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

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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

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

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

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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).


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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

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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

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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

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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.

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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