Identifier
Created
Classification
Origin
06TOKYO7091
2006-12-21 06:09:00
UNCLASSIFIED
Embassy Tokyo
Cable title:  

Tokyo-based Economists give DUSTR Bhatia mixed

Tags:  ETRD ECON JP 
pdf how-to read a cable
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DE RUEHKO #7091/01 3550609
ZNR UUUUU ZZH
P 210609Z DEC 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC PRIORITY 9286
RUEHKSO/AMCONSUL SAPPORO PRIORITY 0283
RUEHNAG/AMCONSUL NAGOYA PRIORITY 8784
RUEHOK/AMCONSUL OSAKA KOBE PRIORITY 2693
RUEHFK/AMCONSUL FUKUOKA PRIORITY 9258
RUEHNH/AMCONSUL NAHA PRIORITY 1742
UNCLAS SECTION 01 OF 03 TOKYO 007091 

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EAP/J PLEASE PASS TO USTR CUTLER AND BEEMAN

E.O. 12958: N/A
TAGS: ETRD ECON JP
SUBJECT: Tokyo-based Economists give DUSTR Bhatia mixed
outlook on prospects for reform


UNCLAS SECTION 01 OF 03 TOKYO 007091

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STATE FOR EAP/J, EAP/EP
EAP/J PLEASE PASS TO USTR CUTLER AND BEEMAN

E.O. 12958: N/A
TAGS: ETRD ECON JP
SUBJECT: Tokyo-based Economists give DUSTR Bhatia mixed
outlook on prospects for reform



1. (SBU) Summary: Leading economists told Deputy USTR
Karan Bhatia and E/B Assistant Secretary Daniel Sullivan
on December 5 that they were somewhat pessimistic about
prospects for continued economic reform under PM Abe.
Richard Jerram, Chief Economist at Macquarie Securities,
criticized the Japanese government, Bank of Japan, and
Japanese managers for poor economic stewardship.
University of Tokyo Economics Professor Motoshige Ito was
more optimistic and focused on signs that Japanese
consumers, younger Japanese, and even Japanese farmers
were becoming more open to reform and change. Toyo
University Economics Professor Toru Nakakita, who co-
chairs the Asia Gateway Strategy Conference with Prof.
Ito, described their goal as bringing together various
strands of JapanQs Asia economic policy with a focus on
pushing for more Free Trade Agreements (FTAs) in the
region.

Prospects for Reform under PM Abe
--------------


2. (SBU) Both Japanese economists agreed that Abe will
find it harder than his predecessor, ex-PM Koizumi, to
sell reform politically and that Abe seemed to be buying
some peace before the election with less public emphasis
on reform.


3. (SBU) Richard Jerram posited that many of JapanQs
leaders have concluded that the countryQs economic crisis
is over, that things are back to "normal," freeing them
to focus on other priorities such as foreign and security
policy and giving jobs to friends. Economic policy
direction has been returned to the bureaucrats, in his
view. However, if Japan really wants to push growth, tax
reform would be one of the single most useful reforms the
government could carry out. Jerram pointed out that
there are no tax Ids in Japan and that there are
estimates that as much as seventy per cent of Japanese
companies do not pay any taxes. Tax evasion is
particularly widespread among the self-employed in Japan.


4. (SBU) Ito believes the public has fully embraced
changes that were resisted 20 years ago such as changes
in the large retail store law. After recalling several
other reforms that now go unquestioned, Ito attributed it
to the transformation of Japanese society, including: a)
generation change, b) behavior and lifestyle change, and

c) attitude change. Younger Japanese are changing their
society and may be able to change Japanese corporate
culture in the future. Still, Ito felt that
entrepreneurship and market mechanisms need to be
nurtured further.

Plenty of Market worries
--------------


5. (SBU) In answer to a question about what most
worries investors in Japan, Jerram listed market worries
about: what happens when the current expansion is over;
when the population begins to decline in earnest; and
when the Japanese government hits a fiscal crunch.
Jerram saw problems at the Japanese central bank which is
worried about inflation and a possible bubble that no one
else sees. He characterized the Bank of JapanQs attitude
as one of knowing better than the government, promising
to end the party if the government becomes speculative or
irrational. Jerram also criticized recent government
moves on consumer finance which unnecessarily restrain
the market, and the proposed rules on triangular mergers
which will reduce foreign direct investment (FDI) into
Japan. Another concern is the perception that Japanese
managers are still not making decisions based only on
economic factors to maximize profits. Because of that,
there is less trust among investors in Japan that the
market knows best, according to Jerram. Ito asserted
that the largest risks to the Japanese economy are still
a recession in the U.S. and a significant decline in the
value of the U.S. dollar.

Attitudes towards FDI need to change
--------------


6. (SBU) Attitudes towards FDI in Japan, especially
among big businesses seem to be stuck in the 1930s, Ito
asserted. This mercantilist approach creates a vicious

TOKYO 00007091 002 OF 003


circle with little investment coming in and, as a result,
attitudes towards FDI are also slow to change. Nakakita
agreed that many people, including in the business
community, have outsized fears of hostile takeovers,
which the media have stoked by playing up negative
stories. However, some attitudes are beginning to
change, Professor Ito stressed. As an example he pointed
out that ten years ago, his students were warned that
going to work for a foreign company like Goldman Sachs
would be a "career-killer." Nowadays many of his
students apply for jobs at Goldman Sachs, but even some
of the best cannot get jobs there because of the
competition.

Asia Gateway/ Regional Relations
--------------


7. (SBU) Nakakita and Ito, who are both members of the
Asia Gateway Strategy Project lead by PM AbeQs chief
Economic Advisor Takumi Nemoto, described the project as
a "window for policy," designed to bring together the
disparate elements of JapanQs economic policy towards
Asia. Free Trade Agreements (FTAs) will be an important
part of that agenda as Japan tries to harness some of
AsiaQs fast growth for its own benefit. Ito gave as one
example the opening up of JapanQs economy through the
division of labor (with lower labor cost countries) to
give Japan higher growth. All of the economists agreed
that better relations with China are one of the keys to
JapanQs economic future and hoped that Abe understood the
importance of getting that relationship back on track.

Agriculture a stumbling block
--------------


8. (SBU) While all of the economists agreed that
JapanQs ability to negotiate FTAs is constrained because
agriculture is considered untouchable, Professor Ito
claimed that there are signs of change which make him
optimistic. Ito believes that there is a change in the
attitudes of farmers and recalled a conversation with an
official from the Agriculture Ministry (MAFF) who said
that they do not want to be seen as obstacles to progress
on FTAs and are trying to portray themselves as neutral,
not in opposition. Ito said it is too soon to say that
Japan is ready to negotiate on agriculture issues, but
that change is already started.


9. (SBU) Many aging Japanese farmers are holding onto
land which they expect will only increase in value,
making it difficult for younger, more productive farmers
to acquire land, according to Ito. He also believed that
the government provides too many benefits and services to
aging farmers and should turn its support now to the
productive and potentially competitive farmers.

Globalization leads to Income Gap
--------------


10. (SBU) The group also discussed how globalization
and the resulting widening gap between rich and poor in
Japan are increasingly visible in Japan. The Japanese
economists agreed globalization has helped those who are
highly skilled and part of the "knowledge culture," while
increasing the gap between rural and city residents,
particularly those living in booming Tokyo. Many who
lost jobs or were never able to find permanent employment
during the decade of recession simply gave up. They also
supported PM Abe's idea that it is important to give
these people a second chance, through education and
training. Japanese people do not enjoy the same
opportunity to recover from bankruptcy or losing a job,
for example, as people in the U.S., where failure has
less stigma and Americans believe it is OK to try and
fail and then try again.



11. (U) Economists participating in the lunch:

Motoshige ITO, Professor, Faculty of Economics,
University of Tokyo:
Toru NAKAKITA, Professor of Economics at Toyo University
USG Participants:
Richard JERRAM, Chief Economist at Macquarie Securities
Ltd

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USG participants:

DUSTR Karan Bhatia
A/S Daniel Sullivan
DAUSTR Michael Beeman
EMIN Hans Klemm
Econoff Marilyn Ereshefsky (notetaker)


DONOVAN