The Japan Economic Scope ?- Economic News At-A-

UNCLAS SECTION 01 OF 08 TOKYO 006931 SIPDIS SIPDIS SENSITIVE DEPARTMENT PLEASE PASS TO USTR PARIS PLEASE PASS USOECD E.O. 12958: N/A TAGS: ETRD ECON JA ZO EAGR SUBJECT: The Japan Economic Scope ?- Economic News At-A- Glance. Sensitive but unclassified. Please protect accordingly. ¶1. (SBU) Table of Contents ¶3. Sub Cabinet in Tokyo ¶4. Transcript of Press Roundtable after Sub Cabinet ¶5. Triangular Mergers: Still Pushing as the End Game Approaches ¶6. Amb. Michalak's Meetings on Triangular Mergers ¶7. DUSTR Bhatia and Dep. FM Yabunaka Exchange Reg Reform Recommendations ¶8. Government Tax Committee Calls for Lowering Tax Burden on Corporations ¶9. USDA Acting Undersecretary Terpstra in Tokyo ¶10. Nishida to be Replaced at MOFA? ¶11. New Players in Japanese Economic Policy ¶12. JFTC Claims Advisory Role in Postal Privatization Process ¶13. Japan-Australia Economic Partnership Agreement Decided ¶14. LDP Interest in Aid to India Surprisingly High, Says Academic ¶15. No Road Map on Beef Yet ¶16. Agriculture Ministry Invites Public Comments on Resuming U.S. Potato Imports ¶17. Toyota the Biggest Player in Japan's Nascent Business Aviation Market ¶18. Kansai International Airport Predicts Historic Profit for First Half of 2007 ¶19. EMIN Klemm Pays Visit to Hyogo Governor Toshizo Ido ¶20. EMIN visits Carnegie Mellon University, CyLab Kobe ¶21. Japan's Third Quarter GDP Revised Substantial Downward to 0.8% Growth ¶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 December 8, 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) Sub Cabinet in Tokyo -------------- United States and Japanese inter-agency delegations squared off in Tokyo to cover a large range of issues on the economic agenda December 6-7, in meetings that both sides agreed were marked by a good level of candor and informality. They were the first official Sub Cabinet meetings since July 2004. The U.S. delegation, headed by Deputy National Security Advisor for Economic Affairs David McCormick, passed the Japanese side papers to initiate concrete activities on areas including transparency, IPR, secure trade, and food safety. The Japanese side had three papers of its own to share - - including on energy security. The two sides also discussed alternative views on the future of FTAAP in APEC and agreed to share information on their respective approaches to FTAs and EPAs. The Senior representatives from six USG economic agencies that attended the Sub Cabinet sessions also met with Keidanren Chairman Mitarai, Minister for Economic and Fiscal Policy Ota, PM Special Advisor Nemoto, LDP baron Nakagawa and U.S. and Japanese business leaders during their visit to Tokyo. Detailed reporting on the two days of meetings will be sent separately. 4.(U) Transcript of Press Roundtable after Sub Cabinet TOKYO 00006931 002 OF 008 -------------- -------------- Press attention after the December 6-7 Sub Cabinet meetings in Tokyo was fairly modest, in part reflecting the Foreign Ministry's desire to keep the event low key. While all principals on the U.S. delegation made themselves available after the meetings in an on-the- record press roundtable, the only on-the-record account on the GOJ side was offered by 2nd North Americas Division Director Koichi Mizushima. MOFA officials told us in the lead up to the Sub Cabinet that they did not want media attention and Japanese principals would not be convening the press for the purpose of discussing the results afterward. Attached is the transcript from the U.S. delegation press roundtable. ¶5. (U) Triangular Mergers: Still Pushing as the End Game Approaches -------------- Embassy has used the opportunity of high level USG visitors this week to impress on the GOJ -- on a daily basis and at multiple levels -- the need for practical and useable rules for cross-border triangular mergers. Deputy National Security Advisor David McCormick raised the issue in a meeting with the Prime Minister?s Special Advisor for Economic Affairs, Takumi Nemoto, and later at the formal Sub Cabinet session. DUSTR Bhatia discussed it with Deputy Trade Minister Kitamura and visiting APEC Ambassador Michalak met with METI senior VM Yamamoto, the chairman of the LDP Tax Subcommittee Working Group, former FM Nobutaka Machimura, and LDP Tax Panel Advisor Toranosuke Katayama (see below for more details). The triangular merger issue was also the headline item in much of the press coverage of the December 5 exchange of recommendations under the Regulatory Reform Initiative. The bureaucratic response to our lobbying, especially from METI, has hardened. Political interlocutors are non-committal. Media coverage, however, especially in the influential Nikkei, is not all negative. In the days leading up to next week?s LDP Tax Committee decision, we will focus our final lobbying efforts at the political level emphasizing the embarrassment to the government and loss of credibility with foreign investors if the final outcome is a situation in which cross-border triangular merger are allowed by law but unusable in practice. ¶6. (SBU) Amb. Michalak's Meetings on Triangular Mergers -------------- -------------- APEC Ambassador Mike Michalak, who also leads the U.S. side in the bilateral investment initiative, met December 4-6 with various officials and private sector representatives, including LDP Tax System Research Committee Working Group Chairman Nobutaka Machimura, LDP Upper House Leader Toranosuke Katayama, Finance Vice Minister Hideto Fujii, and METI Vice Minister Kozo Yamamoto. Based on what Michalak heard in those meetings, it appears that the GOJ is considering, reportedly at the behest of the Japan Business Federation (Keidanren), proposed tax regulations that would effectively prevent foreign companies without an established business in Japan from utilizing the so-called "triangular merger" mechanism to acquire Japanese companies via a stock swap TOKYO 00006931 003 OF 008 arrangement by prohibiting tax deferral on the transaction. This tracks with what we are hearing from the American business community and with remarks that Deputy Foreign Minister Yabunaka made to NSC Deputy David McCormick on December 6. Machimura and Katayama were noncommittal regarding USG concerns, while METI's Yamamoto clearly advocated the position that would undermine the usefulness of triangular mergers. Michalak's interlocutors indicated the LDP Tax Policy Committee will make a decision on the proposed regulations on or about December 14. ¶7. (SBU) DUSTR Bhatia and Dep. FM Yabunaka Exchange Reg Reform Recommendations -------------- The United States and Japan have a solid framework for working together in their current regulatory reform process and hopefully it "can continue to grow." That was what Deputy U.S. Trade Representative Karan Bhatia told Deputy Foreign Minister Mitoji Yabunaka December 5 as the two exchanged reform recommendations, marking the launch of the sixth cycle of talks since the two countries' regulatory reform dialogue was launched in 2001. The two countries' reform recommendations are attached. On the broader economic relationship, Ambassador Bhatia also outlined U.S. priorities, touching on IPR cooperation; foreign direct investment, including triangular mergers; postal privatization; the importance of reaching a Doha agreement; and seeing further liberalization of Japan's beef market. Yabunaka claimed to share a number of the same concerns, in particular the importance of reaching a multilateral trade agreement. He acknowledged the difficulties associated with Doha, and noted he was on the phone with Agriculture Minister Matsuoka practically every day. Ambassador Bhatia was in Tokyo December 5-7 primarily to participate in economic Sub Cabinet meetings, which are being reported separately. ¶8. (U) Government Tax Committee Calls for Lowering Tax Burden on Corporations -------------- The Government Tax Council recently presented their fiscal year 2007 tax changes, including lower taxes for corporations, "appropriate measures" on cross-border triangular mergers, no mention of a consumption tax hike, and perhaps most significantly, a call to ?make active efforts? to introduce a taxpayer identification number system, a suggestion that has always held the whiff of taboo. ¶9. (U) USDA Acting Undersecretary Terpstra in Tokyo -------------- -------------- Deputy Undersecretary for Farm and Foreign Agricultural Service, Ellen Terpstra, was in Tokyo December 5-8 for the Sub Cabinet meetings. She supported Assistant Secretary of State Daniel Sullivan?s efforts to introduce agriculture and food safety issues into the Sub Cabinet process, something that is being vehemently opposed by Japan's Agriculture Ministry (MAFF). TOKYO 00006931 004 OF 008 In addition to the Sub Cabinet, Terpstra held meetings at the Agriculture and Health Ministries, and met former Agriculture Minister Shoichi Nakagawa. Issues raised included food safety, BSE-related age restrictions on U.S. beef, Japan?s management of its rice import system, and Japan?s enforcement of chemical residue rules. Terpstra also met with key industry leaders such as the President of Yoshinoya, the largest single importer of U.S. beef. ¶10. (SBU) Nishida to be Replaced at MOFA? -------------- The press is full of speculation presented as fact that MOFA Deputy Minister for Economic Affairs Mitoji Yabunaka will replace Deputy Minister for Political Affairs Tsuneo Nishida. Nishida, who rose to the ministry?s second highest position in August 2005, will become Japan?s Ambassador to Canada. The press has described the move as retribution for Nishida?s lukewarm support for U.N. sanctions against North Korea. No replacement for Yabunaka has been mentioned. None of our working-level contacts at MOFA would confirm the press accounts. One contact did imply the information was accurate but said no official announcement would come before January. ¶11. (U) New Players in Japanese Economic Policy -------------- -- Prime Minister Abe's initiatives to strengthen the Kantei (Prime Minister's Office) in the policy-making process have created a number of new economic players, one of the most important being Special Assistant to the Prime Minister Takumi Nemoto. Tokyo 6824 details Nemoto's role and effect on economic policy-making. ¶12. (SBU) JFTC Claims Advisory Role in Postal Privatization Process -------------- The Japan Fair Trade Commission (JFTC) can offer non- binding opinions to the Postal Services Privatization Committee (PSPC) on the competitive aspects of postal privatization, but it will not have a role in the approval process for new products, Coordination Division Director Shuichi Sugahisa told ECOUNS November 30. Per the Anti-Monopoly Act, the JFTC will judge the new postal entities by their product practices, and not size, when determining if any anti-competitive behavior exists. Regarding the JFTC's testimony to the PSPC on October 18, Sugahisa said the JFTC recommended two things to ensure a level playing field: 1) that the postal network should not be closed to commercial businesses; and 2) that, given the close ties among the four subsidiary postal entities, the four companies must "strengthen compliance" to preserve arms-length relationships and keep them from acting in a monopolistic manner. ¶13. (U) Japan-Australia Economic Partnership Agreement Decided -------------- The Abe cabinet decided on December 5 to launch negotiations for an Economic Partnership Agreement with TOKYO 00006931 005 OF 008 Australia, its seventh largest trading partner. The Prime Minister and his Australian counterpart, John Howard, will make the official announcement when they meet at the East Asia Summit next week. Negotiations should begin sometime in the beginning of next year. As this would be the first free trade agreement for Japan to work on with a country with a strong agriculture sector, negotiations are expected to be difficult. The government, taking the views of the ruling Liberal Democratic Party's Research Commission on Trade in Agriculture and Forestry -- whose membership includes Japan's agriculture special interests -- wants the negotiations to exclude sensitive commodities, including rice. They claim that without exclusions Japan's agricultural sector could be devastated. (Please click here for details.) The final version of the joint report reportedly indicates that "negotiations will cover all commodities and issues," which would mean all agriculture commodities including rice would be subject to elimination of tariffs. The fine print in the report, however, suggests there could be special treatment on sensitive products. For example, it indicates that negotiations will be "open to all flexible options" including "exclusion (from negotiations) and renegotiation." With two-way trade of approximately 4 trillion yen in 2005, Japan ran a surplus of 1.3 trillion with Australia. Australia is Japan's third largest supplier of agricultural products after the United States and China, with agricultural exports worth about 600 billion yen. ¶14. (SBU) LDP Interest in Aid to India Surprisingly High, Says Academic -------------- After a recent lecture on trends in Overseas Development Assistance (ODA),Liberal Democratic Party (LDP) lawmakers peppered an academic contact with questions about how to use aid to turn India into a counterweight to China. The professor told us the level of interest caught him by surprise given ODA's limited domestic constituency; he attributed the change to China's continuing rise and increased worries about North Korea. See Tokyo 6839 for details. ¶15. (SBU) No Road Map on Beef Yet -------------- Japan is not ready to discuss a road map to liberalize further its onerous restrictions on beef imports from the United States. That was the message we heard from Kenichiro Matsubayashi, Principal Deputy Director of MOFA's 2nd North Americas Division. Flanked by officials from the Agriculture and Health Ministries, Matsubayashi underscored during a meeting at the Foreign Ministry on November 30 that the beef market had only recently been reopened and "sensitivities" among Japanese consumers remained acutely strong. Now was not the time to talk about allowing beef from cows over 20 months old into the Japanese market. Matsubayashi stressed that such a decision in any case would require deliberation by Japan's independent Food TOKYO 00006931 006 OF 008 Safety Commission, an assertion which had not been officially conveyed to us before. He passed us a non-paper (see attachment) answering the United States November 8 request to begin to discuss a further opening of Japan's beef market. ¶16. (U) Agriculture Ministry Invites Public Comments on Resuming U.S. Potato Imports -------------- Japan's Agriculture Ministry (MAFF) on December 5 invited public comments on resuming imports of U.S. potatoes. The deadline for comments has been set for January 4. Imports of U.S. potatoes used in potato chip production halted in April after a brief reopening of the market when authorities in Idaho discovered a new type of nematode, white potato cyst, in the state's crop. MAFF has identified additional measures to resume imports. The Ministry is now asking for public comments on four suggested measures. ¶17. (SBU) Toyota the Biggest Player in Japan's Nascent Business Aviation Market -------------- Providing insights into the still relatively tiny world of business aviation in Japan, one of the principal pilots of AirFlite, Toyota's aviation subsidiary, told Nagoya PO Dan Rochman December 5 that AirFlite now owns and operates a total of seven aircraft globally for Toyota's exclusive use, including Gulf Stream G5s capable of flying between Japan and New York without a fuel stop. Japanese companies often look at business jets as a luxury. Toyota also has a reputation for being tightfisted, but sees the advantages for efficiency and flexibility of transporting its top executives by business jet and is thus the largest Japanese business aviation consumer, with frequent flights between Japan and the U.S., Europe, China, and India. Based on his experience, the captain passed on a number of existing constraints on expansion of business aviation in Japan, in particular advance notification requirements for flights. Note: Nagoya FCS is co-organizing a business aviation forum in Nagoya at Nagoya's Komaki Airport February 9 with the U.S. National Business Aviation Association (NBAA),the Japanese Business Aviation Association and Aichi prefecture at which a variety of U.S. manufacturers are scheduled to display about a dozen jets. ¶18. (U) Kansai International Airport Predicts Historic Profit for First Half of 2007 -------------- Kansai International Airport Co., Ltd. (KIAC) has announced that in the first half of fiscal year 2007, the airport operator expects to turn a profit of 7.9 billion yen, a year-on-year increase of seven percent ? a record for the company. KIAC still receives 4.5 billion yen in annual GOJ subsidies, but it turned a profit even when excluding the government funding from calculations. An international affairs manager from KIAC said that KIX?s business from increased China routes was responsible for the lion?s share of its profits. Although KIAC?s more than 1 trillion yen in debt is decreasing, the airport continues to lobby the GOJ to TOKYO 00006931 007 OF 008 shoulder the largest share of debt, the portion arising from land and building construction costs incurred while the airport was still a public entity. ¶19. (U) EMIN Klemm Pays Visit to Hyogo Governor Toshizo Ido --- EMIN Hans Klemm met with Hyogo Governor Toshizo Ido during his first visit to Kobe on November 28. Governor Ido has strongly promoted FDI, and Hyogo Prefecture currently has the best rate of attracting new businesses in Japan. Ido emphasized that Hyogo was successful in attracting P&G, Eli Lilly, Max Factor, Nestle, AIG?s call center, and many other foreign companies and business units. He invited AIG CEO Sullivan to speak in Hyogo in October, and Sullivan was the first business jet traveler to use Kobe Airport, a point of pride for Ido. As to why Hyogo has been successful in attracting foreign investment, the governor cited good transportation infrastructure, sufficient international schools to attract the families of businesspeople, and a large number of Hyogo expatriates living in mainland Asia who help facilitate trade. Hyogo also has a variety of high tech SMEs to support large enterprises? industrial expansion in the prefecture, such as the new Panasonic Plasma Display Panel Plant, Kobe Steel, Kawasaki Heavy Industry, etc. Hyogo is also promoting investment in its medical industry. According to Governor Ido, private capital investment is also increasing. ¶20. (U) EMIN visits Carnegie Mellon University, CyLab Kobe -------------- EMIN also visited Carnegie Mellon University (CMU), CyLab in Kobe. CyLab is the only foreign educational institution devoted to Information Security in Japan. It opened August 2005 as a foundation (zaidan) established by the Hyogo Prefectural Government. Governor Ido recognizes the importance of information security, and attracted CMU to Kobe through a generous funding package. CyLab was authorized to operate as a foreign university by MEXT due the help of U.S. Embassy Tokyo, so it became easier for foreign students to get student visas in Japan. However, it is still faces unfair barriers and is at a disadvantage to Japanese institutions. CyLab is required to pay corporate tax, and local taxes like a private corporation. Now, CyLab is facing difficulty in recruiting new students due to the lower status of information security professionals in Japan. ¶21. (U) Japan's Third Quarter GDP Revised Substantial Downward to 0.8% Growth -------------- The Cabinet Office announced today that Japan?s real GDP grew at a 0.8 percent annualized rate in the third quarter of 2006, well below the preliminary estimate of 2.0 percent annualized increase. This substantial downward revision, which fell short of the 1.0 percent consensus forecast of private analysts, was due to both weaker-than-expected final private domestic demand, such as business investment and private consumption, and a smaller contribution from inventory accumulation. TOKYO 00006931 008 OF 008 While the downward GDP revision was not good news for the Bank of Japan, it was not weak enough to derail market expectations on a BOJ's policy rate hike on December 19, as the benchmark 10-year JGB yield rose to 1.69 percent this morning, up two basis points from Thursday and 10 basis points from last Friday. SCHIEFFER