Will Allow Sakhalin
2 to Continue

14. Union Leader Says Most Labor Legislation Won't Be
Ready for 2007 Diet

15. Patent Harmonization Progress

16. Foreign Investment in the Regions: Seattle-Based
Lindal Cedar Homes Establishes Presence in Hokkaido

17. Q3 GDP Data Released


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 November 17, 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.


3. (SBU) METI Minister Calls for Deepening of U.S.-
Japan Economic Relations
--------------

METI Minister Akira Amari highlighted three ways to
deepen U.S.-Japan economic relations at a November 13
lunch held by the U.S.-Japan Business Council.

First, Amari suggested using APEC as a mechanism for
strengthening ties. Regarding an APEC-based regional
free trade agreement, he repeated the METI line that
the Ministry's own "ASEAN+6" concept of regional
integration could facilitate the goal of an eventual
APEC-wide agreement.

Second, Amari pointed out areas of greater direct
bilateral cooperation between the United States and
Japan on promoting common interests in East Asia such
as in energy and intellectual property protection.

Finally, in response to the Business Council's support
for a "high-level, comprehensive, and commercially
meaningful" free trade agreement between the United
States and Japan, Amari thanked the Council for its
proposal and indicated it was worth further study.

Ambassador Schieffer, in remarks following the lunch,
stressed that any agreement between the Untied States
and Japan would need to be comprehensive and include
agriculture.

4.(U) Keidanren Joins Call for a U.S.-Japan FTA
-------------- --

Keidanren, Japan's leading business and industrial
association, said it would formally join the recent

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chorus for a U.S.-Japan bilateral FTA on November 21.
Keikichi Honda, chairman of the Keidanren committee
that handles relations with the United States, told
EMIN November 17 that their announcement will
encourage the two governments to begin work as soon as
possible towards a broad economic partnership
agreement.

Honda said the scope of Keidanren's vision is
comprehensive, including agriculture and services, but
falls short of his personal hope to also incorporate
mutual recognition of the professional certification
of lawyers, CPAs, and even doctors.

Keidanren follows the ACCJ and the U.S.-Japan Business
Council among private sector organizations that
publicly are encouraging the USG and GOJ to begin work
towards a comprehensive economic cooperation
agreement.


5. (U) ACCJ Business White Paper Says Economic
Integration Agreement Is Needed
--------------

The American Chamber of Commerce in Japan (ACCJ)
released its "ACCJ Business White Paper: 'Working
Together, Winning Together'" last week in Tokyo,
calling for further reform and recommending the U.S.
and Japan initiate talks leading to an Economic
Integration Agreement (EIA).

A first step toward the EIA, the report says, should
be to "restructure and reinvigorate" the Economic
Partnership for Growth by creating a cabinet level
ministerial economic forum to discuss bilateral,
regional, global strategic issues concerning the two
countries and which offer opportunities for
cooperation.

The report also calls for the U.S. and Japan to
establish a new set of U.S.-Japan Economic Cooperation
Working Groups to address possibilities for further
bilateral economic cooperation, particularly in the
areas covered by the White Paper.

The White Paper provides analyses and recommendations
on specific reforms in the following areas:
macroeconomic issues; the financial system; the
healthcare system; physical infrastructure and air
transport; information technology and communications;
consumer products and food; the legal system; human
resources; and government reform, procurement, and
privatization; Japan in an integrating Asian economy;
and international systems and bilateral economic
dialogue.

The last ACCJ white paper on these issues was released
in 2001.

For more information see the ACCJ's press release.
The full report will be put on the web later.


6. (SBU) Kansai Business Leaders Meet Finance Minister
in Osaka; FTAs, EPAs Stressed
--------------

Representatives of Kansai's major economic
organizations had their first meeting with new
Financial Minister Koji Omi in Osaka.

Kansai Economic Federation (Kankeiren) Chairman
Yoshihisa Akiyama emphasized to Omi that the
importance of the economic relationship between Kansai
businesses and the Asian economy, and requested the
Minister to consider FTAs and EPAs with Asian
countries.

Kansai Association of Corporate Executives (Kansai
Keizai Doyukai) Co-chairman, Shunzo Morishita also

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requested the Minister to promote decentralization
(doshuseido) and tax resource transfer from the
national governments to local governments, important
factors for activating local economies.

FinMin Omi mentioned that it would be a priority for
GOJ to fix disparities among local governments.

One Doyukai staffer said that it was meaningful to
bring the GOJ up to speed on the economic situation in
the Kansai and to make requests of the GOJ, but it is
more important for the Kansai economy in the long run
for business people to strengthen day-to-day relations
with the national government to increase central
government bureaucrats' understanding of the needs of
the region.

Unfortunately, the clout of Kansai business leaders
with the GOJ continues to decrease, according to our
contact.


7. (SBU) Indonesia EPA Negotiators Near Agreement "In
Principle, on Major Elements"
--------------

Japan and Indonesia are near agreement "in principle,
on major elements" to an Economic Partnership
Agreement (EPA),Indonesian Embassy officials told us
November 16.

The Indonesian president's impending November 26
arrival -- PM Abe's first state visit -- have kept
negotiators motivated.

The officials stated the agreement will include an
unprecedented energy chapter on oil and gas industry
transparency, which they called a priority for Japan,
and added that Indonesia is looking to improve upon
provisions in the Japan-Philippine agreement that
allow entry for some nurses and caregivers.

Market access continues to be tough for negotiators,
according to the officials, but steady progress has
been realized in areas such as services, investment,
IPR, government procurement, competition policy,
dispute settlement, and improving the business
environment.

Although the goal had been to wrap up negotiations by
the end of 2006, the officials speculated that the
agreement would not be signed before mid-2007, as the
Indonesian parliament must finalize new investment
legislation before the EPA can be concluded.



8. (SBU) Triangular Merger Issue Still Being Debated
-------------- --------------

The debate over triangular mergers continues to be a
daily topic in the press with the tide beginning to
turn against Keidanren.

The Nikkei, Japan's leading business daily, in a
November 16 editorial, criticized Keidanren's
proposals as placing "unfair restrictions on use of
the merger formula."

Nikkei said there were "no reasonable justification
for taking any further steps to protect shareholders",
and rightly noted that cash takeover bids (TOB)
constitute a greater threat of hostile moves against
Japanese companies than triangular mergers.

The tone of Keidanren public statements has also
shifted in recent days.
Vice Chairman Miyahara on November 13 said the
Federation "basically supports triangular mergers" but
called for "necessary policy measures before the
implementation."

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In our many meetings with ministerial officials and
Diet members on this issue over the last few weeks, we
have detected little sympathy for Keidanren' views.
Descriptions of Keidanren's position within the
bureaucracy range from "unreasonable" to "eccentric"
and Diet members express to us support for increased
FDI.

European contacts report similar generally positive
reactions to their outreach.
EU Ambassador Richardson wrote to Mitarai and all 15
Keidanren Vice-Chairmen warning them of the damage to
Japan's investment climate if the government adopts
Keidanren's position.

We will continue to call on members of the LDP
Judicial Affairs Committee in the coming days.

Meanwhile, the Government's Tax Commission agreed to a
basic framework for introducing tax deferral for
triangular mergers starting May 2007.

The commission noted that without such deferral these
deals would not occur.


9. (SBU) Toyota To EMIN: Major North American
Production Increase; Focus on Hybrids Not Flex-Fuel
-------------- --------------

EMIN Hans Klemm visited Toyota's Tsutsumi Plant and
met with the Central Japan Economic Federation
(Chukeiren) on November 8.

Toyota Managing Officer Masayuki Nakai said that the
opening of the San Antonio Tundra pick-up plant this
month, which Amb. Schieffer attended, along with a new
factory in Canada and expansion elsewhere will raise
Toyota's North American production capacity by 700,000
per year. In 2005, Toyota built 1.55 million vehicles
in North America.

Although pursuing flex-fuel vehicle technology,
Toyota continues to stress hybrids, assuming that the
standard level of ethanol in American gasoline will
not rise above 10% in the next decade.


10. (SBU) EMIN Discusses Nagoya's Central Japan
International Airport
--------------

In Nagoya, EMIN also met with the Central Japan
Economic Federation (Chukeiren) on November 8.

Chukeiren Director General Kiyoh Kinoshita made a
strong pitch for increased passenger service from
Nagoya's Central Japan International Airport to U.S.
destinations and lamented American Airlines' decision
to suspend their Nagoya-Chicago route last fall.

EMIN explained the USG's efforts in bilateral talks to
gain new Nagoya-U.S. and Nagoya-Asia cargo routes for
two American cargo carriers. Kinoshita expressed the
Chukeiren's support for that objective.



11. (SBU) Commercial MC Peters' Nagoya Visit
Highlights Business Aviation and Consumer Products
-------------- --------------

While in Nagoya November 7 to give a speech to the
Central Japan chapter of the American Chamber of
Commerce in Japan, Commercial Minister Counselor John
Peters met with the head of Oaklawn Marketing and
JETRO and Prefectural Officials.

Oaklawn COO Harry Hill explained how, in just over a
decade, the local American-owned television-marketing
firm had grown from zero to $200 million sales per

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year and the largest purchaser of television time in
Japan.

Hill expressed enthusiasm for working with the
Commercial Service to find more ways to present
American products, particularly from SMEs, to Japanese
consumers.

During a call by MC Peters, Nagoya JETRO Chief
Director Hiroki Matsumoto detailed the strong state of
the regional economy and said that, despite JETRO's
current focus on increasing inbound FDI, the
organization continues to promote imports of goods and
services, not least for their positive impact on
investment.

Peters also met with Aichi Prefecture Vice Governor
Makoto Nishimura to move forward with planning for the
February 9, 2007, National Business Aviation
Association (NBAA) Air Exhibition in Nagoya to be co-
organized by the Commercial Service and Aichi
Prefecture.

Vice Governor Nishimura, who attended the NBAA
convention in Orlando this month, pledged to work
whole-heartedly to make this joint enterprise a
success and to expand the business aviation market in
Japan.


12. (SBU) Dreamliner Production Takes Off in Central
Japan
--------------

"The biggest industrial project ever undertaken by an
American firm in Japan," is Boeing's description of
787 Dreamliner fuselage section and wing production by
its Japanese partners in the Nagoya area.

During separate visits, Ambassador Schieffer and EMIN
saw and discussed how production of major 787
components in Central Japan is getting underway using
first-ever processes for carbon composite aircraft.

Those components will be flown on the world's largest
cargo aircraft to Everett, Washington, where, starting
next year, final assembly of each Dreamliner is to
take place in just three days using an adaptation of
Toyota's just-in-time production system.


13. (SBU) Mitsui & Co. Confident Russia Will Allow
Sakhalin 2 to Continue
--------------

On October 27 Econoff met with Mitsui & Co. General
Manager of Planning Ken Yamaguchi and General Manager
of Sakhalin Development Toru Matsui to discuss Mitsui
& Co.'s investments in the Russian Sakhalin 2 oil and
gas project.
(Note: Sakhalin 2 is owned by Sakhalin Energy, a
consortium consisting of Royal Dutch Shell, which
holds a 55 percent stake, Mitsui & Co. with 25
percent, and Mitsubishi Corp. with 20 percent.
Sakhalin 1's primary shareholder is ExxonMobil.)

Matsui believes that the Russian Ministry of Natural
Resources and Energy has no intention of nullifying
the Sakhalin 2 project over environmental violations.
He identified the real issues as the huge cost
overruns of the project and Russian gas major
Gazprom's desire to become part of the project.

Matsui also commented that the term "energy
nationalism" did not apply to Japan, adding that the
Japanese government has very little influence in
Japan's energy market.



14. (SBU) Union Leader Says Most Labor Legislation
Won't Be Ready for 2007 Diet

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

Of the major pieces of labor legislation the Ministry
of Health, Labor, and Welfare (MHLW) wishes to present
in the regular 2007 Diet session, only the new Labor
Contracts Law is likely to be ready for consideration,
a senior official of one of Japan's largest labor
unions told Econoff November 13.

The official, who sits on MHLW's Labor Policy Council,
said that differences between union and management
positions remain too large to be resolved in time.

He singled out two issues as key sticking points in
negotiations to revise the Labor Standards Law: white
collar exemptions and monetary settlements in lieu of
employee re-instatement.

Both are top priorities of the American Chamber of
Commerce in Japan (ACCJ).


15. (U) Patent Harmonization Progress
--------------

At the annual Trilateral Meeting of the U.S. Patent
Office (USPTO),the Japan Patent Office (JPO) and
European Patent Office (EPO) in Tokyo on November 16,
the three agencies announced several small but
significant initiatives that will save time and money
for patent applicants, including agreeing to
standardize the format for patent applications among
all three offices starting in 2007 and electronic
exchange of some of the documents needed to file in a
second or third patent office.

The three Patent offices agreed to conduct a
comparative study on examination practices, an
important step towards the goal of harmonization of
patent examinations.

They recognized the strategic importance of access to
Chinese patent documentation and the three agencies
agreed to urgently consider how make this access
efficient and easy.

The USPTO and JPO are able to move more quickly than
the EPO can, and the two offices are actively working
towards the mechanisms that will permit mutual
recognition of patent examinations.

USPTO experts, however, said privately that the
Japanese press has consistently misrepresented the
U.S. position by wrongly reporting that the USPTO has
already agreed to shift from a first to invent to
first to file system.


16. (U) Foreign Investment in the Regions: Seattle-
Based Lindal Cedar Homes Establishes Presence in
Hokkaido
--------------

In late October, Robert W. Lindal, CEO of Seattle-
based Lindal Cedar Homes, visited Niseko village,
located about 100km southwest of Sapporo, to survey
the construction of four U.S.-style vacation homes.

The construction of the homes uses natural materials
imported from North America to help the buildings
blend in with their environment.

Consul Hillman and EconFSN Baba accompanied Mr.
Lindal, and the Hokkaido Shimbun interviewed Mr.
Lindal and Consul Hillman.

The newspaper ran an article based on the interviews
that highlighted the homebuilding project as an
example of increased U.S. investment in the region.

The company plans to build four more homes on 1.6

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hectors of land it has already purchased next to the
current development zone.


17. (U) Q3 GDP Data Released
--------------

While headline GDP figures were higher than expected,
at two percent annualized, final domestic demand
contributed -0.9 percentage points, due primarily to
weak consumption.

Significant contributors to growth were net imports
(1.6 percentage points) and inventory accumulation
(1.2 percentage points).


SCHIEFFER