The Japan Economic Scope - March 16, 2007

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SUBJECT: The Japan Economic Scope - March 16, 2007

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1. (SBU) Table of Contents



2. (U) This cable contains the Japan Economic Scope from March 16,

2007.


3. EAP/MLS Director Meets MOFA Counterparts in Tokyo
Beef and Agriculture

4. OIE Panel Judges U.S. Beef Safe, Japan Replies, Not So Fast

6. Japanese Must Confront "Egoistic" Agriculture Bureaucrats

7. Biotech Potatoes -- Ending Testing

8. Hyogo Governor Solicits FDI Advice from Foreign Firms and
ACCJ
Trade

9. Record Level of Trade in Western Japan; Trade with U.S. Up

10. ACCJ Person of the Year; Politics Not Involved in Toyota's
Mississippi Choice Says Toyota ex-President and Chairman

11. JAIA -- U.S. Automakers Need to Show Commitment to Japan

12. More Foreign Auto Parts Firms Coming to Nagoya

13. Bolivia President Pleased with Tokyo Visit

14. MOFA DG for Latin America to Visit Washington
Industry Oversight

15. FSA Sanctions 10 Non-Life Insurers

16. Former Livedoor Chairman Horie Sentenced to 2 1/2 Years in
Prison
Labor

17. Cabinet Endorses 3 Labor Bills for Diet Submission

18. KIX Misses Target for Public Fund Use in Second Runway
Construction (REVISED)

19. 2005 Abolishment of MFA had No Affect on Japanese Market

20. Osaka: Asia's First CO2 Emission Trading Market?

21. Northern Japan: Iwate Governor Says Decentralization is
Important for Area's Development

22. Nagoya: Dango Didn't End in Nagoya Despite General
Contractors' Public Pledges

23. A Young New President at Sharp
Documentation


3. (SBU) EAP/MLS Director Meets MOFA Counterparts in Tokyo
--------------

EAP Office of Maritime Southeast Asia Director Scott Marciel
covered a range of issues at the Foreign Ministry during his
February 27 visit to Tokyo, including collaboration on assistance
projects, East Timor, Indonesia, the Philippines, ASEAN and
regional architecture, and combating piracy. For more on
Marciel's meetings, see Tokyo 978. (ECON: Nicholas Hill)


4. (SBU) Misrepresentation Scandal Snares DPJ's Nakai
--------------

Former Justice Minister and Democratic Party of Japan (DPJ) Diet
member Hiroshi Nakai has come under fire because his political
fund management organization allegedly misrepresented 2.86
million yen ($ 24,000) worth of phone bills and flower
condolences as utility costs -- electricity, gas, water, etc. -- in

its 2005 accounts. The Political Funds Control Law bans false
statements in political fund reports, suggesting Nakai's
organization may have broken the law.

The scandal came to light only days after Minister of Agriculture
Toshikatsu Matsuoka was questioned in the Diet over a similar
incident in which his office declared 5.07 million yen ($43,000)
as utilities in 2005 and 28.8 million yen ($246,000) over a five
year period. Matsuoka allegedly concealed shady expenditures as
utilities expenses because lawmakers are not required to offer
detailed explanations for those expenditures.

The DPJ has argued that Diet member utility expenses are covered
by public funds and therefore need not be itemized. Matsuoka
also has declined to give any further explanation. The
secretaries general of three opposition parties had agreed on

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March 13th to continue summoning Matsuoka to the Diet as a sworn
witness but with the DPJ's Nakai now under scrutiny as well,
allegations likely will quiet down.

Nevertheless, with the July Upper House election looming, Liberal

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Democratic Party (LDP) lawmakers, such as Upper House Caucus
Secretary General Toranosuke Katayama and New Komeito legislator

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Takao Watanabe, reportedly have asked for more satisfactory
explanations. Nippon Keidanren head Fujio Mitarai also called for
further clarification. Meanwhile, Prime Minister Shinzo Abe is
standing by Matsuoka, just as he did Health Minister Hakuo
Yanagisawa after Yanagisawa made controversial remarks about
women. (ECON: Ryoko Nakano)


5. (SBU) OIE Panel Judges U.S. Beef Safe, Japan Replies, Not So
Fast
--------------

The member states of the Paris-based International Animal Health
Organization (OIE) have not officially approved it, but an OIE
panel's report has judged U.S. beef to be safe, or in the second
"controlled risk" category.

Responding to the news, Japan's Vice Agriculture Minister Yoshio
Kobayashi told a press conference on March 12 that this would not
immediately change the import terms for U.S. beef. "We are not
at the stage of participating in negotiations to review the terms
of trade," said Kobayashi according to Kyodo news.
His message was consistent with what Agriculture and Health
Ministry officials have told us privately. We heard the same
message on March 16 during a meeting with MOFA officials from the
2nd North Americas Division.

Getting Japan to take a more science-based approach to the BSE
problem and ease its onerous trade restrictions on U.S. beef
figures to be a difficult process in coming months.
The Embassy has taken a low key approach since the OIE panel made
public its findings about the U.S. market. The OIE member states
are expected to endorse the panel decision when they convene in
May. (ECON: Nicholas Hill)



6. (SBU) Japanese Must Confront "Egoistic" Agriculture
Bureaucrats
--------------

Japan's Agriculture Ministry and Japan Agriculture (JA),the
country's major farmers' organization, do not represent the
country's interests -- or even fundamentally the interests of
Japan's farm sector -- in their fierce opposition to a Japan -
Australia FTA, according to Yoshihisa Godo, an economics
professor at Meiji Gakuin University, in the forthcoming May
edition of "Agriculture and the Economy." (See abridged
unofficial Embassy translation attached.)

Meeting in his office March 13, Godo expressed pessimism about
the future of Japan's agriculture sector. He said change was
inevitable, but that MAFF officials, working in cahoots with
Japan Agriculture, will devote their energy to protecting the
country's least efficient farmers. If they succeed in
maintaining high import barriers, Japan's more efficient and
innovative farmers would get short shrift -- and ultimately the
whole sector will wither, he said.

In his article, Godo described MAFF and JA as "egoistic groups
without a cause" except, as he explained to us separately, self
preservation.

Godo told us there is some hope, however, for the country's
agricultural sector. The Japanese public, he explained, had been
subjected to many hardships in recent years as the economy was
squeezed by recession and deflation. People are now less
inclined to allow farmers to be pampered.

Godo drew a parallel between Japan Post privatization and Japan
agricultural liberalization. Before Japan Post was privatized,
it was an unstoppable political juggernaut, but once
privatization went through, it lost its political constituency
over night. The same could happen, he said, to Japan's coddled
small farm sector. A strategy of "passing" over MAFF and JA
needs to be adopted, with an appeal made directly to consumers
and also to efficient farmers who do not benefit from MAFF's
largesse.

Australian food, he noted, is very popular in Japan, and the

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appeal of an FTA with Australia that includes agriculture should
be part of a strategy to break the grip of Japan's backward
looking protectionists. (ECON: Nicholas Hill)


7. (SBU) Biotech Potatoes -- Ending Testing
--------------

Japan currently requires that all potatoes from the United States
undergo costly testing for biotech varieties, even though U.S.
farmers have not grown biotech potatoes for over five years.
The United States is the largest foreign supplier of potato
products to Japan, shipping over 250,000 MT in 2006.

The biotech testing and special handling requirements are
believed to cost the industry several million dollars a year.
The issue was taken up in this year's Regulatory Reform
Initiative in January and progress is now being made.
This week, for the first time, MAFF provided a description of the
process for ending the testing requirements and a proposed
timeline.

The Embassy will work with GOJ and the U.S. potato industry with
a view to ending the requirements this fall. (FAS: Paul Spencer)


8. (U) Hyogo Governor Solicits FDI Advice from Foreign Firms and
ACCJ
--------------

At the Hyogo Global Business Summit sponsored by Governor Toshizo
Ido, American firms such as Eli Lilly and P&G, ACCJ Kansai and
firms from other countries spoke about Hyogo/Kobe's success in
attracting FDI, and challenges for the future.

Speaking on behalf of ACCJ Kansai, Econoff praised the governor
for his assiduous efforts at attracting U.S. firms, and asked Ido
to recognize U.S. firms' contribution not only to the prefecture,
but to the regional and global markets as well. Econoff also
asked Ido to understand the needs of foreign firms better when
designing incentive packages for them.

Hyogo Prefecture also outlined its investment promotion
strategies, a public-private partnership (largely with P&G) which
gave Hyogo Japan's highest number of new factory locations in the
first half of 2006.

One of Hyogo's successes has been in capitalizing on the large
number of "alumni," or people with personal connections to the
prefecture, for business promotion. Governor Ido said foreign
firms were key to his prefecture's economic strategy, and that
Hyogo was ranked fourth in the number of foreign firms
headquartered in Japan, behind Tokyo, Kanagawa and Osaka.
(Osaka-Kobe: Phil Cummings/Naomi Shibui)


9. (SBU) Record Level of Trade in Western Japan; Trade with U.S.
Up
--

According to an Osaka Customs' study, last year the volume of
trade, both exports and imports, in the six prefectures of the
Kansai surged to its highest level ever.

Exports reached $131 billion, a 12.7 percent increase from the
previous year, and imports were approximately $104 billion, a
growth of 13.8 percent.

Exports of audiovisual products including flat TV panels
increased 45 percent from the previous year.

By country, China was the Kansai region's leading export
destination, with exports totaling $25 billion, up 19 percent in
the eighth consecutive year of growth. The United States ranked
second, with exports to the United States valued at $21 billion,
up 7.8 percent from the previous year.

Imports from the United States to the Kansai also went up from
2005 levels due to a large increase in pharmaceutical product
imports.

Strong exports to China and the United States have buoyed the
Kansai economy, and audiovisuals are expected to continue to be

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strong sellers.

Many of economists here, however, are warning local businesses to
be careful about an over-dependence on the U.S. market, where
retail prices are falling and competition is tough. They predict
a plateau in flat TV and other A/V sales in five years. (Osaka-
Kobe: Phil Cummings/Naomi Shibui)


10. (SBU) ACCJ Person of the Year; Politics Not Involved in
Toyota's Mississippi Choice Says Toyota ex-President and Chairman
--------------

In a sign of the times, the American Chamber of Commerce in Japan
presented Hiroshi Okuda with its person of the year for 2006
award at a large luncheon ceremony in the Okura Hotel.

Okuda was President of Toyota (1995-1999) and then Chairman
(1999-2006),and was a member of the GOJ's Council on Economic
and Fiscal Policy under PM Koizumi. Several U.S. ambassadors
have also received the prize.

In his introduction, ACCJ President Charles Lake cited the
critical role Okuda played in U.S.-Japan economic relations from
when he was a Toyota director in the 1980s and oversaw the
preparations for the construction of major plants in North
America to the 1990s when under his leadership Toyota expanded
its investment in the United States to over $15.6 billion and now
directly employs 35,000 people. The good news has continued with
Toyota's recent announcement about opening a fourth U.S. auto
assembly plant in Mississippi.

In his remarks, Okuda overviewed the early history of Toyota,
emphasizing that from the company's beginning there has been an
emphasis on innovation, learning, quality and commitment to the
community.

He covered the five major trends of the 21st century he saw
affecting the business environment -- globalization, demographic
shifts, intensifying technical competition, resources and
environmental issues, and personal enrichment -- and Toyota's
efforts to meet the challenges in each area.

Toyota's commitment to hybrid technology for several types of
engines and its goal of more than tripling the sales of hybrid
vehicles in three years to one million a year in 2010 was
noteworthy.

In a response to questions about a possible backlash in the
United States over Toyota's string of successes and the plight of
the Big Three, Okuda expounded upon Toyota's commitment to
internationalization and globalization, which could be measured
by Toyota increasing its foreign capital ownership -- it is
slightly over 20% now -- and having non-Japanese among its 30 or
so board members and directors. Also, he noted, Toyota has a high
percentage of local staffing even at the managerial level of its
operations.

Internationalization, globalization, assimilation and good public
outreach to local communities, he suggested, are the ways to
blunt criticism and make the case that Toyota benefits the
localities in which it operates.

When asked if political concerns played a role locating Toyota's
new auto production plant in Mississippi, he replied that they
had not since if they had Toyota would have sited it elsewhere
taking into consideration the Democrats. He claimed Mississippi
was optimal from the production and workforce point of view.
After the talk, in response to a follow-up question from us, he
said Toyota had never considered putting a plant in Michigan.
(ECON: Josh Handler)


11. (SBU) JAIA -- U.S. Automakers Need to Show Commitment to
Japan
--------------

We met with the Japanese Automobile Importers Association on
March 12 to learn about their work and get their thoughts on the
ups and downs of the U.S. automakers in Japan.

JAIA has a staff of about 20 and is very active in producing

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statistics on the auto business and following Japanese laws and
regulations to help its members sell their cars in Japan. It
tries to serve as an institutional counterbalance for auto
importers to the Japan Automobile Manufactures Association.
JAIA officials noted several factors that have and are
contributing to the loss of market share of U.S. autos in Japan
among imports as well as a declining number of U.S. imports in
general.

First and foremost is that the Big Three themselves do not seem
to have a strong interest in importing cars to Japan from the
United States. In the early 1990s the Big Three were interested,
but as the Japanese market stagnated and opportunities in China
and India arose, they lost interest in the Japanese market and
set their sights elsewhere. Moreover, the Big Three design cars
for the U.S. market and not for export to Japan. Finally, Europe
and Japan are moving in the same direction in terms of
regulations, standards, and design. China also seems to be going
the way of Europe and Japan. The United States is becoming the
odd-man out, e.g. U.S.-style large SUVs and sedans are unique to
the U.S. market, further complicating exporting U.S.-produced
vehicles.

In contrast, the European car makers retained an interest in
Japan and are having some success. The luxury car market is
dominated by European makes and Volkswagen does a good business
in the mid-priced market. Mercedes and BMW sold almost 50,000
units each in 2006 while Volkswagen sold some 54,000, almost one-
fifth of total import sales of 260,000.

The Big Three managed to sell just about 10,000 units, although
U.S.-owned production was higher as Ford-owned Volvo had some
10,000 vehicles sold. (ECON: Josh Handler)


12. (SBU) More Foreign Auto Parts Firms Coming to Nagoya
--------------

As Japanese auto production surges in North America, more and
more U.S. firms are increasing their Japanese presence, hoping to
gain a larger piece of that growing pie.

Aiming to increase its share of designed-in content with Toyota
and other Japanese makers, leading automotive fluid systems and
seals maker Cooper-Standard, of Novi, Michigan, announced it will
open a Nagoya office.

According to media reports, Cooper-Standard's 2006 Asia region
sales were $300 million, accounting for about 7% of its total
revenue. Cooper-Standard hopes to double that ratio over the
next five to seven years.

Separately, the press reported recently that Canadian parts
behemoth Magna International and the United States' massive but
troubled Delphi plan to expand their Nagoya-area operations, with
similar goals in mind. (Nagoya: Tamiki Mizuno)



13. (SBU) Bolivia President Pleased with Tokyo Visit
--------------

Bolivian President Evo Morales Ayma had meetings with PM Abe,
Foreign Minister Aso, and others during a March 6-7 visit to
Japan, and had an audience with the Emperor. A MOFA source told
us the visit went very well. Aso underscored the importance of
maintaining democratic values and free market policies.
PM Abe promised $200,000 in emergency grant aid in response to
recent flooding in Bolivia and another $100,000 in emergency
relief. According to MOFA, the GOJ will offer more long term
assistance worth about $6.8 million in "non-project free aid,"
although our contact did not have details of how that would be
distributed. (ECON: David DiGiovanna/ Nicholas Hill)


14. (SBU) MOFA DG for Latin America to Visit Washington
--------------

MOFA's Director General for Latin America and Caribbean Affairs,
Akira Miwa, will be visiting Washington next week for meetings at
the State Department before heading for meetings in Madrid.
According to a MOFA source, the primary purpose of Miwa's visit
will be to meet A/S Shannon to discuss President Bush's recent

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tour of Latin America. He will also share the results of
Bolivian President Morales' March 6-7 visit to Japan. (ECON:
David DiGiovanna)



15. (SBU) FSA Sanctions 10 Non-Life Insurers
--------------

The Financial Services Agency ordered business suspensions for
six Japanese non-life insurers on March 14 for failure to pay
legitimate "third sector" insurance claims, mostly on medical
policies. Another four were prohibited from developing new
"third sector" products for three months.

Four firms, including American Home and AIU, received business
improvement orders, which are less serious.

An industry contact called this the latest round in a series of
inspections the FSA has been doing over the past two years, as
well as an example of the kind of increased FSA activity the ACCJ
noted in its 2006 White Paper. (ECON: Marc Dillard)


16. (SBU) Former Livedoor Chairman Horie Sentenced to 2 1/2
Years in Prison
--------------

The Tokyo District Court on March 16 sentenced Livedoor Group
Founder Takefumi Horie to two and half years in prison for
securities law violations.

A member of a new breed of "American-style" Japanese financiers
who flouted convention in both his business and personal life and
sought to empower Japanese shareholders vis-a-vis corporate
management, Horie has become the symbol of change in Japan's
traditionally sedate and opaque financial circles, and some say
this was the reason for his prosecution.

Japanese media have portrayed Horie's conviction as sign of a new
willingness by Japan's prosecutors and courts to crack down on
suspected fraud and manipulation in the country's financial
markets. (ECON: Chris Wurzel)


17. (SBU) Cabinet Endorses 3 Labor Bills for Diet Submission
--------------

The cabinet adopted three labor bills on March 13 for submission
to the Diet. The three bills would raise the minimum wage,
increase the pay rate for overtime work, and require employers to
obtain consent from employees when amending work rules. Although
the bills were endorsed, it is not clear the Diet will have time
during its regular session to consider them.

Media reports have generally focused on the bill to increase the
overtime rate from 125 percent to 150 percent. The 150 percent
provision, however, would only apply to overtime in excess of 80
hours per month, thus limiting its impact. (ECON: Marc Dillard)


18. (U) KIX Misses Target for Public Fund Use in Second Runway
Construction (Revised from newsletter edition)
-------------- -

Kansai International Airport (KIX) is admitting it is behind in
meeting the GOJ preconditions set for using public funds to
construct its second runway, due to open this summer. Kansai
International Airport Company (KIAC) President Atsushi Murayama
commented to Kyoto Shimbun that the airport still has not been
able to increase flights to the target level of 130,000/year set
by MLIT in 2006, missing by about 15,000 flights. Although cargo
flights are on the rise, last yearQs high oil prices and the loss
of several U.S. routes are blamed for the shortfall. The
shortfall will not affect GOJ funding for the runway but airport
officials are eager to meet the deadline for FY 2007 with KIXQs
increased capacity, so that central government funding in 2007 is
not jeopardized.

Murayama said the launch of Kobe Airport (UKB) in February 2006
did not adversely affect business at KIX. He called on cities
in western Japan to come together as Qone KansaiQ to promote use
of KIX within the region. (Osaka-Kobe: Phil Cummings/Naomi
Shibui)

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19. (U) 2005 Abolishment of MFA had No Affect on Japanese Market
--------------

We attended a seminar entitled "Asia's Clothing Industry at a
Crossroads Amid Intensified Global Competition" hosted by the
Institute of Developing Economies (IDE) and the Japan External
Trade organization (JETRO) in Tokyo on March 13.

Tatsufumi Yamagata, Director of Development Strategies Studies
Group, Development Studies Center, IDE-JETRO spoke about the "The
Prospects of Development of the Garment Industry in Developing
Countries: What Has Happened Since the MFA Phase Out?" and
concluded that:

--The Japanese market has been kept almost intact from the impact
of the regime shift;

--After the renewal of quantitative restrictions on Chinese
garment exports was agreed to with the United States and the EU,
a post-MFA surge in Chinese garment exports was significantly
attenuated;

--Instead, the growth in garment exports from other Asian low
income countries to the two markets revived in 2006;

--Some developing countries, such as Bangladesh and Cambodia, not
only survived the liberalization but also have steadily expanded
their garment exports throughout the transition; and

--The profitability of the garment industry in Bangladesh and
Cambodia was high on average according to the surveys conducted
by IDE in 2003, which might have bolstered the steady growth of
the garment exports in the past, and possibly will help future
growth, too. (ECON: Junko Nagahama)


20. (SBU) Osaka: Asia's First CO2 Emission Trading Market?
--------------

Kansai Economic Federation (Kankeiren) is rushing to launch CO2
emissions trading in Osaka, which would be the first such market
in Asia.

The Osaka Securities Exchange and MOF Kinki Bureau have been
working with Kankeiren to get the CO2 Emission Trading Market off
the ground.

The Japan Bank for International Cooperation (JBIC) and Chuo
Mitsui Trust Banking and Company will be testing a similar market
mechanism in Tokyo in June, prompting the Osaka group to try to
push forward the launch of their exchange.

A federation manager said that Chairman Akiyama wants the Kansai,
where the Kyoto Protocol was negotiated, to be the home of Asia's
first emissions market.

In order to push up the start date, a "floor-broker" style market
will be attempted before the group can set up a large-scale
trading system at the OSE. (Osaka-Kobe: Phil Cummings/Naomi
Shibui)


21. (U) Northern Japan: Iwate Governor Says Decentralization is
Important for Area's Development
--------------

On March 10, Sapporo's economic assistant attended a symposium
hosted by the Hokkaido Prefectural Government on doshusei
decentralization measures proposed by the Abe Administration.
The necessity of doshusei is a popular campaign topic in Hokkaido
as the gubernatorial elections in April approach. Iwate
Prefecture's Governor Hiroya Masuda (DPJ),who is well known
supporter of decentralization, delivered the keynote address on
the topic to a packed room of 400 people.

Masuda argued strongly in favor of doshusei, emphasizing that the
decentralization measures are an important tool for encouraging
economic development across northern Japan. He explained that
more autonomy is necessary because the disparities between local
situations in each prefecture are too large to continue to be

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governed by one set of general rules imposed by the central
government. At the same time, Masuda called for neighboring
prefectures, even as they develop individual rules, to make
better use of limited resources by collaborating on projects of
joint interest such as regional tourism campaigns.

Hokkaido Governor Harumi Takahashi (LDP),reiterated her own
support for doshusei in her closing remarks. She stated that
decentralization alone will not magically turn around Hokkaido's
economy, but agreed it could be a helpful tool if used properly.
(Sapporo: Ian Hillman/Yumi Baba)


22. (SBU) Nagoya: Dango Didn't End in Nagoya Despite General
Contractors' Public Pledges
--------------

Five senior staff members of general contractors alleged to be
involved in dango (bid-rigging) for Nagoya City's subway line
construction projects were arrested on February 28, marking the
first time such contractors' employees have been arrested on
suspicion of violating the January 2006-version Antimonopoly Law.
In December 2005, those construction companies, including the so-
called "super general contractors" -- Obayashi, Shimizu and Kajima
-- allegedly engaged in bid-rigging to divvy up main contractor
responsibilities for sections of Nagoya City's subway extension
projects. Immediately thereafter, four major general contractors
officially renounced bid-rigging practices.

Prosecutors say they continued bid-rigging schemes"quietly" on
the business portions they had agreed to prior to their public
pledge to give up dango. A former advisor of Obayashi's Nagoya
Branch, referred to as the "Don", reportedly acted as the
coordinator of the schemes.

Japan's Fair Trade Commission filed a criminal complaint against
the contractors under the antitrust law, which is the first case
in Japan.

Hazama, another general contractor that was involved in the case,
escaped prosecution after it confessed its involvement. (Nagoya:
Tamiki Mizuno)


23. (U) A Young New President at Sharp
--------------

Sharp Corporation, Japan's top LCD flat TV maker, announced that
its new president would be the youngish 49-year old Mikio
Katayama.

The current president, Katsuhiko Machida, has served for nine
years. Machida will move to the chairmanship, a position that
has gone unfilled for 21 years.

President Machida oversaw Sharp race to the top of the flat TV
market in Japan, with more than 50 percent of the domestic market.

Sharp is still weak internationally, however, with only 20
percent global market share.

Katayama is said to be an expert in the LCD business and is
expected to target international growth.

One Sharp manager in the Business Strategy Group for North
America, commented to Pol/Econ staff that it is now important for
Sharp's new president to get a return on its large scale capital
investment in liquid crystal panel plants and to create a new
business strategy not totally dependent on the flat screen TV
business. (Osaka-Kobe: Phil Cummings/Naomi Shibui)